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Russia: 'Fix The Tax System!' Say Moscow And Washington

Washington, 2 April 1997 (RFE/RL) - If it were possible, Russian leaders would have heard one phrase rising simultaneously from Washington and Moscow this week -- "Fix your tax system now!"

Falling government revenues from a tax system nearly everyone acknowledges is inefficient, discourages economic development and is broadly unfair, has been at the center of discussions for years between Russian officials and everyone from the International Monetary Fund (IMF) to business groups.

But the problem is coming to a head this week as IMF Managing Director Michel Camdessus meets with senior Russian officials in Moscow as part of the process of working out the 1997 targets for this year's reform program under the fund's three-year, $10.1 billion loan.

Tax revenues falling to 60 percent of budget projections caused the fund to delay a number of the monthly drawings on the loan late last year and fund officials are determined to see that the problem doesn't keep recurring this year.

Camdessus went to Moscow to signal the fund's pleasure with what IMF officials are calling President Boris Yeltsin's "dream team" of economic leaders -- especially Anatoly Chubais and Boris Nemtsov. As importantly, he is telling Russian leaders that they must act NOW to deal with the tax system.

Camdessus's second in command at the fund, first deputy managing director Stanley Fischer, spoke to a U.S.-Russia Business Council conference in Washington Tuesday to further bring the message home.

"The revenue picture has been nothing short of calamitous," he said, and the non-payment of taxes is getting worse. "It will not be possible to continue to keep a stable economy or to continue rational policies unless this issue is dealt with."

Fischer said Russia is developing a "culture of arrears and non-payment" which is "totally corrosive" to any economy's ability to do business or win the confidence of its citizens. "People who are not being paid are not people who will support the economic system that is being put into place," he said. That "will have to change if the (IMF supported) program is to get back on track."

Fischer said Camdessus's talks seem to confirm that the new Russian government leaders' "understand fully the seriousness of this situation and are absolutely determined to fix it."

However, he said there is no time to wait for tax reforms. Russia's first priority must be to "improve collections out of the current tax system just to make people who are supposed to pay, pay."

Then, tax reforms to make the system transparent, more efficient and more fair can be introduced.

Fischer said the Russian economy carries a fairly heavy tax burden of around 25 percent of gross domestic product, but "what is low in Russia is the amount of revenue the central government collects." He said most of the money is paid either into such things as pension funds or local governments, all of which pass only deficits up to the federal level, which is "starved of revenues."

The message from others was equally as strong. Eugene Lawson, President of the Business Council, said Russia has not been able to move into the level of trade and investment it should because the antiquated tax code keeps business and investors out.

Deputy U.S. Treasury Secretary Lawrence Summers said fixing the Russian tax system "is priority number one." "A tax system that cannot reliably support essential state functions cannot provide a basis for economic growth," he said.

While the tax system is discouraging foreign investors, added Summers, it is far more significantly pushing domestic investors to move their money elsewhere. And every successful economic development in history has been financed "more than 90 percent" by capital from within.

Russia's ambassador to the U.S., Yuli Vorontsov acknowledged that Moscow's "highest economic priority" is a tax regime that meets both the government's revenue needs and stimulates legitimate business. But he said there are problems.

For one thing, he said, many of the country's new, young business people question why they should pay their hard-earned money to the government when they need it for their own businesses.

At the same time some of Russia's largest and most politically powerful enterprises, like Gazprom, Lukoil and others, are not paying their taxes either. But Vorontsov says "eventually they will pay, I'm absolutely sure of that, (but) whether it's going to happen this year, we shall see."

Vorontsov said he doubted that the interior minister, the country's top policeman, named to collect taxes, would be able to convince the big companies to "open their purses." "Their conscience should open their purses," said Vorontsov, adding: "the reasoning should do it. We'll hope it will happen this year."

The financial and business leaders -- at the conference and in Moscow -- made clear that the time to make it happen is now.