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]

Fine, so lets just set an NRST of between 3 & 10% of consumption instead of income and avoid the intrusions of government into the private individuals life.

Now all you have to figure is how you can sell it to Congress.

I'll go for the first step, to an NRST, and let the market,(i.e. consumer/voter) drive the taxs rate to optimum.

[Willie Green]

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 drop in shelf price of goods & services is expected to be on the order of 20-30% within the first year,

What a bizarre and gross exageration SS/Medicare costs don't add up to 20-30% of production costs, let alone selling price of a product. You totally neglect business costs for raw materials, supplies, insurance, electric power, etc. etc. etc. And you sure as hell don't have any "embedded" taxes in all the imported crap we buy, how the hell do you think THOSE prices are gonna drop by 20-30%???

AS USUAL, you're spouting nothing but propaganda. Your NRST tax scheme is a hoax and a swindle.

---

Corporate income taxes are NOT a cost that can be passed along to the consumer. This is because the tax obligation can only be determined after sales have been transacted and costs have been deducted from revenues. Corporate Income tax is imposed only on the profit that is made, IF a profit is made.

In a competitive free market, there is no guarantee of either sales or profit. Thus there is no guarantee that there will be a Corporate Income Tax obligation to "pass along" to the consumer.

NRST advocates who insist that corporate income taxes are "embedded" in the sales price of a product are just plain wrong. This assumes that companies can dictate market price in order to cover any costs that they incur when price is actually determined by supply and demand in a competitive market. Any attempt to raise the product price to accomodate the income tax would have to overcome lower priced product from competitors who did not incompetently attempt to incorporate such "costs" in their pricing strategy. The result would be that the company that attempted to "pass along" the tax would actually lose sales volume, possibly even to the point of losing profitablility. Conversely, the lower priced competitors who did not attempt to "pass along" the tax would gain sales volume and enhance their profitability.

The skewed logic utilized by NRST advocates to claim that corporate income tax is paid by the consumer is completely bogus. To accept their convoluted logic is to deny how businesses actually operate in a competitive market. Further evidence of corporations' inability to "pass along" their income tax obligation is published every day in the business section of our nation's newspapers: "ABC Corporation fails to meet 3rd quarter expectations" or "XYZ Inc. incurs 2nd quarter loss". Once again, with future sales and tax obligations (if any) being unknown, it is IMPOSSIBLE for companies to "pass along" their income tax obligation to the consumer.

The Ivory Tower "experts" who concoct this theory are in denial of how business actually operate in a competitive free market. Their fundamental assumption that companies can dictate the market price of their product to accomodate income tax liability is fallacious and reflective of marxist influence.

[lewislynn]

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

At least part of the flaw/lie exposed in your little scam here is the repeal of payroll taxes...How will you guarantee 100% of wages as take home pay AND repeal the payroll tax?.....HMMM?

I seem to remember you being one of the many who make the claim that the employer portion of the payroll tax as part of the employee wage....which face are you speaking from now?

[ancient_geezer]

Sorry lewislynn, the the amount you will receive as increase in takehome will be the 7.65% wage tax withheld for SS/Mediscare as the employee wage tax. The rest of SS/Mediscare (7.65% employer's tax) will be realised in price declines due to competition, or investment income increases from production expansion from retained or distributed earnings.

The major additional portion of price drops will come from reduction in tax compliance costs associated with both income and payroll tax sytems.

[ancient_geezer]

I seem to remember you being one of the many who make the claim that the employer portion of the payroll tax as part of the employee wage....which face are you speaking from now?

Employer portion of the payroll tax is at the cost of employee's gross income according to Walter Williams. However that does not translate into an automatic wage increase for everyone simply because the employer is realieved of that excise. The more likely form that the employers portion will be applied to is toward maintaining or achieving competitive advantage in the marketplace (e.g. price reductions directly or through productivity improvements) rather than wage or salary increases.

[ancient_geezer]

P.S. lewislynn

Productivity increases do happen to include the hiring of more highly skilled workers at higher wages away from your competitors. So yes there will be some unpredictable increase in wages for the more skilled workers from that viewpoint. Unfortunately that is a longer term effect than merely receiving ones negotiated gross wage that you are now due.

[Roscoe]

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.

Touché.

[ancient_geezer]

What a bizarre and gross exageration SS/Medicare costs don't add up to 20-30% of production costs,

You are forgetting

1) cost of tax compliance at $0.65 for every dollar collected in revenue to the government Willie. Those costs reduced and compensated for under an NRST.

2) corporate income taxes and costs associated with compliance there.

altogether, a very definite drop of more than 20% will be realised depending on assumptions of just how much drop in compliance costs will occur. My assumption are half those to be expected for a $0.65 for dollar collected value determined by Payne.

Costly Returns
The Burdens of the U.S. Tax System
James L. Payne, '93

Where does $1.00 cost you $1.65? On your tax return, that's where! James Payne demonstrates that for every tax dollar the IRS collects, we pay 65 cents more in compliance and other costs.  This hidden financial burden is compounded by the arbitrariness, invasion of privacy, denial of civil rights, and other abuses of a coercive tax system.

 

Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By James L. Payne, Reason Magazine February '94

When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue. Although future studies may come up with slightly different numbers, there is no doubt that the overhead costs of taxation are substantial. This means that every act of self-subsidy entails a significant waste. When the government takes a dollar from Peter to give it back to him later, there is a huge loss attached to the transaction.

Unfortunately, the bad news doesn't end there. Peter is never going to see this dollar, even if it is destined for him, because of the waste in the system for disbursing subsidies.

---

 

The Flat Tax; Hall & Rabushka, '95:

What the Income Tax Cost the American People

The science of estimating compliance costs and indirect economic losses is, as noted, relatively new, and findings differ widely. Payne, for example, estimated the total costs of the federal tax system in 1985 at $363 billion, or 65 percent of actual collections. Others have reached higher costs in some categories of compliance and lower costs in others.

***

Notes & References:

A comprehensive review of all the studies that attempt to measure the costs associated with the federal income tax appears in James L. Payne, Costly Returns: The Burdens of the U.S. Tax System (San Francisco: Institute for Contemporary Studies Press, 1993). Payne summarizes the estimates of compliance costs that appear in the following studies: Joel Slemrod and Nikki Sorum, "The Compliance Cost of the U.S. Individual Income Tax System," National Tax Journal 37 (December 1984): 462–65; Arthur D. Little, Inc., Development of Methodology for Estimating the Taxpayer Paperwork Burden (Washington, D.C.: Internal Revenue Service, 1988), pp. III–23; James T. Iocozzia and Garrick R. Shear, "Trends in Taxpayer Paperwork Burden," in Internal Revenue Service, Trend Analyses and Related Statistics, 1989 Update (Washington, D.C.: U.S. Government Printing Office, 1989), p. 56; Annual Reports of the commissioner of the Internal Revenue Service; and a variety of other IRS memoranda.

[ancient_geezer]

Touché.

One should at least wait to see what lies in the bushes as a response before predicting a score for the other team.

See reply #39.

Demonstrating ignorance of the other teams hand through premature display of enthusiasm can be embarrassing to one's own credibility.

[Roscoe]

Your "proof" that 2 + 2 = 2 ?

Tax protest scams seem to invariably require blind faith.

[ancient_geezer]

TP scams do indeed require blind faith. You really should talk to lewislynn about that one, since between Willy and Lewis, Lewis is the TP proponent. Willy just figures for an individual income tax plus a Tariff with no corporate tax.

Myself, I would rather do away with tax systems that require the private family to say anything to the government about income or profit, thus go for the NRST along with Alan Keyes so I can pay the tax anonomously and still know how hard my pocket book is really being hit by government.

So what's your poison in all this?

[Roscoe]

Anonymity would be a plus.

[ancient_geezer]

Then we have common ground.

[ancient_geezer]

How about the visibility of what government actually costs you at a personal level?

Should cost of government to the individual be proportionate to the benefit each derives vs one's contribution to society?

[#3Fan]

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

I don't trust studies because they are done by liberal universities. So it's my guess and I can vote my guesses if I want to. :^) My guesses are right more than wrong.

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.

Niether the NRST nor the low flat income tax will ever be sold to Congress so it doesn't matter.

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

Already getting complicated.

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.

I don't trust something that needs so much literature to explain. LOL

[#3Fan]

Fine, so lets just set an NRST of between 3 & 10% of consumption instead of income and avoid the intrusions of government into the private individuals life.

How is it not an intrusion on an individual's life to force him to document what he did or did not sell and to whom?

Now all you have to figure is how you can sell it to Congress.

It won't be sold to Congress and neither will the low flat income tax. People love to vote themselves money too much.

I'll go for the first step, to an NRST, and let the market,(i.e. consumer/voter) drive the taxs rate to optimum.

So if a car dealership opens in the Bahamas and begins to sell cars to American citizens minus any sales tax which would make these cars thousands of dollars cheaper, and then ferries them to Florida for pickup, you don't want to put a halt to that? Or would you have the government intrude on individuals lives and force them to disclose everything they bought and in which country they bought these things to force them to pay taxes on it?

[ancient_geezer]

How is it not an intrusion on an individual's life to force him to document what he did or did not sell and to whom?

First: there is no documentation required as to whom an item may be sold to.

Second: There is no documentation required as to what one does not sell.

Third: The Constitutional authority exists to tax individuals, both at state and national level. The issue is to limit the intrusion, as any form of taxation necessarily involves some intrusion. A retail sales tax is clearly less intrusive than other forms as it is imposed upon a retail business enterprise as opposed to the private individual.

Third: Under the proposed NRST businesses are compensated to collect and remitt the tax. There is no law to force one into acting an agent of the government in such capacity as there is no requirement under an NRST that any individual to engage in selling retail as opposed to inter-business sales or sales of used/antique items or engaging in occupations which are not required to collect such taxes.

It won't be sold to Congress and neither will the low flat income tax.

Correct so why bother to thow it out as red herring and wasting effort on debating something that does not garner even token support.

Or would you have the government intrude on individuals lives and force them to disclose everything they bought and in which country they bought these things to force them to pay taxes on it?

We already do and they are called tariffs. A retail sales tax is no more intrusive, and much less intrusive than an income tax which demands the reporting of all income and sources of such by every individual.

[ancient_geezer]

and force them to disclose everything they bought and in which country they bought these things to force them to pay taxes on it?

By the way, the proposed NRST's do not tax that which you own prior to its enactment in any case. So any concerns at this level is a mere hypothetical of no interest. The only reporting of goods brought into the country have impose no requirement greater than already exist under import laws currently on the books.

Or are you suggesting the import tariffs and their collection are somehow more intrusive than income taxes and thus should be done away with.

[ancient_geezer]

Niether the NRST nor the low flat income tax will ever be sold to Congress so it doesn't matter.

The NRST with supported bills in Congress and a growing constituency pushing for it is alot closer, than that strawdog low flat income tax you are throwing out.

Already getting complicated.

I don't trust something that needs so much literature to explain.

And you like an income taxes instead ROTFLM(_|_)O!!

[ancient_geezer]

I don't trust studies because they are done by liberal universities.

And you support an income tax? My will wonders never cease?

I don't know of any studies that have been done by liberal universites on this subject myself. I do know there are a few phd's in economics that happen to be employed in such universities that have done such studies independently and under contract. I also know of studies done by some very clearly conservative folks that support the same conclusions. In fact much of the matterial I use comes from opponents of the NRST to assure that the data is not skewed in favor of NRST support.

How about some studies from conservative foundations? Just as many of those exist in support of the NRST as well.

So it's my guess and I can vote my guesses if I want to. :^) My guesses are right more than wrong.

Any blindman feels the same way. Personally I prefer to be able to read the obvious road signs before driving over a cliff.