Russia's Flat Tax Rakes in the Cash : LUSENET : Unk's Troll-free Private Saloon : One Thread April 12, 2002


Russia's Flat Tax Rakes in the Cash


MOSCOW -- Like many Russians, Nellie dreads her annual visits to the local tax office, with its long lines, surly officials, and Byzantine tax forms. But recently, the 66-year-old grandmother, who supplements her meager pension by cleaning apartments, had a pleasant surprise.

"My taxes were three times lower," she said. "They must have understood they were too high before."

Nellie is not alone. The government says more Russians are paying income tax, thanks to an innovation that should hearten flat-tax advocates.

Last year, President Vladimir Putin introduced a flat tax on income of 13 percent -- the lowest rate in Europe -- designed to draw more Russians out of the "shadow economy" and make them honest taxpayers.

The results have been dramatic. Revenue from personal income tax shot up nearly 47 percent last year, and tax revenue overall rose 50 percent, according to government figures. Early results from 2002 look even better.

"We expect the number of people filling out income tax forms to increase substantially," said Dmitri Mikulich, deputy head of the Tax Ministry's individual income tax department.

For a society with a long history of distrusting the government and hiding cash at home, the taxpaying boom marks something of a revolution. But many analysts say it's too early to declare victory.

"So far, so good," said Alexander Morozov, a senior economist at the World Bank in Moscow. "There are signs that more people are paying personal income tax, but the process of moving from shadow to light has only just started. There's a long way to go."

Small- and medium-sized Russian businesses complain they still face an insuperable array of taxes.

The worst culprit, many say, is the "social tax" of up to 35.6 percent on salaries, the equivalent of U.S. Social Security.

There's also a 5 percent sales tax, a 20 percent value-added tax, a 5 percent advertising tax, a 2 percent property tax, a 1 percent road tax, plus a 24 percent tax on net profits after most other taxes, not to mention various registration fees.

"There's a sea of taxes," said Slava, 40, who owns a travel agency in Moscow and declined to give his last name.

Like many other business owners, Slava operates under a dual salary system. He slips his four employees an envelope of dollars every month, but for the tax inspectors he keeps another set of records on his books, showing much lower wages in rubles.

The gap between real and "official" salaries is striking. Slava's employees make between $100 and $300 per month, while on paper they earn a mere 500 to 1,300 rubles, equivalent to $16 and $42.

Most tax inspectors are willing to set aside their doubts for a "gift," like a bottle of liquor, Slava said with a shrug. Only through this sort of routine deception, he said, can he keep his business from going under.

"If the government makes it a 13 percent tax for business, just like for individuals, then I'm ready to pay it, but right now there's no way," he said. "You'd have to turn over all your profits."

Putin has promised to change that. Last month, he proposed a tax reform package for small businesses, that he said would be "no less revolutionary" than the flat tax on income.

The reforms would eliminate many taxes for small businesses, and give them the option of paying a 20 percent tax on profit or 8 percent on revenues.

Morozov of the World Bank says it's important to make the taxpaying process less bureaucratic as well.

"The tax burden is not just the amount of tax, but the time and effort it takes to fill out all the forms," he said. "Unless it's simplified, it will be difficult for businesses to stay afloat."

-- (, April 13, 2002


"Most tax inspectors are willing to set aside their doubts for a 'gift,' like a bottle of liquor..."

Rampant bribery and corruption in the Russian IRS! Is this the equivalent of one of those "good news, bad news" jokes, Lars?

-- Little Nipper (, April 13, 2002.

"If the government makes it a 13 percent tax for business, just like for individuals, then I'm ready to pay it, but right now there's no way," he said. "You'd have to turn over all your profits."

-- (Slava@Moscow.queue), April 15, 2002.

The situation there is apparently backwards from what it is here. The little guys get the breaks and businesses don't.

I remember years ago when I first went into business for myself; I soon discovered what one friend called, "our little secret:" that just about everything that you bought and used in your work, from your automobile to a set of screwdrivers, was subtracted from your gross income *before* ANY tax (including SS and medicare!) were taken out.

Simple math: let's say my business grossed $70,000. Mileage, tools, professional fees, office equipment (including computers), advertising expenses, and all that other stuff were subtracted from that $70,000 to develop a NET income. I then paid tax (including SS/Medicare) on *that*, NOT on the $70,000.

That's how it should be, of course. My net profit is my actual gain. The unfairness is that many of the same deductions that I could take as an independent contractor/businessman are disallowed for an employee.

The IRS is well aware of this. Several years ago, they began cracking down on contracted help. They decided that if you regularly reported to the same office and were required to follow a set schedule (ANY set schedule), you were in fact an employee of that business. The business had to put you on a W2 and withhold taxes.

(This is a big problem for contract programmers, for example -- speaking from experience.)

-- Stephen (, April 16, 2002.

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