5 Ways to Manage Russia's Crisis
- By Boris Titov
- Dec. 01 2008 00:00
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Finance Minister Alexei Kudrin always considered himself an advocate of the free market, while the members of Britain's Labor Party have often been criticized for being too socialist. Now it turns out that Kudrin is even more left-leaning than his British colleagues are.
At a time when British Prime Minister Gordon Brown is preparing to reduce that country's value-added tax by 2.5 percent, to 15 percent, Kudrin is fighting hard to keep Russia's VAT at current levels.
The crisis has forced Britain to shift its policies toward the right. Its members now understand that it is unwise to overburden the business community with taxes and, at the same time, expect it to drive the economy. When businesses are slapped with too many taxes, they become heavy and sluggish. They think only about how to survive and not how to develop and modernize.
The global financial crisis is similar to a fire. When your house is burning, the first, immediate response should be to use every means at your disposal to extinguish the flames. Most other countries are using their high-powered hoses to contain the fire. But Kudrin is carrying water in buckets, because he is worried that that the well might dry up in a year or two. But if the house burns down today, that water won't save it later.
The authorities have promised the business community that they will lower the tax on profits. But during a crisis, 90 percent of businesses are not earning a profit, so what good is this tax benefit now? Whatever income businesses earn is quickly eaten up by runaway expenses, including rising interest rates, value-added tax, social taxes, property tax and so on.
Delovaya Rossia, of which I am the chairman, has five main proposals for managing the crisis.
First, the authorities should eliminate or reduce VAT, because our studies have shown this particular tax to be the most burdensome for businesses and most susceptible to corruption.
Second, the authorities should institute a 50 percent tax deduction on innovation-related expenses, such as purchases of new equipment and technologies.
Third, we suggest increasing the number of manufacturers that can use the simplified tax system by expanding the eligibility requirements to include companies with revenues up to 60 million rubles ($2.2 million) per year.
Fourth, we suggest that businesses should be given a two-year deferment on VAT and profits taxes for the third and fourth quarters of this year. This is a necessary emergency measure for companies buried in debt -- particularly in those cases where banks have recently increased interest rates on adjustable-rate loans to 25 percent. Without this tax deferment, a huge number of companies will face bankruptcy.
Finally, the state should provide credit guarantees to manufacturers. The guarantees would cover up to 50 percent of loans received from commercial banks at annual interest rates not exceeding 15 percent. Prime Minister Vladimir Putin has supported these proposals.
Delovaya Rossia's proposals could provide a tangible stimulus to production. The top priority is to stimulate the development of manufacturing enterprises, and this calls for industry-specific initiatives.
To his credit, Kudrin did a great deal to combat the chaos of the 1990s when he instituted budgetary discipline, eliminated wide-scale corporate tax evasion and reduced the negative impact of the Dutch disease on the country's economy. He deserves credit for winning these tough battles.
The current financial crisis, however, presents a new set of problems. Unfortunately, Kudrin is fighting nonexistent phantoms. Applying yesterday's solutions to today's problems will only make the crisis worse. The new challenges facing us call for new solutions, new policies and new people -- possibly including a new finance minister.
The business community will be powerless to fight the crisis if the government does not rethink its approach to Russia's manufacturers and continues to rely on corporate behemoths in the oil and gas sectors to be the main engine for the economy.
Countries and the world typically emerge from such crises with a new economy. Does it, therefore, make sense to count beans by calculating how much money the federal budget will lose by lowering VAT?
If Russia wants to reduce the negative effects of the crisis, the government needs to improve the business climate for private companies. Russia was able to overcome the negative consequences of the 1998 default thanks to the millions of Russians who decided to go into business, and the 13 percent flat income tax was a key innovation that helped spur economic development and growth in this sector. But in 2008 and beyond we will need new innovations, and one of the best places to start would be by eliminating or sharply reducing the value-added tax.
Low taxes for a crisis-stricken economy are like life-saving drugs for a seriously ill patient, but to be effective they must be administered in time. If the patient is already dead, it is meaningless to offer him or her medicine.
Boris Titov is the chairman of Delovaya Rossia.