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. Last Updated: 07/27/2016

Poor, Regions Hardest Hit By Tax Code

The government insists that the tax code is a perfect document in all respects. It is being recommended as a cure for all the economy's ills with the same zeal of charlatans selling snake oil. But the claims are being met with increasing suspicion.


Bankers are terribly upset at the code. Instead of a tax on profits, the code introduces for banks an alternative tax on assets. Banks have mastered the art of hiding profits. During the first quarter of 1997, banks forked out only 1.5 trillion rubles ($256 million) -- as much as a couple of metal factories would pay. Assets are somewhat more difficult to hide. The alternative tax hits hardest the big banks that own real estate in the center of Moscow, which is taxable and illiquid.


Oil companies are also not thrilled with the code even though it was the oil lobby that personally wrote the part concerning oil extraction. According to this section, companies have the right to pay taxes not on assets, but on revenues on a sliding scale, depending on the profitability of the deposits. In Russia, the level of profitability on a deposit is determined by the degree of friendship between the oil executives and the institutions that are calculating profitability. Having made such a large concession to the oil companies, in the hope that the main lobby in the country would support the code, the government was obliged to find money for the budget elsewhere. The government won back what it had lost by introducing excise duties on oil refineries.


But the main question is: How justified are the government claims that the tax code will act on the economy like an elixir of life? And if this is the case, why aren't businesses particularly glad about it?


There are few people who have read through the four volumes of the tax code, which is far from lapidary prose. But those who have managed to get through it understand that income tax, which is from 12 to 35 percent, will be decreased because of an increase in the tax minimum and change in tax scale. Taxes on profits will be decreased because the tax base will be brought closer to international standards. But then, value-added tax will be increased. There will be a sales tax and tax on luxury goods. The rate of excise duties will increase.


Such an increase is likely to mean a greater tax burden for the poor. The government is giving up on the tax revenues that it finds difficult to collect and increasing those that are impossible to avoid paying.The other main idea of the code is redistributing taxes in favor of the federal budget and at the expense of the regions. The taxes that generate the least income will go to the regional budgets and those producing the highest yield will go to the federal budget. Moreover, the fund for support of the regions, according to the 1997 budget, will decrease from 15 to 13 percent of the budget. At the same time, the package proposed by the government would mean that a significant share of social security now covered by the federal budget would be turned over to local budgets. Even if the Federation Council, the upper house of parliament, supports the tax code -- which is extremely doubtful -- governors will be forced introduce their own arbitrary taxes in their regions.


Afterward, the government will wonder why its orders are purposely being undermined in the regions and why there is no economic growth.





Yulia Latynina is a staff writer for Izvestia.