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."

[ancient_geezer]

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

Unfortunately, that intention is not shared by those who enact tax systems. Though the impression is definitely fostered to build support for the idea.

Whenever politicians are talking tax "cuts" it behooves one to start looking for the pea hiding under another shell.

As it has been said many times before, "The devil is in the details." That is the most true in the case of taxation and tax "reform".

[ancient_geezer]

Opps! That last reply was meant for you.

[Free the USA]

Check the Bump List folders for articles related to and descriptions of the above topic(s) or for other topics of interest.

[#3Fan]

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).

Yes, they exist on the principle of voting themselves other people's money.

[#3Fan]

My idea of a flat tax would be that it would be the only tax. No corporate taxes, no tolls, etc.

[ancient_geezer]

My idea of a flat tax would be that it would be the only tax. No corporate taxes, no tolls, etc

So why an "income" tax as opposed to a "single rate first sale only retail sales" tax that would remove the intrusion that all income taxes must impose upon personal liberty and privacy.

Either would take as much effort to enact in regard to the current political climate. It seems to me the better and more moral way to put our efforts is with a Retail Sales Tax which would encourage an environment for the repeal of the 16th amendment, and abolishment of the IRS as an coercer over the private citizen household.

As the clear words of the progenitor's of this nation held the following to be true:

Thomas Hobbes from Leviathan

• It is fairer to tax people on what they extract from the economy, as roughly measured by their consumption, than to tax them on what they produce for the economy, as roughly measured by their income.

[Montesquieu wrote in Spirit of the Laws, XIII,c.14:]

• "A capitation is more natural to slavery; a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person."
  --Thomas Jefferson: copied into his Commonplace Book.

Patrick Henry, Virginia Ratifying Convention June 12, 1788:

• "the oppression arising from taxation, is not from the amount but, from the mode -- a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people."

Alexander Hamilton, the first Secretary of the Treasury, posited it clearly in Federalist Papers #21 when he stated:

"Imposts, excises, and, in general, all duties upon articles of consumption, may be compared to a fluid, which will, in time, find its level with the means of paying them. The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal; and private oppression may always be avoided by a judicious selection of objects proper for such impositions. "

As well as Alan Keyes has clearly laid out the strong moral foundation for a National Retail Sale Tax:

Keyes on Taxes & Government Spending:

• "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."

• "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."

• "A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."

Alan Keyes Interview with Des Moines Register:

• Conservative commentator Alan Keyes said Thursday one of the first things he would do as president would be to replace the federal income tax with a national sales tax.

• The Republican presidential candidate said he favors a national sales tax of about 23 percent that would also replace the payroll tax that pays for Social Security.

The intent of the structure of the individual income tax is for political and social control not revenue collection. The Individual Income tax is maintained to establish and hold every person in the country perpetual legal jeopardy.

With current well written legislation already in the pipeline to move on it seems to me to be long past time to end the Income Tax once and for all and get rid of the intrusive anal exam of family finances by government.

I recommend that all support the enactment of the only bills before congress that would actually achieve that.

To get the ball rolling and focus Congress Critter's attention:

H.R.2714
Sponsor: Rep Largent, Steve(introduced 8/2/2001)
Title: To terminate the Internal Revenue Code of 1986.
A bill to prohibit he imposition of any tax by the Internal Revenue Code: (1) for any taxable year beginning after December 31, 2005.

Kill the income and other related taxes outright, and provide a reasonable replacement:

H.R.2525
SPONSOR: Rep Linder, John (introduced 07/17/2001)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer: http://www.fairtax.org & http://www.salestax.org

the modification then enactment and ratification of:

H.J.RES.45
Sponsor: (introduced 4/25/2001)
Latest Major Action: 5/9/2001 Referred to House subcommitte.
Title: Proposing an amendment to the Constitution of the United States relative to abolishing personal income, estate, and gift taxes and prohibiting the Untied States Government from engaging in the business in competition with its citizens.

(Modified to prohibit all income, payroll, gift estate taxes as HR2525 calls for, or we will see European VAT style hidden taxes along with payroll excises to take over in the place of the of the current individual income tax(i.e. personal income tax) that Ron Paul amendment prohibits.)

And to keep em reminded that there is indeed a Constitution to pay attention to:

H.R.175
Sponsor: (introduced 1/3/2001)
Latest Major Action: 2/12/2001 Referred to House subcommittee
Title: To require Congress to specify the source of authority under the United States Constitution for the enactment of laws, and for other purposes.

[#3Fan]

So why an "income" tax as opposed to a "single rate first sale only retail sales" tax that would remove the intrusion that all income taxes must impose upon personal liberty and privacy.

Because I want people to buy their stuff here. I don't want a smuggling empire to result from a retail tax. I believe in a flat income tax. A flat individual income tax is the only tax we need. No need to smuggle products in from Mexico and Canada.

[ancient_geezer]

Because I want people to buy their stuff here.

And what encourages that under an income tax? Somehow I fail to see the connection, as an income tax only assures that imports with low labor(wage costs) have a clear advantage over domestic production.

A uniform retail sales tax assures our exports have no embedded tax to impede international sale of our goods, as a income tax must have of necessity:

The following article covers the mechanism on how a Federal income tax propagates and is embedded into product pricing.

DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation

And a Uniform retail sales tax on the other hand, assures that imports are burdened with the same taxation our own products when sold in this country as opposed to the current situation where imports are essentially free of the income/payroll tax burdens of domestic production.

An income tax is counter productive as far as our trade balance and competiveness relative to the world markets are concerned.

[#3Fan]

And what encourages that under an income tax?

Low prices in our stores. A retail tax would make a boon for residents near the border. They would have their stuff smuggled in thereby saving at least 10%. The people of the interior would pay most of the taxes. A flat income tax insures everyone pays the same percentage.

[ancient_geezer]

A flat income tax insures everyone pays the same percentage.

How does a flat tax stop smuggling and black marketeering, that occurs to evade the income tax. For any given rate of income tax, the total burden is actually higher on over the counter goods as compared to black market goods.

An income tax imposes a much higher cost of compliance embedded into wages/salaries paid to produce goods and services in legitimate domestic industry, than does an over the counter retail sales tax.

The result is a much more active black market and smuggling operation for the income tax situtation just due to the pure economics of an income tax.

We must . . . End Tax Slavery Now; Nov '97
by Jarret B. Wollstein

HOW MUCH DO YOU REALLY PAY?

     According to the Tax Foundation, in 1994 the average American paid 22.4% of his or her income in federal taxes, plus 11.8% in state and local taxes - 34.2% total.

     But that's just the beginning! Dr. James Payne of the University of California found that in addition to direct taxes we also pay huge, hidden taxes including:

• Compliance costs - record keeping, monies spent on tax planning, computers and software purchased to fulfill IRS requirements, etc.
• Enforcement costs - IRS audits, field investigations, service center corrections, criminal investigations, litigation, and forced collections.
• Emotional, moral and cultural costs - families forced onto welfare, time and creative energy lost figuring out how to avoid taxes, etc.

     For every $1 we pay in direct taxes, we spend an additional $0.65 in compliance costs. And even that figure doesn't include the cost of import duties, license fees and other government regulations.

Under a retail sales tax system, 90% of those compliance costs (around $1. Trillion under the tax collections) inflating domestic prices would disappear.

[ancient_geezer]

A flat income tax insures everyone pays the same percentage.

Same percentage of what precisely?

A 0 exemption no deducting income tax on family gross income would be more than 24%.

refer: http://www.cbo.gov/showdoc.cfm?index=1545&from=4&sequence=0

If there is any personal exemption or deductions the rate goes up. And that number does not take into account the effect of compliance costs that are generic to an enforcible income tax system of nearly $0.65 for every Dollar of tax collected.

The total federal burden of a pure individual income tax with no exemptions would be close to 40% of gross family income in its impact on the economy.

[#3Fan]

How does a flat tax stop smuggling and black marketeering, that occurs to evade the income tax.

With no taxes added on to retail prices, there's no need to smuggle. A 10 to 15% tax rate will be the lowest in the world. Again, no reason to smuggle. Individuals will make money from volume, not high prices. It's the basis of supply side economics.

All this arguing is a pipe dream for both of us. I'm not going to get my low single flat tax, and you're not going to get a single retail tax. LOL

[#3Fan]

Same percentage of what precisely?

Total yearly income.

A 0 exemption no deducting income tax on family gross income would be more than 24%.

I believe it could be between 5 and 15%. The lower the tax, the greater the private sector economic activity, and therefore more revenue. Somewhere in there woud be a perfect percentage to maximize revenue, or make at least enough revenue to do what the government should do. I don't believe it's 24%. But even if it was, 24% is a lot better than 70%, which is what some of the productive class is paying now.

[ancient_geezer]

With no taxes added on to retail prices, there's no need to smuggle.

Under an income tax, the tax is embedded into the price of domestically produced goods via the wages paid to us. As a consequence, foreign goods have nearly a 40% advantage in pricing (there VAT systems subsidise their taxes from their exports) over our own goods.

Secondly under an income tax, black markets develop to take advantage of cash economies to evade the income tax and the cost inherent with complying with it.

When you take the two together, a cash black market in foriegn goods become your defacto smuggling operation under an income tax.

I'm not going to get my low single flat tax, and you're not going to get a single retail tax.

Actually, we are a heck of alot closer to realising my pipe dream than yours :O)

H.R.2525
SPONSOR: Rep Linder, John (introduced 07/17/2001)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer: http://www.fairtax.org & http://www.salestax.org

It's in the pipline, while a pure individual income tax is not even on anyone's radar screen.

[Willie Green]

Under an income tax, the tax is embedded into the price of domestically produced goods via the wages paid to us.

There ya go double dipping again, wheezer.

Ya can't go around telling people that you can reduce the cost of a product by eliminating the individual income tax that employees pay, and then tell the employees that they get to keep that part of their paycheck for themselves.

Your NRST propaganda is a sham.

[ancient_geezer]

I believe it could be between 5 and 15%.

You will have to support that, I don't see it in any study I have ever run across.

Even if it were true, I can guarantee a NRST rate would in principle be lower due to lower costs of compliance allowing greater growth.

I don't believe it's 24%.

Unfortunately it's what can be sold to Congress under, not what your or I might agree on.

The NRST as proposed in HR2525, is 23% of individual consumption. Investments & Used goods not taxed.

The NRST's lowest and equilibrium point accounting for growth effects, could be approximately 20% if states and businesses were not reimbursed for collection expenses and all households did not receive povertylevel consumption allowence called for in the NRST to avoid exempting "necessity" goods from taxation.

[ancient_geezer]

Ya can't go around telling people that you can reduce the cost of a product by eliminating the individual income tax that employees pay, and then tell the employees that they get to keep that part of their paycheck for themselves.

I don't willy Green, for if you actually bothered to read what I have stated, most of price falls would occur due to drop in business tax compliance costs and the employers share of SS/Mediscare the Corporate income tax is a negligible 3% of the embedded costs. The family would receive increased takehome from what is now whithheld for individual income tax and the employee's share of SS/Medicare taxes.

The drop in shelf price of goods & services is expected to be on the order of 20-30% within the first year, the increase in takehome pay would be whatever is normally witheld from family paychecks + the NRST monthly FCA.

[#3Fan]

Under an income tax, the tax is embedded into the price of domestically produced goods via the wages paid to us

But at a 5 to 15% tax rate, 85 to 95% of our economic activity would be focussed on the private sector, which is exponentially more efficient than government tax-and-spending. Therefore even though we would be taxed at between 5 and 15%, inherent costs due to taxes would not force the prices of individual products up 5 to 15%. Like I said, it's supply side economics, we would make our money off volume, not high prices. If a store owner buys a gallon of milk from a supplier for $2.00 and sells it to a customer for $2.50, his tax (let's say 10%) that he would pay at the end of the year on that sale would be about $.05. So the price on that gallon of milk would not move more than 5 cents even with a high 25% profit margin. Now a 10% national retail sales tax would force the store owner to make his $.45 that he needs to make to stay in business, plus 10% of the retail, which would be $.25, so the gallon of milk would cost $2.70. 20 cents difference for the same 10% tax. The U.S. would be ripe for illegal smuggling, unfairly punishing interior residents.

[ancient_geezer]

There ya go double dipping again, wheezer.

No double dipping Willie:

For an analysis I have presented several time previously in other threads of expected price reductions:

I refer you to the section of the following article about the Income/Payroll tax system and its impact on our economy "A. Hidden Upstream Taxes. " paragraph 39.

"[39] Dr. Dale Jorgenson, Chairman of Harvard University's Economics Department, believes that the price of goods and services are inflated by about 20 percent or more by upstream taxes consumers ultimately bear. In a recent paper Dr. Jorgenson estimated the built-in taxes contained in the price of goods and services. /22/ In the chart above, he quantified the hidden component of tax, estimating that producer prices would fall on repeal of upstream taxes an average of about 22 percent."

Looking at the accompanying chart, the range of values from industry to industry appears to be about 12-25%.

Economists Gary and Aldonna Robbins of the Texas-based Institute for Public Policy examined the case of dry cleaning a shirt, with a particular eye toward uncovering the hidden costs of taxes in price.

The Robbin's attributed over 33.6% of "consumer prices" to be due to federal taxation passed on to the customer.

The Federal Tax System
http://www.cbo.gov/showdoc.cfm?index=2125&sequence=0&from=1#pt1

From the Table 1 we may extract the proportionate contributions of each sector of taxes as they contribute to consumer price for the year 2000.

• Total revenues collected by Feds in '00 = $1945billion ( 33.6% of consumer price)

Those tax components which will not change prices as a consequence of enactment of HR2525

• Individual Income Tax(Labor) = 945billions,
• Employer half of Social Insurance = 653/2 = 326.5billions,
• Excises = $68billion
• Customs Duties = $19Billion
• Miscellaneous = $40Billion

============================

• Total constant price factors = $1358.5 billion
• Remainder federal tax components affecting price = (1945-1358.5) = $586.5

Adjust for a conservative $600billion(1995 figure, AGCA '00, Payne '95, PillaBartlettNorquist '95 ) interest & cost of compliance effects.

• Total tax related factors affecting consumption price = (600 + 586.5) = $1186.5billions

Estimated change in consumption prices as consequence of enactment of a National Retail Sales Tax, repealing all business income and payroll taxes:

33.6*(1186.5/1945) = 20.5% in consumption prices

Which compares well with the Jorgenson empirical study of 22% fall in producer prices.

The two sources are in reasonable agreement, and I see 20-23% a reasonable value to expect prices to fall not only for customers here in the United States, but in our exports as well making them far more competitive on international markets.

[#3Fan]

Gotta go, will read tomorrow.