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Russia: Analysis From Washington -- Democracy Hinders Tax Code Reform

Washington, 11 February 1998 (RFE/RL) -- Russia is now learning a lesson that many democratic countries in the West have long understood: A democratic political system may make it more, not less difficult to reform the tax code and thus to make it both more equitable and efficient.

On Tuesday, Russian Federation finance minister Mikhail Zadornov warned in Moscow that the Russian parliament must adopt a new tax code by the middle of 1998 or face the prospect that the country will have to continue with the existing one for two years or more, a situation that could undermine the prospects for economic growth and foreign investment.

Zadornov suggested that any delay beyond June 1998 would find deputies caught up in the parliamentary elections of 1999 and the presidential vote in the year 2000, periods when he suggested that the members of the Duma would find it hard to vote for changes in the tax code that might make it easier for the government to collect taxes more effectively.

In other remarks, he noted that Duma deputies had introduced some 4500 amendments to the reformed tax code proposed by the Russian government at the beginning of 1997 and passed in the first reading by the Duma in June of last year.

These amendments, the finance minister continued, catered to the special interests of the constituencies of the deputies who proposed them. And he implied that these modifications in the government's tax plan in most cases made it both less equitable and less likely to work.

On the one hand, Zadornov's remarks are simply part of a Russian government effort, under pressure from the International Monetary Fund and other international investors, to improve the rate of tax collection quickly.

The government legislation is clearly designed to do that. It cuts the number of taxes levied by the state from more than 50 to only 29. It decreases marginal rates for most categories of taxes. And it increases the responsibility of regional authorities to collect taxes from the population.

By calling for rapid approval of the plan and by implying that Russia might have to forgo significant economic growth unless the Duma approves it, Zadornov is thus doing no more than any government minister at any time would do to promote government policy.

But on the other hand, Zadornov's argument and the problem he confronts suggests that in this area at least, Russian democracy is working in precisely the way that democratic systems are supposed to work. That is, the representatives of the people are responding to the wishes of their constituents both when the latter are able to bring pressure and when elections are near.

In virtually every democratic country, both government leaders and financial experts have called for tax codes that are simple, transparent, and without special provisions for special interests.

And the parliaments have responded by making the tax codes complex to reflect the enormous diversity of interests in the population at large, opaque to the point that individual citizens must consult special experts to have any hope of filing their tax returns accurately, and with a plethora of special provisions for special interests.

And equally, in virtually every country, approaching elections have made it virtually impossible for legislators to agree on anything but tax cuts. Anything else, even the most radical simplification of the tax code and the cutting of marginal rates to improve overall collections, would almost certainly offend one or another part of the electorate, something no one seeking reelection will want to do.

In many areas, the Russian Federation is still a country in transition to democracy. But in this one, it has already arrived, a development that may not, for the reasons Zadornov suggests, make its economic or even its political prospects brighter -- at least in the short term.