NCPA - National Center for Policy Analysis

U.S. Should Take A Lesson From Russia's Playbook

November 26, 2002

Russia has recently undergone a tax revolution, says the Wall Street Journal.

  • The Russian reforms began in 2001, when a 13 percent flat tax on individual income replaced a convoluted system with a marginal rate of 30 percent.
  • Then the tax on corporate profits was cut nearly one-third to 24 percent, corporate tax loopholes were closed, and social security levies were simplified and payroll tax rates reduced.

Tax revenues immediately began rising as citizens decided it was easier to pay taxes than to avoid them -- a classic Laffer Curve effect of an enlarged tax base and a surge in tax revenues.

  • Russia's economy grew 9 percent in 2000 and 5 percent in 2001 and is expected to expand by more than 4 percent this year.
  • The Moscow stock exchange has been galloping while other exchanges have groaned.

The tax reforms have provided a solid basis for economic growth and investment. As important, they have signaled to Russian individuals and businesses that the government is serious about creating incentives to productive work and risk-taking.

Another tax going on the Russian scrap heap is the "road user" tax. At about 1 percent of corporate revenues (not profits), the tax was highly regressive, a disincentive to investment that pushed a lot of business into the black market.

"The Russian example shows that this is precisely the right time for tax reforms to spur economic growth in the United States," concludes the Journal.

Source: Editorial, "The Putin Curve," Wall Street Journal, November 26, 2002.

For text (requires WSJ subscription) http://online.wsj.com/article/0,,SB1038271514450758308,00.html

 

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