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. Last Updated: 07/27/2016

The Dollar Economy's Damage

Among the ironies of the post-Cold War world is the role of the ordinary American dollar bill in undermining and gradually eroding the authority of the state in the capital of what once was the most state-centered empire of them all.


Nowhere else in that ex-empire is the dollar so indisputably the currency of choice. In Budapest or Warsaw, Vilnius or Riga, for nearly all things in life, it is necessary to go to a currency exchange and buy the local money. and in Kiev -- well, things are so bad that the ruble is fast becoming a relatively hard currency.


But in Moscow, the dollar is king. and the king is a dangerous revolutionary, systematically and comprehensively cheating the state of essential funds.


Here's how. Howard from Ohio wanders along the Arbat, sees a fake lacquer box he thinks Aunt Jane would like, and offers Misha of Moscow $10 for it. Misha accepts the cash and the two men part, happy with their transaction.


The state, however, is out of pocket on this little deal. Misha avoids paying $2. 80 in value-added tax and fails either to declare the remaining $7. 20 as part of personal income or as part of revenue in his profit-tax calculations.


If it were only a matter of matroshka dealers and cabbies avoiding taxes, this would be manageable. But practically all joint ventures and other foreign-operated enterprises engage in the practice, most without a moment's thought. They do it by paying employees dollars -- in cash. In spite of rumors to the contrary, this is unambiguously illegal.


As of a recent Russian Central Bank directive, there is a slight -- very slight -- loophole permitting accredited foreign organizations (i. e. , embassies, foreign news bureaus and representation offices) to pay in hard currency, but only via bank deposits. This is to permit tax withholding at appropriate levels.


But, almost universally in the foreigner-related economy, employees receive, if not dollar wages, then dollar bonuses. And, as often as not, these are in cash.


Let's start to add some of this up.


Imports are not subject to value-added tax. This means that any dollars spent in a hard-currency store avoid what was originally intended as the new Russian state's main revenue generator.


Cash dollars cannot be paid to employees. This means they do not get declared as income, and do not fall prey to the potential 40 percent income tax. Moreover, because such payments do not appear as part of the enterprise labor fund, they are not subject to the various payroll taxes paid by businesses, including the social security tax of 31. 6 percent.


None of this should be taken as support for Russia's high tax rates. But the rates are more understandable in the context of a shrinking pool of payers and widespread tacit connivance in tax evasion, by foreigners and Russians alike.