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Russia: Tax System Desperately Needs Reform

  • Robert Lyle



Washington, 26 November 1996 (RFE/RL) - Yegor Gaidar, one-time reform prime minister and economic guru for Russian President Boris Yeltsin, says the country's tax system desperately needs overhauling, but that tax collections should improve enough now to at least get Moscow's monthly drawings on the International Monetary Fund's (IMF) extended loan back on track.

The IMF held-up releasing one of the $340 million tranches in October because tax collections had fallen so far below projections they were threatening the government's entire revenue base. The Russian tax service says collections are improving by the week, now running at over 70 percent.

But the IMF review team has still not been able to finish its check on the situation, so has left Moscow for a brief holiday and consultations with senior IMF management. They will resume their work in the first week of December. IMF officials say this may also delay release of the November tranche of around $340 million.

Gaidar, who now heads the Russian Institute for the Economy in Transition, told an audience in Washington last week there is no secret why tax collections dropped to below 60 percent. It was a series of events which combined to tell taxpayers not to worry because nobody was serious about collecting taxes.

The uncertainty was launched in January when then-Deputy Prime Minister Anatoly Chubais, the architect of the reform policy, was forced out by Yeltsin as the president prepared his campaign. Gaidar, who left his last position in the President's council of advisors shortly thereafter, says Chubais' firing "was the most expensive in the history of the country -- it cost us approximately four percentage points of the GDP (gross domestic product) in government tax collections between the fourth quarter of 1995 and the first quarter of 1996," Gaidar said.

Leaders of big Russian enterprises in particular got the message that before the elections, the government would not be too serious in collecting taxes, and that afterward a less reform-minded government might not give them credit for having paid to this regime.

"They decided that it's much better not to pay taxes at all," said Gaidar.

Then, after the election, the government was paralyzed by Yeltsin's illness and the renewed possibility of another presidential ballot in three months, so the "mood that prevailed...in the Russian White House was 'let us not be in a hurry, let us wait and see.'"

This inability of the government to move on even minimal taxes while businesses felt it was foolish to pay, Gaidar says, led to the dramatic fall in tax collections.

The government had reacted to all of this by simply borrowing more through the sale of state treasury bills at unsustainably high interest rates. The borrowed money kept things going through the presidential election, says Gaidar, but they raised the state debt from five percent of GDP to 10 percent, and as seriously, kept people from investing in the real economy. After all, asked Gaidar, why invest in companies and businesses with their attendant risk when you can get a return of 40 percent in hard currency in state bills?

Now, says Gaidar, with the good news that Yeltsin is recovering well from his heart surgery and the government has started to get serious about tax collections, revenues should begin to return to more appropriate levels while interest rates the state is paying on treasury bills will continue to go down -- saving the cost of borrowing while pushing more money into productive investment.

"I am a reasonable optimist," Gaidar told the gathering at the National Press Club in Washington, but that doesn't means there are not serious problems ahead. There is a "very urgent need" now for "serious middle-term reforms which have been delayed all these years."

Gaidar says the Russian social system must be reformed, putting means-tests on all social payments for housing, unemployment and families. Currently, he says, "more than 80 percent of the money we are expending on social support goes to families which are not poor."

The tax structure must be reformed to close loopholes, unify the tax rate, broaden the base to include all forms of revenue and lower the general tax on wages, says Gaidar. Under the present system, taxes on wages are about 50 percent, while non-wage income is not taxed at all.

That means, for example explained Gaidar, that an employee of a bank would have to pay 50 percent of his wages in taxes, but if the bank set up a savings account and he got the same amount of money in interest payments instead, he would owe zero taxes. In a set-up like that, says Gaidar, in five years "we will have an economy with a zero wage."

Gaidar says as Yeltsin recovers from his surgery, he has a unique opportunity to push through the needed reforms quickly.

"The best way to move with this would be for the president, who is not running for reelection any more, to make these reforms the essence of the second term -- not to try to implement them piece-by-piece, step-by-step, but to create a broad package -- to make it the center of a political campaign" and "confront the Duma to vote."

Gaidar said the president now could probably win a Duma vote, but that this window of opportunity won't last long. The only question, he says, is not whether the communists will regain power, but "whether we will be able to make our capitalism more just, more efficient, more compatible with normal life -- less criminal, less corrupt."

The problems Russia needs to deal with now, he says, are similar to those in any market economy, including the United States The difference, he says, is that "America is a much richer country and you can afford the level of mess -- we cannot afford it."
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