Russia Imposes Flat Tax on Income, and Its Coffers Swell

New York Times ^ | 3/23/02 | SABRINA TAVERNISE

[kattracks]

OSCOW, 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."

[JZoback]

bump for later read

[#3Fan]

Can u imagine what would happened here, if we had flat tax, my Lord, I just can see demos going orgy, for not being able to pay for their fat programs

A low flat tax would actually increase economic activity and thereby increase revenue as long as the percentage wasn't miniscule.

[Cincinatus' Wife]

Ah, the much derided flat tax.

[Nubbytwanger]

Good for the Russians! Wouldn't it be rich if they showed us the way?

[meenie]

When will the politicos come out with the "low" tax. In certain respects, this has more appeal even than the flat tax.

[Sgt_Schultze]

Higher tax receipts would surely result from a flat tax. But, demoncrats would no longer be able to use the tax code to punish their enemies and favor the grifters. Once they lost such abilities, there would be no reason to have them around. They know they owe their stations in life to their ability to rob Peter to pay Paul (with Paul's vote, of course).

[grania]

Ah, the much derided flat tax.

For the benefit of the newby freepers...let me add that you are being a tad cynical, having been Steve Forbes strongest advocate during the primaries and presenting an excellent and rational explanation of the benefits of flat tax.

You were right, of course. But it'll have to get EVEN WORSE before there is screaming for a streamlined system. (people are still looking for individual loopholes instead of seeing the total picture)

Maybe sooner rather that later. Revenues are down, the government keeps printing money for us to spend, and no one wants to give up expensive programs instituted in the money glut of the '90s.

Just remember, CW TOLD US SO!!!

[M Kehoe]

I hope the democRATS are reading this.

All the RATs could do in the '80s was laugh at the Laffer (sp) curve.

Oh, nevermind, democRATS don't understand economics anyway.

5.56mm

[Jimmy Valentine]

Perhaps that's because we have more Socialists in Congress than the Russian Duma

Regards,

[M Kehoe]

Perhaps that's because we have more Socialists in Congress than the Russian Duma

Sad, but true.

5.56mm

[2right]

Someone once posted that every tax form should have a line that says that "if you feel that you have not paid enough taxes enter the amount you wish to pay here". This should be required for every tax form on every level, not that I expect it would be a huge revenue generator.

[Ben Ficklin]

Another article on the subject from NRO

[Dialup Llama]

How did this article make it into the New York Times?

[ancient_geezer]

if we had flat tax, my Lord, I just can see demos going orgy, for not being able to pay for their fat programs

Don't bet on it, the Russians are being more heavily taxed than ever, they have just had the pea slipped under a different shell on em:

What they don't tell you about the Russian "Flat Tax":

SEE: ----> [ PART TWO OF THE RUSSIAN FEDERATION TAX CODE ]

It is a European income tax coupled with a European VAT + Profits/Investments + Social Security regressive payroll tax, starting at 35.6% and declining to 2%(~ US$22,000).

Maximum overall profits tax rate is 35% on whatever they determine to be a "profit".

---

And as far as flat taxes go that have been proposed for the US:

Why don't we name the "Flat Tax" for what it is A Flat Individual Income Tax, + 15.3% Payroll Tax with a subtraction method VAT.

It isn't the size of the report card that makes the complexity. Its the Internal Revenue Code that describes the allowed deductions and exemptions for determining taxable income on which the rate is to be applied that is the problem.

The Flat Income Tax fails to remove the legal jeopardy that every individual is placed under to prove what their taxable income is.

The Flat Income Tax fails to remove the complexity of the corporate and business income and payroll taxes requiring endless droves of tax accountants working more expending $400Billion trying to comply with an incomprehensible income tax code, an army of lawyers litigating with the IRS to the tune of another $200 billion, as well as the fines, penalties levied on the losers of such battles for even more. The Armey Flat Income Tax actually perpetuates that complexity, legal jeopardy and attendant cost of compliance for generations to come.

That is the reality of the Flat tax. the 1st $80k hit with the 15.3% payroll tax, with 19+% individual Flat Tax kicking in at $13K, and Increased Corporate taxation on all goods and services including the internet with the reduction of business deductionsincreasing the take. through that mechanism. That latter by the way is still collected from the individual through his purchases with after tax dollars no less.

The so called Flat Tax is less flat than even Reagan's 3 bracket tax, and the "Flat Tax" falls heaviest on middle income wage earners. We have a real winner there.

Whats worse and Flat Tax proponents fail to tell you is that the supposed 17% Flat Tax starts in excess of 19% and "may" be decreased to 17% overtime at the pleasure of Congress as well as redefining income in a manner that everyone's income appears to be greater than present by removal of exemptions and deductions. Oh! instant make believe tax reduction/simplification and you are buying into it just like they want of you.

H.R.1040 Sponsor: (introduced 3/9/1999).

Freedom and Fairness Restoration Act of 1999 - Title I: Tax Reduction and Simplification - Amends the Internal Revenue Code to impose a 19 percent tax (17 percent after December 31, 2000) on the taxable income of every individual.

Redefines "taxable income" to mean the amount by which wages, retirement distributions, and unemployment compensation exceed the standard deduction. Increases the basic standard deduction and includes an additional standard deduction for dependents. Includes in taxable income the taxable income of each dependent child under the age of 14. Provides for inflation adjustments.

(Sec. 102) with a Replaces the current tax on corporationstax on every person engaged in a business activity equal to 19 percent (17 percent after December 31, 2000) of the business taxable income of such person. Makes the person engaged in the business activity liable for the tax. (not the business as a separate entity as today, this seems to be a rather curious change with broad interpretations as earning a wage is a commercial[business activity])

Imposes a tax of 19 percent (17 percent after December 31, 2000) on the value of excludable compensation provided during the year by an employer for the benefit of employees. Makes the employer liable for the tax. (increases effective tax on employee wage by 50-100% or more depending on the mix of employee benefits and what is counted into the cost of them.}

(Sec. 103) Repeals: (1) numerous provisions relating to pension plans; and (2) provisions imposing a tax on any employer reversion from a qualified plan.

Revises requirements regarding transfers of excess pension assets.

(Sec. 104) Repeals from the Internal Revenue Code: (1) the part relating to alternative minimum tax; (2) the part relating to credits against tax; (3) the subtitle relating to estate and gift taxes; and (4) subject to exception, the chapter relating to normal taxes and surtaxes.

In fact the budget scoring required by law to assure revenue neutrality and phase in for all tax reform bills, for the "Flat Tax" gives a rather grim picture of Armey's plan especially since it does not do away with withholding nor the 15.3% payroll tax. Taking that into account it is actually much worse in the burden placed on the middle class than even the current income tax.

Flat Tax Valuations:

Joint Economic Committee

Revenue Neutral Tax Rates for Alternative Allowances and Exemptions Under a Flat Tax
Standard Allowances	Option 1	Option 2	Option 3	Option 4	Option 5
Single	$13,100	$13,100	$ 6,550	$ 6,550	$0
Joint	$26,200	$26,200	$13,100	$13,100	$0
Head of Household	$17,200	$17,200	$ 8,600	$ 8,600	$0
Dependent Exemption	$ 5,300	$ 2,650	$ 5,300	$ 2,650	$0
Revenue Neutral Tax Rate	19.9%	19.4%	16.8%	16.3%	13.1%

Source: Congressional Budget Office, 1995.

A real winner! Not only does it fail to actually lower taxes as claimed. The complexity does not go away for business as the very definition of income changes for them while leaving the code entirely open to future tinkering to increase taxation behind the veil of price inflation.

 

Lets see, Armey proposed a Flat VAT, back in 95, so lets look at how it was scored:

Here's how some rates come out for a flat income tax, based on maintaining constant levels of revenue to pay the nation's debts etc. (not including SS/Medicare payments) and a $10,000 personal exemption, no deductions "flat" income tax.

http://www.library.unt.edu/govinfo/subject/vital.html

• "The chart below shows a hypothetical set of flat tax rates and allowances that would result in revenue neutrality. This model, produced by the Congressional Budget Office shows that all federal income tax revenues [no SS/Medicare, Federal Unemployment , gift or estate taxes are considered] could be fully replaced by a system with a flat tax rate of 13.1 percent and no deductions. Allowing total deductions for a family of four to reach $36,800 (more than double the amount allowed in 1995) would require a 19.9 percent rate."

Joint Economic Committee

Revenue Neutral Tax Rates for Alternative Allowances and Exemptions Under a Flat Tax

Standard Allowances	Option 1	Option 2	Option 3	Option 4	Option 5
Single	$13,100	$13,100	$ 6,550	$ 6,550	$0
Joint	$26,200	$26,200	$13,100	$13,100	$0
Head of Household	$17,200	$17,200	$ 8,600	$ 8,600	$0
Dependent Exemption	$ 5,300	$ 2,650	$ 5,300	$ 2,650	$0
Revenue Neutral Tax Rate	19.9%	19.4%	16.8%	16.3%	13.1%

Source: Congressional Budget Office, 1995.

Gee that means under a "flat" tax a single person would pay:

15.3% ---- 15.3%(SS/Medicare) on wages/salary below $13,000,

35.2% ---- 19.9% + 15.3% on wages/salary and other income from $13,000-$75,000

19.9% ---- on wages/salaries and other income from $75,001 up.

And being constucted similarly to the Armey Flat Tax, Businesses would also pay,

19.9% --- on (Gross Receipts less allowed business costs) taxable income as defined by Congress & the Gucci Gulch lobbiests.

Course, need I also point out the IRS and income tax remains alive and well under the ey Flat Income Tax. Not even a possibility of repeal of the 16th amendment or prohibition of the income tax is even considered under the Flat Tax proposal.

You are aware of course that the primary function of the income tax is for political control, not collection of Revenue. That is why it comes to us so highly recomended by Karl Marx and the pack of socialists and communists ever since.

The Flat (income) Tax, however, is anything but Flat, for much of it can and is hidden from the citizen's view being embedded in an inflated product prices.

Most tax schemes are designed to make the citizen think they are getting a break.

Whether or not any particular individual pays an individual income tax is irrelavent to the statutes regarding it. An individual income tax is not for the aquisition of revenue, many other forms of taxation will do equally as well if not better at that job.

An individual income tax exists for one overwhelming purpose and that is to maintain the populace in a constant state of legal jeopardy and ignorance as a political tool for

molding the electorate into opposing factions,

rewarding political friends through targeted exceptions and credits

punishing political enemies through punitive tax rates and expensive legal harrassments; and

hiding the full cost of government from the perceptions of the electorate.

As such, a particular individual may not pay an apparent tax or even need to file a return. Even at nil tax rates in a zero bracket area on an individual income tax, the legal jeopardy remains in place to be imposed at political whim.

Above all else the Flat Income Tax system remains a shell game, allowing Congress to hide the true cost of government from the electorate assuring the status quo is maintained and continued support from 70% of the voting public clamoring for more from government looking for the top 40% of income earners to foot the bill.

Walter Williams, World Net Daily, 10-25-2000

According to the most recent U.S. Treasury Department figures, in 1997 the top 1 percent of income-earners (those with income of $250,000 and higher) paid 33 percent of all federal income taxes. The top 5 percent of income-earners ($108,000 and over) paid 52 percent, and the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?

If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?

To remove taxation of the individual, is to remove the goad which assures accountability of government to the electorate. Federal tax rates are high because a majority of the electorate do not share proportionately in the burden their demand for largesse imposes on the minority of citizens.

The siren call for representation without taxation is the formula that got us where we are at today. The ability to hide or disguise taxation from the view of large sectors of the electorate allows the Congress to get away with the creation of the evergrowing monster that it fosters.

A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw

Liberty and freedom have a price, responsibility. If that price is avoided there are no brakes on the growth of government, the ultimate result is the end of freedom through creeping socialism.

[Dialup Llama]

So I guess you're saying that as long as gov't spending remains high, alternative tax formulations are not necessarily magically better than the present one.

[Dialup Llama]

When people think positively of a flat tax, they also mentally intend that their overall level of taxation will decrease.

[ancient_geezer]

On the nose!.

The best you can hope for, is visibility of the real cost of government providing incentive, and removal of government out of family finances (as with a Retail Sales Tax instead of income tax).

The electorate has to push for cuts in programs before there can ever be a real reduction in government.

[eniapmot]

From reading this article, I get the impression that the NYT doesn't like the flat tax at all.