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. Last Updated: 07/27/2016

How Not to Collect Tax

The VChK, the abbreviation for Yeltsin's emergency tax commission which, menacingly, shares the initials of the Special Commission for Combatting Counter-revolution, Sabotage and Speculation, better known as the Cheka, has once again entered Russian life. Some are looking to it with caution or scorn, others with interest or hope, but everyone is following carefully the first steps of this newly born body. In my view, however, they are following it for nothing. Of course, the commission will manage to press certain debtors and wring out some money from them. But it still won't be able to solve the question of tax collection, since the roots of the problem are buried in places where the VChK is not searching.


Any schoolboy or girl could tell you that Russia's current tax system is bad. They might add that the taxes are too numerous and too high and that industries cannot pay them. But how to return tax revenues to the budget is a far more complicated question. To answer it, one must look back several years to the time when the present tax system was just being created.


The current tax system took shape toward the end of 1991 under conditions of high inflation and therefore counted on a large share of indirect tax revenues. Moreover, the tax burden fell mostly on corporations, whereas income, property and land taxes were almost negligible. And as long as inflation remained high and production more or less functioned, the tax system worked successfully. Since the start of 1994, however, tax collection has continued to decline. And if the tax revenues from the first nine months of this year are less than two thirds of what had been expected, then it is not owing to a lack of discipline but to the fact that the tax system has ceased to correspond to current realities.


As was the case five years ago, the present tax system is based on large manufacturers. But the lowering of inflation has inevitably led to a decline in revenues in many branches of industry and therefore to a smaller tax base. The very composition of the gross domestic product has changed, with less than half of it coming from manufactured goods.


On the other hand, the service sector has grown dramatically, and many new industries such as banking, finance, information and construction are simply not included in the current tax system. The same can be said of other business activities such as the wholesale and retail trade of imported goods and the shuttle trade. Furthermore, the differences in income and property ownership have widened considerably, but this differential is not reflected in the tax rates.


Another problem is tax exemptions, which are the subject of much debate. The real problem is that the tax burden is not spread evenly among various branches of industry. There are some sectors that suffer greatly from the weight of taxes while others are hardly touched. The answer of course is to decrease the general tax burden but spread the burden more evenly, which would allow the government to collect more taxes.


The third aspect is tax law. There have been many amendments to the current laws, which were created in 1992, but none which have changed them in any fundamental way. The tax law should be joined to the Civil Code and new market laws that have arisen in recent years. Special attention should be put on reaching a consensus between the federal government and the subjects of the federation. It is no secret that local taxes are frequently a bigger burden for the taxpayer than federal taxes. And of course the directives and powerful ministerial normative acts that often contradict current laws should be cut short.


The subject of tax discipline has been one of the most widely discussed themes today. Why, though, has the subject arisen only recently? Carrying out the law in good conscience has never been a characteristic of Russian society. And it is only recently that avoiding paying taxes has nearly become a matter of national and social prowess. Any worker, for example, can cite examples of how his enterprise or organization has managed to evade taxes. Take all the barter deals and cash that is kept off the books. This amounts to not billions but trillions of rubles that slip through the government coffers.


Increasing tax discipline is not only an administrative and legal question. The government should first take a hard look at itself. The ineffective use of tax revenues is by no means the least reason for which taxes are not paid. There is a lack of a clear system of control over carrying out the budget at various levels and simply widespread cases of theft from the treasury.


A final aspect of some importance should be mentioned: the organization of tax collection. The equipment that is used to gather data for tax collection today is at a very low technological level. It is to be expected that in these conditions, elementary ways of evading taxes such as re-registering companies for money-laundering purposes would be employed.


There can only be one conclusion from all that is mentioned above: Increasing tax collection is in no way a question of creating a VChK or similar organizations. Instead, it is a matter of modifying the tax system itself, lowering the general tax burden while widening the tax base, creating new tax laws and strengthening discipline and the organization of tax collection. If we can solve these tasks, then the budget problems can be resolved. If only one or some aspects of the problem are addressed, then we risk remaining in the end with an emergency tax commission but without revenues. In other words, back where we started from.





Mikhail Zadornov is chairman of the State Duma Budget Committee. He contributed this comment to The Moscow Times.