Publication: Monitor Volume: 3 Issue: 126

The major achievement of the government over the past month was to persuade the Duma to accept on first reading its new draft tax code. The Duma approved the code on June 19 by a 294 to 80 vote, with only the Yabloko faction opposed to the measure. The decision was greeted with enthusiasm by international financial institutions, who see Russia’s chaotic, Soviet-era tax system as the main barrier to market reform, economic recovery, and foreign investment.

The new draft code proposes reducing the number of taxes from 75 to 28. It will lower the burden of tax on corporations, while individuals will face a12 percent tax on earnings up to 60 million rubles ($10,400) and a 30 percent rate thereafter.

There is no doubt that Russia needs a new tax code. But there is considerable doubt over whether the measure passed on June 19 will be effectively implemented. The code, which consists of 1200 articles, was drafted in about six weeks, and it will take many months for lawyers and tax specialists to figure out the necessary changes in other, related, legislation and in the Civil Code. The Duma is not going to consider the code on second reading until November 1, which means that actual adoption could well be pushed back into 1998. Duma deputy Pavel Bunich, a member of the pro-government "Russia is Our Home" faction, described the code as a "cloud in trousers," arguing that nobody knows what it will be like in one-two years time. (NTV, June 24) Critics suggest that the tax code is repeating the history of the 1997 budget — that is, it is being rushed through for political reasons and will have to be completely rewritten at a later date. (Trud, June 14)

The macroeconomic impact of the code as it stands is also something of an unknown. Duma Budget Committee chairman Mikhail Zadornov complained that deputies had not been given detailed projections of the likely economic consequences of the code, except for a mere two pages of figures about projected revenues. (ORT, June 11) Deputy Finance Minister Sergei Shatalov has repeatedly stated that the new code will lessen the tax burden on the economy. It is variously estimated that federal revenues will fall by 50-75 trillion rubles, or 2-3 percent of GDP. (Kommersant-daily, June 20, Rossiiskaya gazeta, June 14) This would leave a huge hole in the federal budget, which is already straining to meet its minimal social commitments. The new code seems to rely on a supply-sider leap of faith — the belief that cutting tax rates will unleash growth and hence boost revenue overall.

Yabloko leader Grigory Yavlinsky criticized the new code as an "instrument of fiscal repression," arguing that it violates existing laws, grants excessively harsh powers to the tax police, and assumes in advance that tax-payers are guilty of hiding income. (Russian agencies, June 17) Given that Yavlinsky criticizes everything the government does, his rhetoric should perhaps not be taken too seriously. More worrying, however, is the fact that Aleksandr Ioffe, president of the Association of Small Businesses, told journalists that the new code will "destroy" small businesses. (Russian agencies, June 25) In a recent poll 84 percent of small businessmen complained about high taxes, and only 9 percent complained about racketeers. (Izvestia, June 25)

Finally, it is worth remembering that many of the problems with tax collection in Russia have deep political and economic causes, which will not be solved by the new code. The acute lack of liquidity means that many businesses lack the cash to pay taxes — as of April about 25 percent of taxes were still being collected in the form of securities rather than in cash. (Komsomolskaya pravda, June 5) Another major problem that businesses face is the profusion of locally-set taxes. Regional authorities were forbidden from imposing taxes and duties by presidential decree no. 1214 of August 18, 1996, but many regions continue to impose such levies nonetheless. (Ekonomika i zhizn, No. 23, June) These deep structural flaws in the Russian political economy will not be solved by hastily-written legislation rushed through a brow-beaten Duma.

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