#14
New York Times
March 23, 2002
Russia Imposes Flat Tax on Income, and Its Coffers Swell
By SABRINA TAVERNISE

MOSCOW, March 19 — The American publishing billionaire Steve Forbes once trumpeted a flat-rate income tax so simple you could fill it out on a postcard. The Russian government recently took his advice about the flat tax to heart.

But instead of a postcard, Russians are filling out 12 pages of forms.

Still, Russia is reporting stellar first results from a bold experiment, a 13 percent flat-rate income tax. The centerpiece of the government's tax reform program, it is the lowest rate in all of Europe and the envy of American right-wingers.

Personal income tax revenues jumped by 47 percent in 2001. Tax collection over all was up by half last year and, despite a small dip in February figures, the Russian Tax Ministry expects it to rise by more than that this year.

"The January figures made us happy," said Anna P. Komardina, deputy head of the individual income tax department at the ministry. "We have nothing to be sad about here."

The early success is leading economists to wonder if Russians, who rate the taxman one notch below the dentist, have leapt out of the shadows into the government's collection net. Or is the rise simply because traditional payers — oil and gas companies — are getting richer and paying more?

Either way, last year's figures are quite an improvement over those of the 1990's, when state tax authorities could not, no matter how they tried, beat taxes out of this stubborn economy. They begged. They pleaded. When all else failed, they sent in men with guns.

Finally they abandoned the old system, three different rates running as high as 35 percent, and turned to the flat income tax to offer a carrot.

In truth, it was not really that people had refused to pay. The economy, quite simply, was paralyzed. There was no cash. Companies paid one another in pigs, tires and teakettles, making taxes nearly impossible to calculate, never mind collect.

An economic explosion in 1998 solved that problem. "The cash came back," said Christof Ruehl, the World Bank's economist in Moscow.

Unlike Americans, the vast majority of Russians are not required to file an income tax return because their taxes are deducted from their wages. That makes life easy for most. For those who do not have taxes deducted, the procedure, which is not likely to impress Mr. Forbes, goes like this:

First, pick up forms from the tax inspector, since they are not available in post offices. Then read 32 pages of instructions and fill out the 12-page form. Print carefully — a misplaced mark is ground for rejection.

Next, hand deliver the forms, which are truly considered filed only after the tax inspector signs them. (Translation: forms lost in Russia's spotty mail system are your fault.) Finally, to pay, go to the state-owned savings bank Sberbank (but not during its lunch break) and fill out the same form twice. Carefully copy the 20-digit number across the top.

Exhausting? Russian accountants think so. Some carry gifts to soften surly inspectors, perfume for women and whiskey for men. Others come prepared with tranquilizers.

Svetlana, a 45-year-old accountant who takes on private clients in addition to her day job at a store that sells Italian bathroom fixtures, says she drinks a drop of Valerian, a homeopathic sedative, before making her case to the tax inspector. On a recent visit to the social security office, she was told, after waiting in line for over three hours, that she had incorrectly filled out one of her forms.

"I asked, `Please show me how to fill it out,' " she said, on the condition her last name not be used. "They told me, `That's not our job.' They told me to come back when I got it right."

Income tax is a small piece of the government's pie. Revenues from the tax make up about 13 percent of income, compared with more than 50 percent of all government tax revenues in the United States. The state here takes a much larger chunk in other taxes.

The other taxes are the heart of the problem. Long before employers deduct income tax from workers' wages, they must pay the government for pensions, social security and health care. As a result, businesses like to hide the true value of the wages they pay.

Take Oleg, 40, whose small Moscow company makes women's coats. He agreed to speak on the condition his last name not be used. Oleg's 36 seamstresses each earned $200 a month last year. But in tax filings, he declared that he paid them only $66.

On every dollar he pays his seamstresses, he must pay 35 cents in social taxes to the government. His conclusion? Don't tell the whole story.

"It's just not realistic," Oleg said. "Income tax comes after all the other wage taxes. They haven't changed. Why should I?"

But government policy makers are working hard to change the system. The new income tax is a sign of that to Vladislav L. Korochkin, the owner of a 450-employee company that grows and sells garden seeds.

Mr. Korochkin, 38, thinks that top officials have become more responsive to criticism. He even stated his complaints about the arduous accounting requirements of a new corporate tax to President Vladimir V. Putin at a meeting with a small-business lobby group in December.

"It hasn't gotten worse and that's pretty good," said Mr. Korochkin at his company's Moscow headquarters, where the walls are lined with brightly colored seed packets.

According to government records, more businesses are standing up to be counted. Finance Minister Aleksei L. Kudrin said recently that 400,000 new businesses were registered in the year and a half that ended last July, a rise of 11 percent.

Mr. Ruehl, the economist, advises caution. "There is no evidence that the increased tax collection is a result of people suddenly becoming happy taxpayers," he said. "The happy taxpayer is a person we have never met, which is weird because he should be very public."