IV. Communicative practice. Situations

1. You are members of the local Duma. You have been discussing the town priorities. You are concerned about the town government expenditures covering a variety of things from sweeping the streets to providing local schooling. This must be financed through taxes. Some of these taxes will be local, but some from central government revenue raised through the national tax system. Be sure to mention the crucial issue of wage arrears (causes, consequences, ways out).

2. Discuss the problem of tax evasion in general. Speak about tax contribution of pop stars. There have been quite a number of notorious cases covered in newspapers.

3. Are tax defaults hampering the progress of economy in Russia? Prove your opinion.

4. What are the ways of reducing the number of defaulters?

5. Which of the following are public goods? (a) the fire brigade; (b) clean streets; (c) refuse collection; (d) cable television; (e) social toleration; (f) the postal service. Explain and discuss alternative ways of providing these goods or services.

6. Why does society try to ensure that every child receives an education? Discuss the different ways this could be done and give reasons for preferring a particular method of providing such an education.

7. Whereas a progressive tax takes proportionately more of a rich person’s income, a regressive tax takes proportionately more of a poor person’s income. Classify the following taxes as progressive or regressive: (a) 10 per cent tax on all luxury goods; (b) taxes in proportion to the value of owner-occupied houses; (c) taxes on beer; (d) taxes on champagne.

8. Show why the following statements are incorrect: (a) The only reason for taxation is to provide for shirkers by penalizing people who do an honest day’s work. (b) It is obvious that the government is supplying too many goods and services. In a free enterprise economy it would be profitable only to supply a fraction of the amount to which the government is currently committed. (c) The government spends all its revenue. Taxes cannot be a burden on society as a whole.

Russian Experience

Think and say:

a) What do you know about the tax system in Russia? Does it need reforming? Why?

b) Read the texts and discuss them in pairs. Report your conclusions.

c) Compare the Russian tax system with the tax systems of other countries.

d) Make a report “Taxes in Sweden”.

Taxes Higher in Russia Than Elsewhere

Russia’s current tax system is closely modelled on Western systems — a fact that makes it easier to conclude agreements to avoid double taxation and attract foreign investments.

Like western countries, Russia has a profit tax, a value-added tax (VAT) and a property tax for individuals and businesses. And as in Russia, a three-tier tax system consisting of federal, regional and local taxes exists in most Western countries. For example, in the United States there are federal, state, and local taxes, and in Switzerland — federal, canton and local taxes.

On the other hand, each country has certain specifics. For instance, each of Switzerland’s 26 cantons has the right to establish its own taxation period (one year in some, two in others). In some cantons there are tax privileges, in others there aren’t. Germany’s federal law provides a “model tax rate”, which can be adjusted to local rates.

Until recently, the Russian tax system allowed regional and local authorities to introduce new taxes. Today, the Russian system is analogous to that of any Western country in both structure and taxable items. In addition, Russia’s tax rates correspond to those of the industrial countries.

Take, for example, Germany. Its VAT rate is 15 %, which is comparable to Russia’s 20 %. But Germany’s tax on corporate incomes, which is comparable to Russia’s profit tax on enterprises, is far higher — 46 % to 50 % (Russia’s is 35 %, and it will soon be reduced to 33 %). Germany has a 25 % tax on capital gains (on dividends and increases in the value of securities), while the corresponding tax in Russia is 15 %. Income tax in Russia rangers from 12 % to 35 %; in Germany — from 22 % to 53 %.

In Germany the nominal tax rate on corporate incomes is much higher than Russia’s profit tax. But not only the tax rate is important, the taxable items are also crucial. For example, interest on credits in Germany, as in any other Western country, is totally tax-exempt. In Russia, interest on ruble credits is charged at the Central Bank’s rate.

Thus, Germany’s tax on corporate incomes and Russia’s profit tax are two different things. Germany’s tax on corporate incomes is high, but Russia’s profit tax is no less burdensome.

Russia’s income tax is also nominally lower. Germany has a progressive income tax system: 22 % is the minimum rate, and 53 % the maximum. But there is an important point to bear in mind. In the early 1990s, the average statistical wage in Germany was around DM 4,000 a month, taxable at 26 %. In Russia, such a wage is taxed at the maximum rate of 35 %.

Russia’s income tax rates hit hardest those who would perhaps like to pay their taxes and be exemplary taxpayers. These are professionals who earn from $1,000 to $2,500 a month. They are the people who are forming Russia’s middle class; but they are taxed at a rate equal to that on those who earn $15,000 a month. As a result, professionals are discouraged from declaring their incomes.

A major change was made to the income tax in 1996, when three rates were converted into five. People in the high tax brackets did not notice a 5 % increase in the rate, and people with low incomes did not notice that the taxable minimum had risen from 10 million to 12 million rubles a year. The whole burden of the change lay on the shoulders of middle-income people. It was proposed to introduce two rates: A minimum rate of 12 % to 15 % and a maximum rate of 45 %-50 % on high incomes. But this was not done.

Therefore, one cannot say that Russia’s income tax is lower than Germany’s.

To get a complete picture, let us compare excise duties.

In Germany there are fewer excise duties than in Russia. Germany levies excise duties on tea, coffee, tobacco, salt, beer and strong liquor, and also on light fixtures. There is also an indirect tax on luxury articles, which is included in the price or real estate in prestigious arrears, jewelry, and tickets to places of entertainment. But excise duties and “luxury” taxes account for a small share of state budget revenue.

The situation is the same in the United States, where there are excise duties on wine and strong liquor, tobacco products, matches, firearms, gasoline, and in some States, cars. The USA’s budget revenue from excise duties has been dwindling, and now stands at just over 3 %.

In Russia there are some 15 excisable items, and the excise duties on them form a key budgetary revenue item. According to figures from the State Statistics Committee (Goscomstat), in 1995 excise duties accounted for 24.1 % of the consolidated (federal) budget, or 1.5 % of the GDP.

Finally, there are mandatory payments to extra-budgetary funds. These payments take up to 13 kopeks from every extra ruble earned by Russian enterprises. This is a lot of money, but the country still faces a sad situation concerning the payment of pensions.

In Germany social security payment rates vary according to the size of the average monthly income. They average 37.5 %, of which enterprises pay half and the other half is deducted from employees’ wages. In Russia, social security payments remitted by enterprises to the state budget total 39 % of the wage fund. Therefore, Russia has higher rates of VAT and social security contribution, and more excisable items. While the tax rates on businesses’ and individuals’ incomes are nominally lower in Russia, the methods of assessing the tax base actually make the rates higher.

Conclusion: Taxes in Russia are higher than in other countries, whatever the arguments of state financial spearmints may be.

Sadly, this year should see even tougher tax measures because of new laws that have abolished or reduced a whole series of tax privileges and introduced new taxes, such as those on hard currency purchases and capital.

Calculation of taxes upon shipment will give enterprises more headaches. For businesses, tax calculation upon shipment chiefly means widespread demand for prepayment for deliveries, which is bound to exacerbate the shortage of current assets.

Hopefully, the tax regime will be eased by the enforcement of a new Tax Code. This document will do away with the above-mentioned shortcomings in the current tax system to a large degree.