Firing from a position near Selydove, eastern Ukraine, this month. The tax rise is likely to hit hard in the country, where people have already seen their economic well-being plummet because of the war.
Credit...Nicole Tung for The New York Times

Ukraine’s Parliament Approves Biggest Tax Hike of War to Support the Army

The authorities are resorting to a politically unpopular move as they scramble to raise funds for the grueling military effort against Russia.

by · NY Times

The Ukrainian Parliament voted on Thursday to approve its biggest tax hike since Russia’s full-scale invasion began more than two years ago, resorting to a politically unpopular move to raise funds for its grueling war effort.

The bill increases a tax on personal income that raises money for military expenditure, raising the rate to 5 percent, from 1.5 percent. It also retroactively doubles taxes on bank profits, to 50 percent for this year, and raises taxes on the profits of other financial institutions to 25 percent, from 18 percent, among other provisions.

The tax rise approved on Thursday will help to fund a $12 billion military spending increase for this year. Yaroslav Zhelezniak, deputy chairman of the parliamentary committee on finance, tax and customs policy, called it a “historic tax increase.”

The move is likely to hit hard in Ukraine, where people have already seen their economic well-being plummet because of the war. But the authorities argue that they have no choice if Ukraine is to sustain its fight against Russia, which has ramped up its own military expenditure. President Volodymyr Zelensky of Ukraine is expected to ratify the bill in the coming days.

Oleksii Movchan, a member of Mr. Zelensky’s party and the deputy chairman of the parliamentary committee on economic development, acknowledged that the bill was “unpopular.”

“We will be hated, but we don’t have any other option,” he said. “It’s about our survival in this war.”

While Ukraine receives substantial military aid from its allies in the form of weapons, along with significant financial support for social expenses and reconstruction, it must cover the salaries of its service members and domestic arms production from its own revenues. That military spending accounts for more than half of the state’s $100 billion annual budget, Mr. Movchan said.

Until recently, the Ukrainian government had sought to shield its population from bearing the brunt of the war’s financial burdens, mindful that many had already suffered significant economic losses as they fled their homes in the face of the Russian Army or were laid off from businesses destroyed by Russian missiles. Ukraine has a flat tax rate of 18 percent on personal income.

Instead, the government tried to raise funds by selling off state assets as part of a privatization push and reducing spending on debt after striking a multibillion-dollar restructuring deal with international private creditors.

But with fighting continuing into a third year, Ukrainian officials warned this summer that raising taxes would become unavoidable.

“We need to find other ways to keep the macroeconomic situation stable, to help the army and win this war over Russia,” Oleksii Sobolev, Ukraine’s deputy economy minister, said in an interview in June. “Whatever revenue you bring that is generated domestically, through taxes, through businesses — it all goes to the army.”

The bill is projected to raise an additional $2.8 billion in tax revenues next year, about 14 percent more than in 2024, according to an analysis by the Kyiv School of Economics.

The analysis was made before Thursday’s vote and it was unclear whether amendments adopted during the debate, which softened some aspects of the rise, would affect revenue collection.

The urgency to bolster the state budget has only increased in recent months as Ukraine’s troops are steadily losing ground on the battlefield in the east of the country and as military and financial backing to Kyiv is at risk of declining because of war fatigue in the West.

Mr. Zelensky embarked on a whirlwind tour of European capitals on Thursday to urge foreign allies to increase their support. After meeting with the British prime minister, Keir Starmer, in London in the morning, he traveled to Paris for an afternoon meeting with President Emmanuel Macron of France. He is scheduled to visit Rome and Berlin on Friday.

His tour comes in the wake of disappointing news for Ukraine — the postponement of a meeting to discuss Ukraine’s war effort after President Biden withdrew because of a hurricane’s striking Florida. That gathering would have presented Mr. Zelensky a chance to press his plan to end the war with world leaders.

But when Mr. Zelensky returns home, he may have to face the wrath of his population over the tax hike — an unpopular measure in any nation, but especially so in a country whose economy has been ravaged by the war.

On Thursday, several residents of Kyiv, the Ukrainian capital, said that they strongly opposed the measure.

“We’ve all been struggling financially for a long time, and now we’ll lose even more of our salaries and income,” said Lola Kuzmina, 47, who works in a shoe store.

“Even at my job, I see how prices are rising, and people can’t afford to buy our shoes,” she added. “People are buying much less now.”

Ms. Kuzmina said that everyone around her — family, friends and colleagues — was discussing the tax increases. “There’s a lot of concern and dissatisfaction,” she said.

But Anna Paskal, a 44-year-old accountant, disagreed, saying that the tax increase was “not critically high and won’t affect my quality of life.” She said she believed the bill would help the military.

But both opponents and supporters of the bill expressed a shared fear: that the newly generated revenues might fall prey to Ukraine’s pervasive corruption and ultimately fail to reach the military. Those concerns have intensified recently after a series of arrests of Ukrainian officials accused of hoarding millions of dollars in cash at home.

“I believe that this money won’t go where it’s supposed to,” said Olha Poliakova, a 46-year-old barista, referring to the tax revenue. She and other Kyiv residents pointed out that many Ukrainian brigades had been relying on crowdfunding organized by volunteers to purchase military equipment and clothing because of a lack of funding.

Those concerns were echoed during the final debate over the bill in Parliament, which stretched through the night into Thursday, with opposition members largely voting against the measure.

Solomiia Bobrovska, an opposition lawmaker and member of the Parliament’s defense and intelligence committee, said, “There is no trust that the state will properly use the money.”

“It’s been more than two years of war,” Ms. Bobrovska added. “If the state had used funds properly, we wouldn’t need volunteers to raise money for our army.”

Oleksandra Mykolyshyn contributed reporting.

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