Russia's 13 percent flat tax rakes in cash

Sunday, April 14, 2002

MOSCOW -- Like many Russians, Nellie dreads her annual visits to the local tax office, with its long lines, surly officials, and Byzantine tax forms. But recently, the 66-year-old grandmother, who supplements her meager pension by cleaning apartments, had a pleasant surprise.

"My taxes were three times lower," she said. "They must have understood they were too high before."

Nellie is not alone. The government says more Russians are paying income tax, thanks to an innovation that should hearten flat-tax advocates.

Last year, President Vladimir Putin introduced a flat tax on income of 13 percent -- the lowest rate in Europe -- designed to draw more Russians out of the "shadow economy" and make them honest taxpayers.

The results have been dramatic. Revenue from personal income tax shot up nearly 47 percent last year, and tax revenue overall rose 50 percent, according to government figures. Early results from 2002 look even better.

"We expect the number of people filling out income tax forms to increase substantially," said Dmitri Mikulich, deputy head of the Tax Ministry's individual income tax department.

For a society with a long history of distrusting the government and hiding cash at home, the taxpaying boom marks something of a revolution. But many analysts say it's too early to declare victory.

Small- and medium-sized Russian businesses complain they still face an insuperable array of taxes.

The worst culprit, many say, is the "social tax" of up to 35.6 percent on salaries, the equivalent of U.S. Social Security.

There's also a 5 percent sales tax, a 20 percent value-added tax, a 5 percent advertising tax, a 2 percent property tax, a 1 percent road tax, plus a 24 percent tax on net profits after most other taxes, not to mention various registration fees.

"There's a sea of taxes," said Slava, 40, who owns a travel agency in Moscow and declined to give his last name.

Like many other business owners, Slava operates under a dual salary system. He slips his four employees an envelope of dollars every month, but for the tax inspectors he keeps another set of records on his books, showing much lower wages in rubles.

Most tax inspectors are willing to set aside their doubts for a "gift," like a bottle of liquor, Slava said with a shrug. Only through this sort of routine deception, he said, can he keep his business from going under.

"If the government makes it a 13 percent tax for business, just like for individuals, then I'm ready to pay it, but right now there's no way," he said. "You'd have to turn over all your profits."

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