Tuesday, July 22, 2014

Window on Eurasia: Taxes Needed for Re-Armament Seen Lowering Russian Standard of Living and Expanding Shadow Economy

Paul Goble


            Staunton, July 22 – Although Russians now say they support Vladimir Putin’s assertive foreign policy, their attitude may change if Moscow introduces new taxes and improving its tax collection program, efforts that experts say will lead to a decline in their standard of living and an increase in the size of the country’s shadow economy.


            In “Novyye izvestiya” today, journalist Sergey Putilov says that “in the nearest future, Russian citizens and businesses will face a number of unwelcome tax innovations,” at least some of which are needed to fill holes in the budget caused by sanctions and to pay for refitting the Russian military (newizv.ru/economics/2014-07-22/205076-fiskalnaja-perestrojka.html).


            The finance ministry wants the country’s hard-pressed regional governments to be able to introduce a sales tax of from three to five percent, the third time that Moscow has tried to introduce such a tax.  Mikhail Gorbachev tried and failed to get this in 1991, and it was imposed between 1998 and 2004 before the Constitutional Court held it to be unconstitutional.


            Because almost all regions are in trouble and because Moscow would likely further reduce subsidies if this tax were available to the regional governments, almost all of the country’s federal subjects would likely feel compelled to impose the tax if they were allowed, making what Moscow wants to present as a regional issue a Russia-wide one.


            The introduction of such a tax would not only undercut the promises that the Russian government has made but “lead to a significant increase in prices and a sharp growth in inflation, and also promote the further exit of business into the gray zone,” all things that will exacerbate the country’s current economic and political problems.


            But that is only one of the new tax measures the finance ministry is considering, Putilov says, adding that it hopes to raise the value added tax and the tax on individual incomes as well.  No decisions have been reached, officials say, but they will need to be made by the fall if the taxes are to go into effect in January of next year.


            That these measures are being discussed, the journalist says, reflects a dramatic change in government policy on taxes reflecting Moscow’s desires to fill up its budgetary “holes” at a time of international sanctions and capital flight. But the government has little choice but to look for new sources of revenue.


“While the economy is stagnating,” Putilov points out, “Russia has become involved in an arms race” unknown since the end of the cold war.  And the authorities plan to spend 20 trillion rubles (600 billion US dollars) over the next seven years to pay for that.  The size of the total is far more than the government’s current annual budget.


Because of the bookkeeping requirements of such a measure, Moscow would have a hard time overseeing its imposition. The size of the bureaucracy required would be enormous.  Moreover, imposing the tax could have just the opposite effect intended by driving businesses underground and leading them not to pay taxes at all.


And experts add the entire plan is unconstitutional and illegal, although those limitations may not in the end be enough to stop this new effort.  What may, they suggest, is popular anger over the price rises such a tax would entail and business anger about new taxes given the worsening economic situation.


But what makes the entire measure so problematic on its face, Tamara Kasyanova, vice president of the Russian Club of Financial Directors, says, is that “introducing this ‘Gorbachev tax’” as it is universally known “just now in the midst of a crisis and growing inflation is untimely,” quite possibly politically as well as economically.

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