Russian Federation Country Study. A Public Finance Perspective

RUSSIAN FEDERATION COUNTRY STUDY
A PUBLIC FINANCE PERSPECTIVE
Ryan Grace [email protected]

Political Background
The separation of powers which existed under the Soviet constitution was
essentially a myth. A Russian accurately characterized the relationships
that existed between party, state and society as, …The state absorbed the
society, the Party absorbed the state, and the Party appartchiks, the
nomenclature under the totalitarian leadership of the Secretary-General
absorbed the Party.» Both legislative and judicial branches served as
rubber stamps» to the Presidium of the Supreme Soviet which unlike the
Supreme Soviet itself was constantly in session. The development of
political reform in the late 1980s weakened the party's control over the
reigns of power. The devolution of power from the Presidium occurred
through the creation of the office of the President which received the
executive powers while the legislative powers were assigned to Congress of
Peoples Deputies. The judicial branch also achieved higher visibility
during the late Soviet period through the creation of the Committee on
Constitutional Supervision. The Soviet Union's collapse in 1992 introduced
radical changes into all aspects of Russian society. Russia has little
experience with democracy in any form. Without a strong democratic
tradition, it should not be unexpected that instability would develop in
all aspects of Russian life. The role of governmental finance in post-
Soviet society is no exception. Competing explanations exist for Russia's
travails but a shared trait of many them is the distribution of power at
the federal level and the relationship between the federal and sub-national
levels of government.
Political problems did not take long to develop in the Russian Federation
after the USSR's dissolution. At the federal level, the creation of the
present constitution is one cause of the instability which plagues Russia
today. After winning a national referendum on August 15, 1993 in which the
electorate was asked to endorse the Yeltsin's reform policy, he convened a
constitutional assembly to ratify his version of the new constitution.
Three drafts were in contention to replace the constitution under which the
Soviet Union was nominally ruled. Other than Yeltsin's constitution which
became the one implemented, the two other variants were the communist draft
which advocated a strong Presidium of the Supreme Soviet with a chairman
who had similar powers to the position of General Secretary during the
Soviet period and the Rumyanstev draft which contained plans to restrict
executive power and grant the legislative body wide powers. Yeltsin's draft
advocated the exact opposite of the aforementioned plans with wide powers
to the executive and minimal power delegated to the legislative. After the
Duma rejected Yeltsin's order to dissolve, he ordered military troops to
forcefully evacuate the building—which they did by shelling it. Briefly,
the president is the protector of the constitution, human rights, and civil
liberty. In order to protect the constitution and the aforementioned
rights, the constitution grants the president wide injunctive and
declarative powers. The former powers consist of the president's ability to
use «conciliation procedures to resolve disputes between the federal
government and the governments of the constituent subjects and disputes
between the various subjects of the federation.» A three stage procedure
exists for the adjudication of disputes but his ability to suspend
legislation after it is submitted to the appropriate court» which he deems
to be in violation of the constitution is considered by many as
inappropriate for a fledgling democracy. The President also has the power
to issue decrees and orders which are superior to the laws of the
government as long as the decree or order does not violate the
constitution. Further, the president has the ability to appoint important
member of his government without consent for the Duma and has sole power to
appoint and remove the command structure of the Armed Forces. In regards to
the legislature, the president has the ability to dissolve the Duma if it
passes two no-confidence vote in the Russian government within three months
of each other and if it rejects three presidential nominee for Chairman of
the Russian government. Although there are limitations of the president's
ability to dissolve the Duma, it remains a potential weapon against a
contentious parliament that affects every aspect of public finance.
The power of the legislative and judicial branch are limited in relation to
the executive. Russia's judicial system consists of a several court systems
that have different spheres of federal/national jurisdiction.» The most
visible court is the Constitutional Court which has the right to review the
constitutionally of all federal laws, presidential orders and degrees,
legislation of government, and unratified treaties. Challenges to the
aforementioned areas must be brought by individuals with standing. Although
the Constitutional Court's power seems vast, the president's expansive
powers and lack of civil relations between the different branches makes the
Court's utilization of this power suspect. Federal law and federal
constitution laws are the two types of laws which exist in the Russian
Federation. The latter is considered superior to federal laws. The
procedure for enactment differ in each case. Once a bill is passed it must
presented to the president within five days of the passage by the
parliament. The president then has fourteen days to reject the law. In
order to veto the federal law, a two-thirds majority must be gained in both
parts of the legislative assembly. In the case of federal constitutional
law, three quarters of the Federation Council and two thirds of the Duma
must approve it for enactment. The constitution does not describe any right
for the president to veto federal constitutional laws. According to Article
106 of the Russian Constitution, laws in regard to the following area must
be voted upon by the Federation Council: The federal budget, federal taxes
and levies, foreign currencies, custom regulation, and currency issuance.
Budgeting
Recently, the Duma rejected the government's first draft of the budget.
Deputies were divided over the size of the projected federal budget
deficit, which was set at 95.4 trillion rubles or 3.5 percent of GNP. When
the budget is rejected by the Duma, the government has 20 days to revise
and re-submit the budget. If differences exist between the government's
proposed budget and the Duma's, an option exists to create a committee to
reconcile their disagreements. The Duma rejected the government's proposed
1997 budget in October 1996 and did not opt initially for such a
commission. If no budget agreement is reached, parliament would be forced
to pass monthly or quarterly budgets which would cause confusion throughout
the economy. Since the initial rejection however, a reconciliation
commission (in which both houses of parliament and the government are
represented), has been working on a new version. The reconciliation
commission is due to have a final meeting on Wednesday, with the Duma
giving the budget a new first reading on November 20 or 21. There is no
legal framework to cover the failure to pass the budget, but parliament has
faced the problem every year of Russia's independence except 1996 and has
in the past approved temporary budgets.
The work of the reconciliation commission is being drawn out because
neither the communist majority in parliament nor the government wants to
take responsibility for making a decision on the budget. Russia is trying
to keep to a small deficit in 1997 under pressure from the International
Monetary Fund, but the Duma is eager to increase budget spending to a
starved economy. Reform minded deputies want a lower budget deficit to
achieve lower credit rates—which they say are vital for economic growth
but which are kept high through heavy government borrowing. The dilemma is
that the communists in the parliament want to increase spending and as a
majority they can block implementation of any budget bill.
Taxation
Russia's tax system is an exercise in frustration for both Russians and
foreigners. The problem arises because it seems that many taxes spring out
of the blue and carry heavy retroactive penalties» which are often three
times the tax amount due. Russian tax reform is difficult now because the
government desperately needs money and has little room to maneuver since
revenues are static and low. The budget take, both federal and regional,
came in at just 27.3 percent of GDP, compared to 50 percent in the Czech
Republic and 47.7% in Poland Russia's budget deficit has been narrowed in
recent years, but this only been achieved by cutting back on expenditures
in real terms, almost 50 percent from 1993 to 1995.
Like the United States, Russia has a three-tiered system of taxation.
Federal taxes are enforced by Parliament, regional taxes enforced by the
regional councils, and local taxes enforced by the local authorities. Under
the existing system, very little coordination can be found between the
three levels of government which causes serious tax policy problems. In a
1993 decree, regional and local authorities were given the power to decide
on types and sizes of taxes for their jurisdictions. The hope was that
authorities at each level, being responsible to its citizens, would act
within reasonable limits. Local authorities, seeing a way to increase
revenue, devised more complicated and exotic taxes. There are 150 locally
imposed taxes within the Federation . They were competing who would invent
the more interesting taxes at their respective levels—for example a tax on
grazing cattle.
Tax Code

The Russian tax system is very complicated. The first two sections of the
new code have 416 articles which are contained in more that 100 pages—and
this is just an the overview of general principles. In an effort to improve
tax law, a new draft of tax code was presented to the Russian parliament in
February 1996. Apart from laws, the tax regime is regulated by many other
documents. The list of these tax documents includes 900 items. It is
understandable that the taxpayer can be confused by so many documents. Even
a good taxpayer can make mistakes. The code is not expected to be enacted
this year but it is a good step toward improving the clarity of the tax
system. The current system, plagued by an excessive tax burden and rampant
tax evasion, has seriously impeded tax collection efforts. The proposed
draft code seeks to implement a number of the reforms prevalent in Western
economies during the 1980s, including a broadening of the tax base,
lowering of tax rates, and the reduction of incentives, exemptions, and
deductions.
A new mechanism for tax refunds in the case of overpayment is also provided
in the code. If a taxpayer paid too much tax at his own initiative, the
taxpayer may request the overpayment amount be credited towards his next
payment or be refunded within a specified time limit. If the time limit was
exceeded, the amount would be refunded with interest at a interest rate
tied to the prime rate of the Central Bank. In January 1996, new rules came
into effect concerning the refund of VAT if the taxpayer is involved in
exports operations. It was a major problem since VAT refunds were the
responsibility of local budgets. The 1996 budget, which was submitted in
mid-August, provided such VAT refunds from special funds of the federal
budget.
Overview of Major Taxes

Income tax
Russia's individuals income tax has several bands which range from 30 to 60
percent. The 60 percent rate is essentially the only rate in effect for
Westerners. In 1993, the tax law was changed. Earlier, individuals could
only pay taxes in rubles. Now, taxes on income earned in hard currency may
be paid in rubles or in hard currency. Proposals to increase the Russian
personal income tax rates were rejected by Russia's upper house, so the
1995 personal income tax rates remain in effect as of January 1, 1996 (see
appendix). Three tax brackets now exist in the Russian Federation: 12
percent on income up to Rubles. 10 million, 20 percent up to Rubles. 50
million, and 30 percent over Rubles. 50 million. The current exchange rate
is one dollar to approximately 4,700 rubles. While many individuals may
complain that the higher income tax rates will cripple them, Russia would
still have the lowest personal income tax rate in Europe at 35 percent.
Excise tax
The excise tax in Russia explicitly covers imported luxury goods, including
tobacco products, beer wine and spirits, cars and light truck, tires,
jewelry, gemstones, rugs, crystal, fur, and leather products. The rate of
excise tax ranges from 10 percent for crystal to 90 percent for grain
alcohol personal. A new principle was applied, in accordance with a recent
decree, to the calculations of excise taxes on alcohol and tobacco imports.
In contrast to the previous practice where excise taxes were calculated in
proportion to the customs value of the imported goods, under the new
procedure, the taxes (on August 1, 1996) will be imposed in ECU per one
unit of commodity item. In some ways, excise taxes and single-stage retail
taxes would seem to be prime candidates for regional taxation in the Russia
just as they are in market economies, especially if the taxing locality is
large enough to avoid revenue loss from consumers crossing the border to
regions with lower tax rates Such taxes thus seem more suitable for larger
intermediate governments than for small local governments.
Profit tax
The profit tax calls for a 32 percent tax on all profits, with an exception
for profits generated by retailers. Profits by retailers are taxed at a 45
percent rate. The tax discriminates against Russian workers because the tax
is not applied to the wages of foreign workers. The profit tax keeps intact
the profit reinvestment concept of prior Soviet tax legislation.
Essentially, no tax is imposed on profits reinvested in the business
venture. Also, the government has not changed the 15 percent withholding
rate for interest, dividends, and other passive income. A 20 percent
withholding rate applies to royalties on copyrights and licenses.
VAT
A VAT of 28 percent passed into a law on December 6, 1991 and became
effective on January 1, 1992. The VAT was not initially imposed on imports
or exports. However, the government changed the policy very soon
afterwards. For instance Russian neighbor, Ukraine will be happy to realize
that Russia imposed a VAT on imported goods originating from Ukraine
(Decree No 1216 of August 18, 1996). The reason for the decree is to
preserve stability of the Russian commodity market. The decree also takes
into account that Ukraine is not a part to an agreement signed by the
member states of the Commonwealth of Independent states on the coordination
of tax policy. The general VAT rate as of January 12, 1996, remains at 20
percent. A rate of 10 percent applies to certain food items and children's
goods. Payment of the profits tax and VAT of state owned enterprises is
centralized at the level of their ministries administrative departments
(Decision No 629 of May 22, 1996).
Corporate income tax
The corporate income tax has three tax rates and the application is based
on the type of income earned. Manufacturing income is taxed at 18 percent,
service income at 25 percent, and income earned by retailers at 45 percent.
One of the most interesting things is that the revenue is not intended to
go to the central government. Moreover, the law is written that regional
authorities can tax corporate profits up to 18 percent, 25 percent, and 45
percent.
Sales tax
The sales tax was first introduced on December 29, 1990 by USSR Cabinet of
Ministers. It was decided to approve a list of goods and services whose
sale on USSR territory will not incur the 5 percent sales tax. The local
and regional authorities may make additions to list of goods in everyday
demand and services to the population which are exempt from the sales tax
(see the appendix). population.
Further Drawbacks of the Russian Tax System
Attorneys and tax specialists in Russia say the greatest problem facing
enterprises is the lack of a satisfactory tax code. It is necessary that
tax policy should be circumscribed and that more power should be given to
the legislature. The nature of the tax structure allows some people to be
heroes by breaking the rules. For example, a pharmaceutical company chief
who had his security guard expel tax inspectors from his head quarters and
vowed to shoot them if they returned, was elected to a seat in Parliament
instead of going to jail. The penalties for non-payment of taxes is a
defiency of the tax system that drives people from the tax system because
they are so afraid of making a mistake that they prefer not to pay. For
example, a standard 100 percent fine exists for understating income. The
interest rate on late payments alone amounts to 0.7 percent a day, or 255
percent per annum, a penalty that can dwarf the actual liability. The
penalty amount is presently reduced and is tied to the refinancing rate of
the Bank of Russia. The penalty for each day of delinquent payments would
equal 1/300 of the prime rate of the Central Russian Bank.
Russia also does not have a specialized tax court. To seek justice in tax
issues, taxpayers have to find a people's court which is willing to accept
the case. The courts do not have expertise in the area of tax law which is
why most of the courts are reluctant to accept tax cases. The lack of legal
recourse leads to corruption within the tax collection system. Russia does
not have a law like the Freedom of Information Act (FOIA) or the Privacy
Act which hinders the accountability of the tax service.
Aside from ample monetary reasons to evade and avoid taxes, taxes (in the
Western sense) did not exist in Russia during the Soviet period and
therefore the idea of a Western style taxation is unpalatable to many
Russians. Taxes began to appear in the USSR only in 1991 which means that
the current population has only had to deal with the issue of taxation over
a short period of time. The result of this historical experience is that
only between 60 and 75 percent of projected tax revenues have been
collected this year.
Recent attempts to Improve Revenue
Decree No 1212 of August 18, 1996 is designed to improve tax collection by
preventing tax evasion and streamlining cash and non cash turnover. Among
other measures, the decree orders enterprises in arrears of payments to the
government to open settlement accounts in banks or credit institution
within the Russian Federation. Those accounts are referred to as accounts
of enterprise in arrears. When requested by the appropriate tax
authorities, banks and other credit organizations are required to provide
data about the transaction of enterprises holding these accounts. Taxation
organ may refuse to register the account of an enterprise in arrears in
case there are no funds available on the correspondent account of the bank
or other credit organizations. An interesting aspect of this decree is that
the government finally began to crack down on misrepresentation «in case of
noncompliance with this requirement or intentional provision of false
information in the notice submitted to taxation organ enterprise in arrears
that had performed the transactions in question will be fined by the
taxation organ in the amount of the transaction value». It has proposed to
improve the tax system by scrutinizing financial transactions through
banks. If an enterprise opens a bank account, the bank or other type of
credit institution must immediately inform the tax organs about the
accounts for tax purposes. Such tax policy will let the tax agencies
observe tax payments more efficiently as everything will be recorded.
Presidential Decree No 1212 of August 18, 1996 also introduced policies
concerning cases containing the circumstances stipulated in the Law of the
Russian Federation on Insolvency (Bankruptcy) of Enterprises, the Federal
Department on Insolvency (Bankruptcy) at the State Property Management
Committee of the Russia Federation shall file with arbitration court
request to institute proceedings on insolvency (bankruptcy) against
enterprises that have repeatedly violated this Decree during one calendar
year. As it was with collective farms and state farms, enterprises can just
change their names and continue to evade taxes. An important issue related
to insolvency is loss of massive amounts of jobs and what will workers and
one enterprise» towns do for a living and revenue.
On the bases of the decree, the government has widened its crackdown on tax
evaders—adding several leading oil companies to a list of tax delinquents
that might be forced into bankruptcy court unless they pay their arrears.
The move was the latest in a series of desperate measures the government is
taking to boost tax collection and mend its thread bare budget. The
government hopes that by threatening major tax evaders with bankruptcy,
they will scare the country's errant tax payers into filling empty coffers.
Major companies targeted for bankruptcy can avoid insolvency proceedings,
if their accounts showed the government owes them an amounts equal to their
tax debts for fuel supplied to state organizations.
The most recent step in fighting tax evaders was Russian presidential
decree No 1428, (dated (October 11, 1996, which created a Processional
Emergency Commission (the Commission) on strengthening fiscal discipline.
The major principals and objectives are:
. Control over the timely and full payment of taxes and customs and other
compulsory payments; . The elaboration of measures to secure a full-scale
collection of taxes and other compulsory payments; . Securing the legality
and efficiency of the work of tax and customs, as well as tax police
agencies; . Control over the timely and special-purpose use of the
resources of the federal budget and state extra budgetary funds. . Take
decisions to carry out checks of the financial and economic activity of
legal entities and compliance by individuals and entities with the tax,
customs and banking legislation of the Russian Federation; . Check the
operations of tax and customs bodies;
. Organize check of the timely and special-purpose use of the resources of
the federal budget and state extra budgetary funds.
In addition, the President granted broad powers to the Commission to meet
the objectives of the decree and secure its accountability.
Monetary Policy
Interest rates, much to the chagrin of reformers, in the past barely
reacted to currency stabilization and the ensuing drop in inflation. Little
confidence existed in the sustainability of reforms while inflation
expectations remained high. In 1996, interest rates finally started to come
down—albeit slowly. Real interest rates, however, are still very high. As
recently agreed by the Russian government and the IMF, the ruble is due to
become convertible by 1997. Better access to the ruble market could thus
lead to a rapid increase in international interest in the currency.
Nevertheless, the ruble is trying to join the club of respectable
currencies. Due to the establishment of a crawling peg, the currency's
downslide is almost under control. A generally more stable economic
environment and high interest rates could make the ruble more attractive.
The ruble's recent past has been eventful to say the least. Between January
1992—effectively the start of economic reform under Yeltsin—and March
1995,the currency depreciated by a massive 2,130 percent. In the second
quarter of 1995, an over-restrictive monetary policy led to a severe
shortage of the currency which then duly appreciated by 15 percent within
three months. As concerns rose that too rapid currency appreciation would
further destabilize the economy, the free-floating ruble program was
abandoned and a 'ruble corridor', which envisaged further depreciation but
within predetermined limits, was introduced. The ruble corridor program has
proven to be quite successful. The Central Bank, which has been intervening
repeatedly in the market, has managed to keep its foreign exchange reserves
at a satisfactory level, and the business community has been able to rely
on a more predictable exchange rate trend. In July 1996, the 'fixed' ruble
corridor (the upper and lower limits of which only had to be redefined
every few months) was transformed into a 'variable' ruble corridor, with
the band shifting on a daily basis. Under this program, monthly
depreciation now stands at around 1.5 percent. By the end of December 1996,
the exchange rate against the dollar should have reached Rb 5,700/US $.
Russia's monetary environment started showing promising signs of
stabilizing in 1996. During 1995, inflation reached 200 percent by
December. 1996 is drawing to a close and the inflation rate seems set to
fall to 19 percent. The central bank has been pursuing a very consistent
policy lately, so its goal of maintaining monetary stability looks
credible. Moreover, low inflation is one of the conditions imposed by the
IMF in return for its monthly credit and it is therefore hardly in the
government's interest to start emission based means of financing the budget
deficit. The main risk for inflation could come from a high budget deficit
due to low tax revenues. Financing the deficit has become easier than in
the past due to good international credit ratings—for example, IBCA: BB+,
Moody's: Ba2.—are making it cheaper for Russia to borrow on the foreign
capital markets.
A key element of Russia's macroeconomic stabilization program has been a
tight monetary policy to soak up excess rubles floating around the Russian
economy and fueling inflation. That policy's success is among the factors
that drove T-bill yields up by 26.6 percent Monday to an annualized 121.4
percent on the secondary market. Just a month ago, yields stood at 53.33
percent, according to Skate-to Press Consulting Agency.
The reason for the jump, analysts say, is simple supply and demand — little
ruble supply in the market at a time when government spending demands
revenue. The banks do not have the money to invest in GKO (treasury bills)
at 3 percent per month—but they will find the money to invest for 10
percent per month. Russia's monetary expansion under the IMF agreement is
not to exceed 3 percent, compared with 9 percent in December. Combined with
promises by Yeltsin to repay wage arrears and ease the impact of reforms on
the social sphere, that tight policy has forced the government to raise
yields as a lure to banks to loan the government money.
Intergovernmental Finance
The decentralization of the Russian Federation's intergovernmental
financial relationships began with a series of successive tax sharing
arrangements along with the regions expenditure responsibilities
increasing. This sharing and reassignment strategy continued up to and on
through the adoption of a new constitution in December 1993. In Russia, the
tax formula sharing rates vary by region and are often negotiated by each
locality with the center. This makes any assessment about the equity impact
of transfers or their effects on local revenue effort difficult. A general
disadvantage of tax sharing is that it does little to enhance local
accountability or efficiency. Localities receive revenue regardless of
their tax effort and have no discretion to set the tax rate or base. If
they view these revenues as costless, their incentive to spend efficiently
is lessened. The result may be undue expansion of subnational spending. In
Russia shared taxes are retained by (or accrue to) the jurisdiction in
which they are collected. This differs from most market industrial and
developing economies where shared taxes (like the VAT in Germany) may be
shared through a formula based on factors such as population, per capita
income, urbanization or other factors. Derivation-based sharing as a rule
channels resources to high income areas where the tax base and, therefore,
revenue collections are largest. It is thus inherently counter-equalizing.
This may be a problem in countries where regional inequities are serious
and where the intergovernmental system lacks other instruments (such as
transfers) to address such imbalances.
The intergovernmental fiscal relations of the Russian Federation continues
to be highly opaque due to the bargain-based system which presently is
being utilized. The bargain-based system is making accountability in fiscal
policy even worse than is necessary—therefore further reducing the
transparency. The size and structure of the Russian Federation contributes
to the problems occurring in its fiscal relationships. It is made up of 89
regions consisting of 29 republics, 50 oblasts, 6 krais, and 10 autonomous
okrugs, plus 2 metropolitan cities (Moscow and St. Petersburg) which are
referred to as the 89 «subjects of the federation» in the constitution. The
regions are even further subdivided into more than 2000 districts, where
all the local governments within a region report to the regional
governments and are subject to regional regulations, although each local
government has independent» (emphasis added) budgetary and administrative
status.
Effects of Decentralization
Economic decentralization has led to the transfer of a number of services
with major benefit spillovers (education, health, and social welfare) to
the regional and local levels. While the administration of these programs
by local governments may be appropriate because they are closer to the
people, the many small local governments that have been created as a result
of the strong political push for decentralization cannot likely provide
these services at an adequate level from their own resources. In some
regions, enterprises' «public» spending exceeds budgetary social spending
and, in a few «one-company towns» there is no public spending by the budget
at all on non-administrative functions. Enterprises did not provide these
services once privatized, and responsibility fell onto regional and local
governments to finance them. But local governments will need revenue
sources to finance the additional burden.
Decentralization, which led to ownership assignment and financial
responsibility, has caused the regions to become more involved in the
commercial sector through producer subsidies, capital transfers, and
privatization. It has also led to the budgetary expenditures by the
regional governments to increase from 13 percent of the GDP in 1992 to
around 18 percent in 1994. Recent policy changes have suggested that this
trend of more subnational spending is likely to continue.
The Federal government has approved legislation which led to the previously
discussed changes in expenditure assignment and also gave local governments
the power to formulate budgets and raise revenues without worrying that
their surpluses were going to be extracted by the central government. These
new assignments of expenditures are not efficient, in part because the
federal government has passed down» many of the expenditure assignments
which were formerly the responsibility of the Soviet state. Revenue
autonomy has not been reached partially due to the yearly changes in tax
sharing rates. Disparities between the rich and poor regions has also
contributed to a problem budgetary concern. Along with these disparities,
the high rate of inflation has significantly contributed to revenue
unpredictability of the rayons and oblasts. Revenue predictability and the
subnational area's economic state due is of the utmost importance when one
is considering expenditure assignment of the federation.
Social Welfare and Russia
The significance and necessity of an efficient social safety net in the
Russian Federation can only be understood within the context of the Soviet
experience of social security and how today the ideological inclination
toward a welfare state is affecting Russian society. The state's pervasive
role in Soviet society affected both economic and social conditions.
Economically, a state-caused inverse relationship existed between GDP and
the state's commitment to social safety during the Brezhnev regime.
Economic and political stagnation characterized the latter years of the
Brezhnev era. Economically, GNP growth declined precipitously between 1961
and 1985 (see A1 and A2). Prior to 1960, the USSR utilized extensive rather
than intensive factors of production—specifically labor, capital (stock),
and natural resources. In essence, Soviet authorities were able to take
advantage of Imperial Russia's lack of a strong industrial base by
transferring much of the population from agriculture to industrial
production during Stalin rapid industrialization drive of the 1930s and
1940s. The emphasis placed on heavy industry produced a correspondingly
high rate of consumer saving which allowed for increased capital growth,
that when combined with the natural resource abundance and intensive use of
existing capital helped sustain economic growth The USSR's ability to
sustain economic growth in the 1970s was fostered by its large reserve of
oil that helped finance imports of western technology.
The exhaustion of labor surplus, declining birth rates, inefficient use of
natural resources and other factors of production, the growing expenditures
needed to maintain military parity with the United States, and the sudden
drop in oil prices, and the mis-development of the economy all were factors
that contributed to the USSR's economic stagnation in the late 1970s and
early 1980s. While economic efficiency decreased during the Brezhnev
period, the USSR's leadership demonstrated increased commitment to the
Soviet version of the social safety net. The party-state's pervasive role
in society had the effect of slowing economic growth through poor re-
allocation of resources and the social effect of retarding the development
of a civic society. As a result, Soviet society developed an enduring
attachment to the idea of an omnipotent state which provided for their
basic needs regardless of the economic costs.
From a Western perspective, the Soviet Union was ideologically a hyper»
welfare state in the sense that prior to the Gorbachev era, the state
attempted to provide a high level of social security for every citizen,
often to the point of harming economic efficiency. Additionally, it heavily
restricted the development of private sector in order to prevent wide wage
disparity. As mentioned above, the CPSU's monopoly on power extended to
every aspect of society and in exchange for party dominance the working
population received implicit social guarantees in the form of a social
contract.» Linda J. Cook succinctly identifies each sides' basic
commitments and responsibilities:
Basically, the regime provided broad guarantees of full and secure
employment, state controlled and heavily subsidized prices for essential
goods, fully socialized human services, and egalitarian wage policies. In
exchange for such comprehensive state provision of economic and social
security, Soviet workers consented to the party's extensive and
monopolistic power, accepted state domination of the economy, and compiled
with authoritarian political norms. Maintenance of labor peace in this
political system thus required relatively little use of overt coercion.
The weakening of the party and other unintended consequences of glasnost
and perestroika such as the emergence of the Russian Republic, the decision
to release Eastern Europe from Soviet domination, and the attempt to make
state owned enterprises more efficient all had a direct impact on lowering
the standard living for the USSR's population. Gorbachev tried and failed
to cut the guarantees of the social contract. In contrast to earlier in the
Soviet period, the perestroika reforms had the effect of giving
significance to money» in the sense that inputs had developed value through
the economic decisions which constituted perestroika. From the center's
perspective, the problems caused by the inability to cut expenditures
through revision of the social guarantees were compounded by revenue loss
in three key areas: vodka sales, turnover tax, and republic contribution to
the center—especially from the Russian Republic.
Gorbachev began perestroika with an attack on worker efficiency. One
measure adopted to combat this perceived evil was restriction on the sale
of alcohol. The consequence was a loss in revenue which was further
compounded by expenditures related to the Chernoybl disaster and the
massive Armernian earthquake in 1987. In 1990, the center granted state
owned enterprise (SOEs) greater leeway in the setting of prices—between 50
percent and 100 percent of state mandated prices. Since retail prices were
unaltered, the state lost a huge amount of revenue from the turnover tax.
In addition, Russia offered to lower the profit tax for those enterprises
willing to pledge» allegiance to the Russian Republic. Finally, the
dissolution of the Soviet Union was hastened by the rise of Russian
nationalism and populism both of which had economic implications. The
Russian Republic provided 80 percent of the revenue to the USSR's budget.
Yeltsin, using his powerful position within the Russian parliament,
declared in October of 1989 that the Republic would halt all payment to
Union institutions. He followed this devastating maneuver by nationalizing»
the USSR Ministry of Finance and seizing its mints. In October of that
year, Russia seized her share of the USSR'S precious metals. Faced with
such tremendous loss of revenue which created a budget deficit that equaled
10 percent of GNP, the Soviet government elected to increase the amount of
money in circulation without a corresponding increase in the production of
consumer goods and services. The decision to increase money circulation,
through wage increases, had a jarring effect on Soviet society. The first
impact, characterized by the indelible image of long bread lines and the
stereotype that a large profit could be made on a pair of Levis familiar to
many Westerner was the result of the disruption of goods and services to
the general population.
Price stability began to go by the wayside in the fall of 1988 with an
estimated inflation rate of 7 percent which mushroomed to 10 percent in
1990. As Table A3 and A4 indicate, the state increased both the level of
wages and subsidies in the other which constituted the component parts of
the Soviet safety net. Real wages, however did not compensate for
inflation. The decline in social welfare from a monetary angle was
compounded by quality decline in social consumption areas. Although the
state increase subsides to social consumption areas, the collapse of the
Council on Mutual Economic Assistance (CMEA) which provided much of the
USSR's medicine and medical supplies and a growing environmental movement
which forced the closure of many chemical plant that supplied the limited
domestic market. Gorbachev's attempts at reforms destroyed not only the
social contract which existed between the state and its citizens but the
USSR as well. The late Soviet period thus provides the starting point for
examining poverty and the Russian Federations response to it in the form of
the social safety net.
The Soviet social welfare system was effective in that absolute poverty, i.
e. wide spread hunger or inadequate diet, was avoided in the latter years
of the Soviet period since the state could supply the basic needs of the
population through its control of USSR's resources and society as a whole.
Research into question of poverty and therefore poverty alleviation policy
(specifically the question of income inequality and distribution) was
hindered by the imposition of political rather than economic explanations.
In 1965, the Soviet Labor Research Institute adopted a social minimum
income norm which was derived from the estimated costs of human
consumption. Goskomstat revised the income level based on the prices
reported by state-owned stores. The price consumers were faced with,
however, due to their shopping habits, the existence of a black market,»
and inflationary pressures dramatically reduced their purchasing power. The
Russian Federation revised the poverty line in 1992 to encompass the age
and gender of individual households. The six categories are: children under
six years of age children between the ages of 6 and 17, men between the
ages of 18 and 59, women between the ages of 18 and 54, men age 60 and
above, and women age 55 and older
Closer to the U.S poverty line definition, the Russian poverty level is
established by first collecting low-cost cost food baskets for each
demographic group… [and] after pricing each market food basket at
national prices, age, and gender-specific multipliers yield individual
poverty line for each demographic group. The definition of poverty is
critically important to social welfare of Russia because, in theory, it
sets pension, minimum wage level, and welfare payments. The USSR's
dissolution has altered the scope, source and method of financing of social
welfare programs. The Soviet state provided a broad range of social
services, through state owned enterprise. From a public finance
perspective, the transition to a more market oriented system has meant the
diversification of social spending responsibility through the creation of
off-budgetary funds (OBF) and passing down the bulk of public social
spending mandates to sub-national governments. The following are the major
OBFs: Pension Fund, Social Insurance Fund, Employment Fund, and the Fund
for Social Support.
Created in 1991, the Pension Fund was designed to take pressure of federal
budget and is authorized to collect a mandatory payment from employers in
the form of a mandatory 28 percent contribution while from agricultural
enterprises the mandatory contribution is 20. 6 percent and 5 percent of
the total income of self-employed individuals. Employees make a 1 percent
contribution to the Fund. Labor pensions, financed from these contribution,
and social pension which are financed from the federal budget are
administered by an independent government agency. The former constitute the
majority (80 percent) of Russian pensioners and thus the level of labor
pensions affect the lives 19. 5 percent of the Russian population. To be
eligible for labor pensions, men must have made 25 years worth of
contributions while women must have made 20 years of contribution.
Eligibility for labor pensions can be lower depending on occupation—
hazardous occupations such as coal mining and military service are two
examples. Social pensions are for individual with less than 5 years of work
experience and is equal two-thirds of the minimum old-age pension or in the
case of disability the amount varies but does not exceed the minimum labor
pension.
Payroll contributions are the also the main source of funding for the
Social Insurance Fund (SIF) and the Employment Fund. Created in August
1992, the SIF is funded by a 5.4 percent payroll deduction from every
worker. The SIF is intended to fund child care, maternal care benefits, and
sick care. Generally, 74 percent of revenue collected from the SIF
contributions remains with the enterprise while the remainder is sent to
the center to finance federal responsibilities. Workers who have accrued
eight or more years of experience receive their entire salary as do
Chernobyl victims, parents with three or more children, and war victims.
Workers with less that five years experience receive 60 percent of their
salaries while those with between five and eight years experience receive
80 percent of their salaries. It is accepted practice that benefits are
paid until the worker recovers or is granted a disability pension.
Mothers receive support through a maternity grant which equals five times
the amount of the present minimum wage. Additionally, working mothers
receive a maternity allowance, over the span of 126 days, which is
equivalent to her entire salary. When this time has elapsed, the mother can
receive a payments that equals the minimum wage for up to a year and half.
The expenditure responsibility for family benefits, which generally are
divided into the following broad categories: payment made to all families
with children without regard to income or prerequisites, cash transfers to
disadvantaged families, and payments made to working mothers, is unequally
shared among all three levels of government. Although the national level
contributes, it mandates the levels of benefits while often leaving it to
the sub-national governments to finance the increase.
Unemployment in the region in a relatively new phenomena due to the general
nature of the Soviet system. The Employment Fund was created in 1992 to pay
unemployment benefits to those affected by the transition to a market
economy. Contribution to the fund comes from a mandatory two percent
payroll deduction and budget transfers. Revenue collected from the payroll
tax is shared between the raion and oblast governments on a 45 percent to
55 percent ratio. The former then remits 10 percent to the center for
federal responsibilities. Benefits, from Western perspective, are
considered generous. Individuals just entering the work force receive the
minimum wage. Workers who have been laid of receive in the first three
months receive a cash benefit equal to 75 percent of their previous salary.
The benefits level drops to 60 percent for the following six months and 45
percent for the remainder of the year.
The Fund for Social Support ( FFS) is a limited national source for sub-
national funding of social programs. In 1992, the FFS accounted for only
.01 percent of GDP. The stated purpose of this fund is to aid rayons that
have been particularly hard hit in the transition from a command economy.
The FFS began operations in 1992 with revenue from seized Party assets and
tax from re-appraised inventories. It is also supposed to receive revenue
form the privatization process (although it did not receive the ten percent
assigned in 1992) and «receipts from the revaluation of commodities in
state stores and ruble receipts from sale of food aid.»
Although inflation increases revenue to the Russian government, it
naturally impoverishes the population when adjustments are not made (or
insufficient to deal adequately with inflation) to monetary benefits such
as the minimum wage and pensions which provides the basis for the social
safety net. Inflation was one of the primary causes of poverty in Russia.
As chart A5 shows, social subsidies and transfers have also been
ineffective because they do not reach the truly needy. The primary reason
for this economic waste is the lack of means based testing.
The problem of hyper-inflation which had plagued Russia earlier in the
transition period has been replaced» by the dramatic reduction in real
wages and severe dilemma of arrears. By December 1995, real wages declined
by 13 percent and real consumption declined by 5.3 percent. Real wage
decline, and unexpectedly low levels of unemployment, can be attributed to
evasion of excess wage tax and inside the gate employment» by which
enterprise managers hoard labor by paying minimum wage and compensation
workers in non-taxable manners such as payment in kind, low interest long-
term loans that have questionable repayment terms. It should be noted that
the Pension Fund is becoming more experienced in detecting methods of tax
avoidance and recent action has been taken to close loopholes
Reduced inflation has given way to arrears as one of the primary causes of
poverty in the Russian Federation and has primarily been the result of
international pressure to reduce the budget deficit by ending emission
based methods of covering the deficit» and tax avoidance and evasion.
According to ITAR-TASS, pensioner were owed nearly 3 billion dollars in
October 1996. Revealing the revenue gap, 22 regions were able to make
pension payments while the remaining 69 needed transfers from the federal
fund. Wage arrears for both private and public sector were estimated at 43
trillion rubles—9 billion of which was the state's responsibility.
An area of concern which was not addressed in 1992 and continues to be a
problem today is a rapidly deteriorating income distribution between the
regions of the Russian Federation. The disparities between the rich and
poor regions could possibly be the worst amongst all the federations.
CONCLUSION AND SUGGESTION
One of the greatest obstacles to successful Russian market economic
development is the absence of a modern and effective tax system and lack of
reliable data. Foreign capital always seeks predictability, especially in
terms of projecting tax liabilities. Lack of a stable tax regime is the
number one reason why Russia's direct foreign investment dollar level is so
low compared with other emerging markets. A frequent and common concern
expressed by foreign companies is the fear (whether real or perceived) of
an unstable, inequitable, unreliable, and unpredictable tax system in
Russia. As a result, capital that could potentially be invested in Russia
is instead invested in other countries that are perceived as enjoying more
stable tax systems. For Russia, it is time to introduce tax breaks or other
incentives by the end of the year for companies using international
accounting methods as part of a new business reform plan. For example,
companies which would follow these (international accounting) standards
will have their profit tax lowered by, say, five percent… or maybe they
will receive other privileges. Most Russian companies use domestic
accounting practices developed to calculate tax levels. Western accountants
say Russian accounting has limited use for business planning and
investment. Below, we have stated some suggestion and concerns regarding
public finance in transitional economies:
Before making any changes in the tax system the officials have to think
very carefully to avoid unplanned changes. For instance, the law on the VAT
has been changed 13 times since it was enacted. Proper tax reform would
also solve another of Russia's problems—its chronic budget deficit. The
country's inadequate system of tax revenue collection has been unable to
keep pace with the rise in government expenditure, leading to a budget
deficit of 6.3 per cent of GDP in the first half of this year. According to
Mr. Stuart Brown, eastern Europe economist at Paribas Capital Markets,
while fiscal policy has been lax in Russia, monetary policy has had to bear
the burden of reducing inflation. The result has been high real interest
rates. No wonder then that several leading companies are looking abroad for
capital. Reducing the budget deficit, to reduce «crowding out» at home and
allow fiscal policy to take some of the burden in controlling inflation,
must therefore be a priority for the Russian government. The problem is
that tax evasion and a culture of non-payment in Russian industry, will
hamper efforts to improve revenue collection.
Regulate the movement of budget money by reorganize the Russian treasury
and concentrate all budgetary financial flows within it.
A good approach to battling non-compliance would be the implementation of a
unified computer information system to control revenues and expenditures of
the federal budget and state extra-budgetary funds, which should contain
taxpayers registration system and bring together information on tax and
customs duties payments, banking transactions and cash disbursements, as
well as data on tracing and utilization of the federal budget resources.
But it is still difficult to implement. First, Russia does not have high
qualified specialists in database and management information systems (MIS).
Second, it will require buying expensive mainframe computers what is
critical under collected (60 percent — percent) revenue. It is also
important to decide what kind of tax information is going to be the first
to be put in the database. The State Tax Service of the Russian Federation
recently began this process by requiring all taxpayers to indicate a
personal taxpayer identification number (PTIN) on payments and settlement
documents for taxes and other levies beginning on August 1, 1995. The rule
as of January 1, 1996, states that a PTIN should be included on all payment
and settlement documents. Also Russia's State Taxation Service is
redoubling its efforts to stop commercial banks from hiding income from tax
authorities. The taxation service recently found that credit institutions
failed to transfer 3 trillion rubles to the state on time, and that they
have used legal means to hide their income. With the centralized computer
tax information system, it would be easier to observe taxpayers and prevent
tax evasion.
Reduce the cost of servicing the state debt.
Stop the emission of money.
Improve control over monopolies.
Reorganize the banking system. Set up a federal deposit of insurance bond.
Reform ministry of finance and economy.
Diversification of the tax base.
Some services should be financed by taxes levied on local beneficiaries.
«Local taxes» are those over which local authorities have some control.
Which taxes to assign? The question is not easy for Russia. In many market
economies, the central government controls those taxes considered to be
most redistributive, such as personal income taxes, and the cyclical
corporate income tax, leaving more stable revenue sources levied on a
consumption base or property to the local level. For example, some federal
systems (the U.S., Switzerland, Canada) allow subnational corporate taxes,
it would be better for the federal government to set the corporate income
tax. For the transition economies, considerations of both administrative
complexity and allocative efficiency suggest that subnationally levied
corporate taxes should be avoided at the present time. Permitting the many
small subnational governments in the transition economies to set corporate
tax rates (or adjust the tax base) will allow substantial tax competition
and differentiation in enterprise taxation, influencing enterprise location
decisions in perhaps undesirable directions.
.The development of a more efficient and effective social safety net in
perhaps the most immediate and difficult task to accomplish in the Russian
Federation. Aside from cultural reasons outlined earlier, economic growth
cannot occur without social stability which will not happen until Russia
can design an effective system of coverage. Some possible ways to improve
this critical area are: diversify the tax base for social programs,
redesign the system of federal-sub-national relation which has made the
latter bear an unjust amount of the burden—unfair because of regional
differences and compounded by Soviet planning—, and make stronger attempts
to reduce arrears which is a difficult task due to the temptation to return
to emission-based methods of covering expenditure requirements.

| | | | | | | |
|Table A2 | | | | | | |
|Compariso| | | | | | |
|n of GNP | | | | | | |
|Growth in| | | | | | |
|USSR and | | | | | | |
|Western | | | | | | |
|Countries| | | | | | |
|1961-85 | | | | | | |
|(Average | | | | | | |
|Annual | | | | | | |
|Growth in| | | | | | |
|Per Cent)| | | | | | |
| |USSR |US |FRG |France |Italy |UK |
|1961-65 |4.8 |4.6 |4.8 |5.8 |5.2 |3.2 |
|1966-70 |5.1 |3.2 |4.2 |5.4 |6.2 |2.5 |
|1971-75 |3 |2.2 |2.1 |4 |2.4 |2.2 |
|1976-80 |2.3 |3.4 |3.3 |3.3 |3.8 |1.6 |
|1981-85 |1.9 |2.4 |1.3 |1.1 |0.9 |1.9 |
|Note: US | | | | | | |
|GNP | | | | | | |
|calculate| | | | | | |
|d in 1982| | | | | | |
|prices. | | | | | | |
|GNP | | | | | | |
|growths | | | | | | |
|of FRG, | | | | | | |
|France, | | | | | | |
|Italy and| | | | | | |
|UK are | | | | | | |
|calculate| | | | | | |
|d from | | | | | | |
|GDP in | | | | | | |
|1980 | | | | | | |
|prices. | | | | | | |
|Source: | | | | | | |
|Cohn | | | | | | |
|(1987, p.| | | | | | |
|12) | | | | | | |
|Authors' | | | | | | |
|Source: | | | | | | |
|Elliot | | | | | | |
|and Dowla| | | | | | |
|in | | | | | | |
|Internati| | | | | | |
|onal | | | | | | |
|Journal | | | | | | |
|of Social| | | | | | |
|Economics| | | | | | |
|» v. 21 | | | | | | |
|p. 78 | | | | | | |

| | | | | | | |
|Table A3 Soviet | | | | | | |
|state budget | | | | | | |
|expenditures for| | | | | | |
|consumer and | | | | | | |
|food subsidies, | | | | | | |
|social | | | | | | |
|insurance, and | | | | | | |
|health care, | | | | | | |
|1985-1990 | | | | | | |
|Type of |1985 |1986 |1987 |1988 |1989 |1990 |
|expenditure | | | | | | |
|In billions of |386.5 |417.1 |430.9 |459.5 |482.6 |488.2 |
|rubles (nominal)| | | | | | |
| | | | | | | |
|Total state | | | | | | |
|expenditures | | | | | | |
|Consumer |58.0 |65.6 |69.8 |89.8 |100.7 |110.5 |
|subsidies | | | | | | |
|Food subsidies |56.0 |58.0 |64.9 |66.0 |87.7 |95.7 |
|Social insurance|83.6 |89.3 |94.5 |102.5 |105.5 |117.2 |
|and health care | | | | | | |
|As percent of |7.5 |8.2 |8.5 |10.3 |10.9 |11.6 |
|GNPConsumer | | | | | | |
|subsidies | | | | | | |
|Social insurance|10.7 |11.2 |11.5 |11.7 |11.4 |12.3 |
|and health care | | | | | | |
| | | | | | | |
|Source: Anders | | | | | | |
|Aslund, | | | | | | |
|»Gorbachev, | | | | | | |
|Perestroyka, and| | | | | | |
|Economic | | | | | | |
|Crisis,» | | | | | | |
|Problems of | | | | | | |
|Communism, vol. | | | | | | |
|40, nos. 1-2, | | | | | | |
|Jan.-Apr. 1991, | | | | | | |
|p. 25 | | | | | | |
|a. Estimated | | | | | | |
|figures. | | | | | | |
|Authors' Source:| | | | | | |
|Linda J. Cook. | | | | | | |
|1995 The Soviet | | | | | | |
|Social Contract | | | | | | |
|and Why It | | | | | | |
|Failed p. 148 | | | | | | |

| | | | | | | |
|Table A5 | | | | | | |
|Significan| | | | | | |
|ce of | | | | | | |
|Public | | | | | | |
|Transfer | | | | | | |
|in | | | | | | |
|Household | | | | | | |
|Income for| | | | | | |
|households| | | | | | |
|Receiving | | | | | | |
|the | | | | | | |
|Benefit | | | | | | |
| |Very |Poor |Poor | |Not |Poor |
|Transfer |% |Avg % of |% |Avg. % of |% |Avg. % of |
| |Receivi|Recipient |Receivi|Recipient |Receivi|Recipient |
| |ng the |Household |ng the |Household |ng the |Household |
| |benefit|Income |benefit|Income |benefit|Income |
|Family |288.8 |23.6 |32.4 |14.5 |25.7 |5.9 |
|Allowances| | | | | | |
|Pensions |0.3 |75 |41 |66.9 |48.7 |58.4 |
|Unemployme|0.8 |21.7 |0.4 |17.8 |0.3 |9.8 |
|nt Benefit| | | | | | |
|Subsidies |100.4 |9.6 |10.4 |9.6 |14.5 |8.1 |
|from Local| | | | | | |
|Authoritie| | | | | | |
|s | | | | | | |
|Subsidies |55 |9.4 |8.7 |10.8 |17.7 |11.7 |
|from | | | | | | |
|Enterprise| | | | | | |
|s | | | | | | |
|Scholarshi|50.2 |17.8 |6.2 |18.2 |6.7 |8.7 |
|ps | | | | | | |
|All |666.8 |58.5 |70.9 |48.4 |74.4 |42.6 |
|Transfers*| | | | | | |
| | | | | | | |
|*All | | | | | | |
|transfers | | | | | | |
|includes | | | | | | |
|those | | | | | | |
|listed | | | | | | |
|(except | | | | | | |
|subsidies | | | | | | |
|from | | | | | | |
|enterprise| | | | | | |
|s, which | | | | | | |
|are | | | | | | |
|included | | | | | | |
|with | | | | | | |
|subsidies | | | | | | |
|from local| | | | | | |
|authoritie| | | | | | |
|s) plus | | | | | | |
|welfare. | | | | | | |
|Note that | | | | | | |
|the | | | | | | |
|overall | | | | | | |
|average | | | | | | |
|percent of| | | | | | |
|the | | | | | | |
|household | | | | | | |
|income can| | | | | | |
|be | | | | | | |
|calculated| | | | | | |
|form the | | | | | | |
|two values| | | | | | |
|reported | | | | | | |
|for each | | | | | | |
|poverty | | | | | | |
|status. | | | | | | |
|Source: | | | | | | |
|RLMS. | | | | | | |
|Round 4. | | | | | | |
|October | | | | | | |
|1993- | | | | | | |
|February | | | | | | |
|1994. | | | | | | |

A6 List of Goods in Everyday Demand and Services to the Population which
are Exempt from the Sales Tax
Children's food, meat, meat products (except delicatessen products), milk
and milk products, margarine, fats, bakery products, flour, pasta products,
eggs, tea, sugar, salt, vegetables (cabbage, carrots, beet, onions,
potatoes),fish and fish products, vegetable oil, mineral water, children's
items, textbooks for general education schools, specialist educational and
medical equipment and medical supplies;
Children's items, including clothing, footwear, furniture, bed-linen,
school uniform, toys and sports items; Consumer goods on lists approved by
the councils of ministers of the republics within the USSR, kray soviet
executive committees, oblast soviet executive committees, Moscow and
Leningrad city soviet executive committees and executive committees of
autonomous oblast and autonomous okrug soviets of people's deputies;
A7 USSR: SALES TAX DECREE Full text of instruction issued by USSR Ministry
of Finance and dated February 11, 1991 ). The provisions include some of
the following:
1. Liability extends to joint ventures and Soviet organizations engaged
in importing;
2. Joint ventures will pay tax on hard currency sales in rubles,
converted at the prevailing commercial rate of exchange fixed by USSR
Gosbank;
3. Liability extends over a wide range of supply, including professional,
informational, communication, etc. services;
4. The tax rate is 5%;
5. Tax exemption applies to sales of precious metals, coal shale, export
services, trade between parts of a constituted enterprise.
SOURCE: EKONOMIKA I ZHIZN February 23, 199. P19
A8 Taxable income received in calendar year. Source: Tax 96 TNI 4-1
(Foreign Taxation) (Doc 96-947)

less than 12 million Rubles 12 % from 12 million Rubles 1, 44 million
Rubles +to 24 million Rubles 20 % of the sum exceeding 12 million Rubles
from 24 million Rubles 3.84 million Rubles to 36 million Rbls, 25 percent
of the sum exceeding 24 million Rubles above 48 million Rubles 10.44
million Rubles + 35 percent of the sum exceeding 48 million Rubles

1. Isaak I. Dore , 1995 Distribution of Governmental Power Under the
Constitution of Russia» in Parker School Journal of Eastern European
Law» v. 2 p. 675
2. ibid p. 681
3. ibid p. 865
4. ibid p. 691
5. ibid p. 678
6. ibid p. 688
7. With the current political situation we can say that the budget as a
whole, without doubt, will not pass the Duma by the end of the year.
8. The Moscow Times May 21, 1996. p. 54.
9. World Paper. September, 1996 p. 33
10. TNI 73-22, 1996
11. TNI 22/16, 1992, John Turro
12. Joint Letter No VG-4-12/25N of June 16, 1995
13. Doc 96-947
14. Much of the literature on tax assignment argues that the personal
income tax(PIT), generally one of the more important taxes in revenue
terms, should be retained by the central government, largely for
redistributional and stabilization reasons. Nevertheless, the central
government may give local governments a share in the PIT.
15. Tax Analysts, Tax Notes International. January 25, 1993
16. NOVECONCOMMERSANT. July 28, 1994. p. 2
17. In Russia, this tax is mostly levied at a national level because of
the administrative convenience, these taxes have been levied at the
producer level, not the retail level; and in the transition economy
context this often translates into a tax on a few manufacturers as in
Russia, for example, there are cigarette factories in only 21 of its
2000 «raions» (Comparative Economic Studies Winter 1994, Vol. 36, No.
4), or sometimes on the single monopoly producer. Thus, only a few
producing districts would benefit from levying these taxes and
revenues from them would accrue to only a few localities
18. Tax Analysts, Tax Notes International. January 25, 1993
19. Tax Analysts, Tax Notes International. January 25, 1993
20. Tax Analysts, Tax Notes International.January 25, 1993
21. The British Broadcasting Corporation March 15, 1991
22. Scot Antel. The Moscow Times. May 21, 1996
23. Though temporary steps were made like creating special colleges that
are attached to courts of arbitration, we suppose that creating a
special tax courts is essential here
24. Of course, taxes existed but people could not evade them as they were
centralized and in theory all means of production were owned by the
state.
25. Washington Post. October 12, 1996. p. A25
26. But we are afraid that this provision will not benefit the economy
27. Betsy McKay. The Wall Street Journal.October 29, 1996. p. A12
28. Comment & Analysis; Statistics; Forecast; November 1996 p. 2
29. Information Services Quest Economics Database Credit Suisse Financial
Forecast, 1996
30. Reuter Textline Reinsurance, October 31, 1996
31. In our opinion, inflation will come down further in 1997, to
approximately 15 percent. Also, Russia continues to fail in its
economic performance of it fiscal and monetary policy within the
framework established by the International Monetary Fund.
32. The Moscow Times. March 27, 1996
33. Dmitry Falcovich, head of the macroeconomic department with Alliance-
Menatep
34. Russian Federation: Toward Medium-Term Viability. 1996. IBRD/World
Bank p.39
35. Fiscal Management in Russia. 1996. IBRD p. 39
36. Fiscal Management in Russia. p. 22
37. John E. Elliot and A.F. Dowla. Gorbachev, Perestroika and
Democratizing Socialism» in International Journal of Social Economics»
v. 21 p. 78
38. Linda J. Cook. 1995 The Soviet Social Contract and Why It Failed.»
Harvard University Press: Cambridge p.2 Cook suggests the following as
empirical evidence: 1. That the Soviet regime consistently deliver to
workers economic security and social welfare; 2. That the regime
deliver these policy goods because it is constrained by it perception
of workers' expectations or its fear of labor discontent if it fails
to deliver them; [and] 3. that workers give in exchange political
compliance and quiescence. p. 5
39. Vladmir Mau. 1996 The Political History of Economic Reform in Russia,
1985-1994. Center for Research into Communist Economies p. 59
40. John Dunlop. 1993. The Rise of Russia and the Collapse of the Soviet
Empire. Princeton University Press: Princeton. p. 267
41. Cook p.141
42. ibid p.187
43. Thomas A. Mroz and Barry M. Popkin. 1995. Poverty and Economic
Transition in the Russian Federation» in Economic Development and
Cultural Change . V 44 p.3
44. ibid p.4
45. ibid p. 4
46. Russia: Social Protection During Transition and Beyond International
Bank For Reconstruction and Development Report No. 11748-RU. p. 23
47. Vladimir Mikhalev Social Security in Russia under Economic
Transformation» in Europe-Asia Studies v. 48 n.1 (note: As this source
came from an electronic medium, I have omitted page numbers—DL)
48. ibid
49. IBRD Report No. 11748-Ru. p. 35
50. ibid p. 11
51. EBRD p. 40
52. ibid
53. BISNIS Country Report
54. OMRI November 31, 1996
55. OMRI October 4, 1996
56. Financial Times. September 23, 1996
57. Of course, it is possible to lower administrative costs and improve
overall efficiency in the tax system by going to a more computerized
system but resistance to change due to unquestionable job loss is
quite evident in the Russian government.
58. Komsomol'skaya Pravda. Sept. 24, 1996

The file was preapred by Dmitri Maslitchenko [email protected]

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