Russia Should Risk Radical Tax Reform

Former Russian finance minister Boris G. Fyodorov is shaping up as the Willie Sutton of tax collectors. The American thief is still remembered for replying when asked why he robbed banks: "That's where the money is." Fyodorov is applying the same logic to Russia's chronic problem of collecting taxes.

Moscow's inability to collect taxes and thus pay the salaries of millions of state workers and pensioners is the biggest single factor undermining its nascent market economy. Russia's revenue plight is so desperate that Fyodorov has correctly sensed that he has nothing to lose as director of the State Tax Service by being innovative. He is embarking on a series of tax reforms that, if implemented, have the best chance so far of building financial stability for the Russian government and support for capitalism among the people.

First Fyodorov is tilting tax collection away from reliance on a handful of tycoons and big conglomerates and more toward consumers via a sales tax collected in restaurants, shops, and markets. Sales taxes make a lot more sense in the new Russian cash economy than income taxes. Next, Fyodorov is proposing a simplified flat income tax. Another good idea. Russia has a moderately progressive income tax that starts at 10% and climbs to 35% on incomes of $8,000. But, as fewer than 5% of Russians even bother to file tax returns, the yield is small. Fyodorov is suggesting that Russia adopt a flat tax of about 20% on all forms of income. He figures it could easily double or triple Russia's tax take. In a normal environment, a measure of progressivity translates into fairness and makes sense. In Russia, simplicity and acceptance by citizens is more important. Finally, Fyodorov is talking about possibly cutting the 35% corporate tax rate in half and ending all other taxes on companies.

But why stop there? Various radical ideas such as shifting taxes entirely to the expenditure side of the economy have been floated in recent years. That means levying a full-blown, value-added tax that European governments have used for decades to collect revenues from a citizenry no less zealous than their Russian counterparts in avoiding taxes. In turn, income taxes could fall dramatically or disappear completely.

No government with a well-functioning system is going to tempt fate, or its tax revenues, by experimenting this way. But a government confronted with a hostile nation of tax bilkers can afford the risk. Russia is one such country.

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