Opinion Editorial | |
| Wednesday, August 26, 1998 | |
Russia's Disastrous Tax System |
Last Friday's near-crash in the stock market -- the Dow Jones Industrial
Average was down 283 points before recovering -- is largely blamed on worsening
economic conditions in Russia. Its economy is in free-fall, with the Russian
stock market down 70 percent so far this year. Its currency, the ruble,
has collapsed, falling 34 percent against the dollar, and the Russian government
has given up efforts to prop it up. Where the bottom is, no one can say. The result is skyrocketing inflation and rapid deterioration in the living
standards of millions of Russians, who were barely getting by before the
crisis, just as Russia's notoriously harsh winter approaches. Whether democracy
will be able to survive this disaster is now a matter of serious doubt and
great concern in the West. The root of Russia's problem is that the government has virtually no
revenue. It has plenty of taxes, but no one pays them. Last year, just
4 million Russians paid any income tax at all, out of 60 million liable
for tax. As a consequence, the government runs chronic budget deficits
that it finances mainly by printing money. As the money supply expands,
its value falls, causing prices to rise and real incomes to fall. To be sure, a big part of the problem is just ordinary corruption. Tax
collectors are underpaid and easily bribed to look the other way. As Russia's
chief tax collector, Boris Fyodorov, recently remarked, "People see
tax collection as a job where you don't get a huge salary, but you get lots
of benefits." Moreover, the Russian tax code, like ours, is riddled with a myriad of
legal tax avoidance provisions. For example, some companies do not pay
their workers directly, but instead buy insurance policies for them. The
policies pay workers a monthly benefit in lieu of a salary. This allows
them to legally avoid paying any income taxes on their wages. The International Monetary Fund has been pressuring the Russian government
to raise taxes in order to eliminate the budget deficit and get inflation
under control. But given that Russia already has taxes on just about everything
that moves, this is unlikely to yield much additional revenue. As one Russian
businessman recently remarked, "It's very simple. If they [the government]
raise taxes, then my lawyers and accountants will find ways to avoid paying
them." Ironically, nominal tax rates in Russia are not especially high. It
has a top income tax rate of just 35 percent. The problem is the large
number of different taxes that often overlap, creating extremely high effective
tax rates. For example, the natural gas company Gazprom, Russia's largest
company, has complained that it must pay both a value-added tax of 22 percent
and an excise tax of 30 percent on its sales. As a consequence, it loses
money on all the gas its sells in Europe, because the market price is not
high enough to cover the taxes. The Russian economy would have completely disintegrated long ago but
for one thing: the underground economy. It is estimated that 50 percent
of all production in Russia takes place underground, untaxed and unregulated.
Outside the view of tax collectors and government regulators, many Russians
are becoming fabulously wealthy. Indeed, one Russian millionaire in Chelyabinsk
became so wealthy that he actually donated $80 million to the city to pay
for crumbling schools, theaters and sports facilities. While such generosity may be welcome, one cannot run a modern state on
gifts, as the ancient Athenians did. Mr. Fyodorov hopes to improve tax
collections by reducing tax rates and stepping up enforcement. Until he
is successful, the Russian economy will remain moribund. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
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