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
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."