NANCE PERSPECT

NANCE PERSPECT. ive, the transition to a more market oriented system has meant the diversification of social spending responsibility through the creation of off-budgetary funds OBF and passing down the bulk of public social spending mandates to sub-national governments. The following are the major OBFs Pension Fund, Social Insurance Fund, Employment Fund, and the Fund for Social Support.

Created in 1991, the Pension Fund was designed to take pressure of federal budget and is authorized to collect a mandatory payment from employers in the form of a mandatory 28 percent contribution while from agricultural enterprises the mandatory contribution is 20. 6 percent and 5 percent of the total income of self-employed individuals. Employees make a 1 percent contribution to the Fund. Labor pensions, financed from these contribution, and social pension which are financed from the federal budget are administered by an independent government agency.

The former constitute the majority 80 percent of Russian pensioners and thus the level of labor pensions affect the lives 19. 5 percent of the Russian population. To be eligible for labor pensions, men must have made 25 years worth of contributions while women must have made 20 years of contribution. Eligibility for labor pensions can be lower depending on occupation hazardous occupations such as coal mining and military service are two examples.

Social pensions are for individual with less than 5 years of work experience and is equal two-thirds of the minimum old-age pension or in the case of disability the amount varies but does not exceed the minimum labor pension. Payroll contributions are the also the main source of funding for the Social Insurance Fund SIF and the Employment Fund. Created in August 1992, the SIF is funded by a 5.4 percent payroll deduction from every worker. The SIF is intended to fund child care, maternal care benefits, and sick care. Generally, 74 percent of revenue collected from the SIF contributions remains with the enterprise while the remainder is sent to the center to finance federal responsibilities.

Workers who have accrued eight or more years of experience receive their entire salary as do Chernobyl victims, parents with three or more children, and war victims. Workers with less that five years experience receive 60 percent of their salaries while those with between five and eight years experience receive 80 percent of their salaries.

It is accepted practice that benefits are paid until the worker recovers or is granted a disability pension. Mothers receive support through a maternity grant which equals five times the amount of the present minimum wage. Additionally, working mothers receive a maternity allowance, over the span of 126 days, which is equivalent to her entire salary. When this time has elapsed, the mother can receive a payments that equals the minimum wage for up to a year and half. The expenditure responsibility for family benefits, which generally are divided into the following broad categories payment made to all families with children without regard to income or prerequisites, cash transfers to disadvantaged families, and payments made to working mothers, is unequally shared among all three levels of government.

Although the national level contributes, it mandates the levels of benefits while often leaving it to the sub-national governments to finance the increase.

Unemployment in the region in a relatively new phenomena due to the general nature of the Soviet system. The Employment Fund was created in 1992 to pay unemployment benefits to those affected by the transition to a market economy. Contribution to the fund comes from a mandatory two percent payroll deduction and budget transfers. Revenue collected from the payroll tax is shared between the raion and oblast governments on a 45 percent to 55 percent ratio.

The former then remits 10 percent to the center for federal responsibilities. Benefits, from Western perspective, are considered generous. Individuals just entering the work force receive the minimum wage. Workers who have been laid of receive in the first three months receive a cash benefit equal to 75 percent of their previous salary. The benefits level drops to 60 percent for the following six months and 45 percent for the remainder of the year. The Fund for Social Support FFS is a limited national source for sub-national funding of social programs.

In 1992, the FFS accounted for only .01 percent of GDP. The stated purpose of this fund is to aid rayons that have been particularly hard hit in the transition from a command economy. The FFS began operations in 1992 with revenue from seized Party assets and tax from re-appraised inventories. It is also supposed to receive revenue form the privatization process although it did not receive the ten percent assigned in 1992 and receipts from the revaluation of commodities in state stores and ruble receipts from sale of food aid. Although inflation increases revenue to the Russian government, it naturally impoverishes the population when adjustments are not made or insufficient to deal adequately with inflation to monetary benefits such as the minimum wage and pensions which provides the basis for the social safety net. Inflation was one of the primary causes of poverty in Russia.

As chart A5 shows, social subsidies and transfers have also been ineffective because they do not reach the truly needy.

The primary reason for this economic waste is the lack of means based testing. The problem of hyper-inflation which had plagued Russia earlier in the transition period has been replaced by the dramatic reduction in real wages and severe dilemma of arrears. By December 1995, real wages declined by 13 percent and real consumption declined by 5.3 percent.

Real wage decline, and unexpectedly low levels of unemployment, can be attributed to evasion of excess wage tax and inside the gate employment by which enterprise managers hoard labor by paying minimum wage and compensation workers in non-taxable manners such as payment in kind, low interest long-term loans that have questionable repayment terms. It should be noted that the Pension Fund is becoming more experienced in detecting methods of tax avoidance and recent action has been taken to close loopholes Reduced inflation has given way to arrears as one of the primary causes of poverty in the Russian Federation and has primarily been the result of international pressure to reduce the budget deficit by ending emission based methods of covering the deficit and tax avoidance and evasion.

According to ITAR-TASS, pensioner were owed nearly 3 billion dollars in October 1996. Revealing the revenue gap, 22 regions were able to make pension payments while the remaining 69 needed transfers from the federal fund. Wage arrears for both private and public sector were estimated at 43 trillion rubles 9 billion of which was the state s responsibility.

An area of concern which was not addressed in 1992 and continues to be a problem today is a rapidly deteriorating income distribution between the regions of the Russian Federation. The disparities between the rich and poor regions could possibly be the worst amongst all the federations. CONCLUSION AND SUGGESTIONOne of the greatest obstacles to successful Russian market economic development is the absence of a modern and effective tax system and lack of reliable data. Foreign capital always seeks predictability, especially in terms of projecting tax liabilities.

Lack of a stable tax regime is the number one reason why Russia s direct foreign investment dollar level is so low compared with other emerging markets. A frequent and common concern expressed by foreign companies is the fear whether real or perceived of an unstable, inequitable, unreliable, and unpredictable tax system in Russia.

As a result, capital that could potentially be invested in Russia is instead invested in other countries that are perceived as enjoying more stable tax systems. For Russia, it is time to introduce tax breaks or other incentives by the end of the year for companies using international accounting methods as part of a new business reform plan. For example, companies which would follow these international accounting standards will have their profit tax lowered by, say, five percent or maybe they will receive other privileges.

Most Russian companies use domestic accounting practices developed to calculate tax levels. Western accountants say Russian accounting has limited use for business planning and investment. Below, we have stated some suggestion and concerns regarding public finance in transitional economies Before making any changes in the tax system the officials have to think very carefully to avoid unplanned changes.

For instance, the law on the VAT has been changed 13 times since it was enacted. Proper tax reform would also solve another of Russia s problems its chronic budget deficit. The country s inadequate system of tax revenue collection has been unable to keep pace with the rise in government expenditure, leading to a budget deficit of 6.3 per cent of GDP in the first half of this year. According to Mr. Stuart Brown, eastern Europe economist at Paribas Capital Markets, while fiscal policy has been lax in Russia, monetary policy has had to bear the burden of reducing inflation.

The result has been high real interest rates. No wonder then that several leading companies are looking abroad for capital. Reducing the budget deficit, to reduce crowding out at home and allow fiscal policy to take some of the burden in controlling inflation, must therefore be a priority for the Russian government. The problem is that tax evasion and a culture of non-payment in Russian industry, will hamper efforts to improve revenue collection.

Regulate the movement of budget money by reorganize the Russian treasury and concentrate all budgetary financial flows within it. A good approach to battling non-compliance would be the implementation of a unified computer information system to control revenues and expenditures of the federal budget and state extra-budgetary funds, which should contain taxpayers registration system and bring together information on tax and customs duties payments, banking transactions and cash disbursements, as well as data on tracing and utilization of the federal budget resources.

But it is still difficult to implement. First, Russia does not have high qualified specialists in database and management information systems MIS . Second, it will require buying expensive mainframe computers what is critical under collected 60 percent - percent revenue. It is also important to decide what kind of tax information is going to be the first to be put in the database.

The State Tax Service of the Russian Federation recently began this process by requiring all taxpayers to indicate a personal taxpayer identification number PTIN on payments and settlement documents for taxes and other levies beginning on August 1, 1995. The rule as of January 1, 1996, states that a PTIN should be included on all payment and settlement documents. Also Russia s State Taxation Service is redoubling its efforts to stop commercial banks from hiding income from tax authorities.

The taxation service recently found that credit institutions failed to transfer 3 trillion rubles to the state on time, and that they have used legal means to hide their income. With the centralized computer tax information system, it would be easier to observe taxpayers and prevent tax evasion. Reduce the cost of servicing the state debt. Stop the emission of money. Improve control over monopolies. Reorganize the banking system.

Set up a federal deposit of insurance bond. Reform ministry of finance and economy. Diversification of the tax base. Some services should be financed by taxes levied on local beneficiaries. Local taxes are those over which local authorities have some control. Which taxes to assign? The question is not easy for Russia. In many market economies, the central government controls those taxes considered to be most redistributive, such as personal income taxes, and the cyclical corporate income tax, leaving more stable revenue sources levied on a consumption base or property to the local level. For example, some federal systems the U.S Switzerland, Canada allow subnational corporate taxes, it would be better for the federal government to set the corporate income tax. For the transition economies, considerations of both administrative complexity and allocative efficiency suggest that subnationally levied corporate taxes should be avoided at the present time. Permitting the many small subnational governments in the transition economies to set corporate tax rates or adjust the tax base will allow substantial tax competition and differentiation in enterprise taxation, influencing enterprise location decisions in perhaps undesirable directions. .The development of a more efficient and effective social safety net in perhaps the most immediate and difficult task to accomplish in the Russian Federation.

Aside from cultural reasons outlined earlier, economic growth cannot occur without social stability which will not happen until Russia can design an effective system of coverage.

Some possible ways to improve this critical area are diversify the tax base for social programs, redesign the system of federal-sub-national relation which has made the latter bear an unjust amount of the burden unfair because of regional differences and compounded by Soviet planning, and make stronger attempts to reduce arrears which is a difficult task due to the temptation to return to emission-based methods of covering expenditure requirements.

APPENDIX Table A1 Selected Economic Indicators, Average Annual Rate of Growth 1961-70 1971-75 1976-80 1981-85 1986-90 1. Net material product NMP , Soviet official 6.4 5.1 3.9 3.1 4.1 2. Gross national product GNP , CIA estimates 5.1 3.7 2.1 1.9 C 3. Gross fixed capital investment, Soviet official 6.9 6.8 3.5 3.5 4.9 4. Industrial output, Soviet official 8.5 7.4 4.4 3.7 4.6 5. Industrial output, CIA estimates b. 6.6 5.9 2.4 2.0 C 6. Agricultural output, Soviet official c. C 2.5 1.8 1.0 2.7 7. Agricultural output, CIA estimates b c. C 1.4 0.4 - 0.6 C 8. Real income per capita, Soviet official 6.5 4.3 3.4 2.1 2.7 9. Consumption per capita, CIA estimates b. 3.8 2.9 2.0 1.9 C SOURCES Soviet official data and plan goals, TSSU 1986 and earlier volumes in the same series Pravda, March 9, 1986 June 19, 1986 June 20, 1986 John Pitzer 1982 , CIA 1985, pp. 64ff 1989, pp. 45, 59ff Gertrude E. Schroeder and M. Elizabeth Denton 1982 . For consumption, 1981-1985, and agricultural output, 1976-85, unclassified CIA data supplied to author.

Authors Source Abrham Bergson Soviet Economic Reform Under Gorbachev in From Socialism to Market Economy .ed William Kern 1992 p. 37 a. Utilized for consumption and accumulation. b. Output valued in 1970 prices for growth rates for 1961-75 and in 1982 prices for growth rates for 1976-85. c. Not available. d. CIA estimates essentially accord with Soviet official data. e. Yearly growth rate of average for five-year period over average for previous five-year period.

Table A2 Comparison of GNP Growth in USSR and Western Countries 1961-85 Average Annual Growth in Per Cent USSR US FRG France Italy UK 1961-65 4.8 4.6 4.8 5.8 5.2 3.2 1966-70 5.1 3.2 4.2 5.4 6.2 2.5 1971-75 3 2.2 2.1 4 2.4 2.2 1976-80 2.3 3.4 3.3 3.3 3.8 1.6 1981-85 1.9 2.4 1.3 1.1 0.9 1.9 Note US GNP calculated in 1982 prices.

GNP growths of FRG, France, Italy and UK are calculated from GDP in 1980 prices.

Source Cohn 1987, p. 12 Authors Source Elliot and Dowla in International Journal of Social Economics v. 21 p. 78 Table A3 Soviet state budget expenditures for consumer and food subsidies, social insurance, and health care, 1985-1990 Type of expenditure 1985 1986 1987 1988 1989 1990 In billions of rubles nominal Total state expenditures 386.5 417.1 430.9 459.5 482.6 488.2 Consumer subsidies 58.0 65.6 69.8 89.8 100.7 110.5 Food subsidies 56.0 58.0 64.9 66.0 87.7 95.7 Social insurance and health care 83.6 89.3 94.5 102.5 105.5 117.2 As percent of GNPConsumer subsidies 7.5 8.2 8.5 10.3 10.9 11.6 Social insurance and health care 10.7 11.2 11.5 11.7 11.4 12.3 Source Anders Aslund, Gorbachev, Perestroyka, and Economic Crisis, Problems of Communism, vol. 40, nos. 1-2, Jan Apr. 1991, p. 25 a. Estimated figures.

Authors Source Linda J. Cook. 1995 The Soviet Social Contract and Why It Failed p. 148 Table A5 Significance of Public Transfer in Household Income for households Receiving the Benefit Very Poor Poor Not Poor Transfer Receiving the benefit Avg of Recipient Household Income Receiving the benefit Avg. of Recipient Household Income Receiving the benefit Avg. of Recipient Household Income Family Allowances 288.8 23.6 32.4 14.5 25.7 5.9 Pensions 0.3 75 41 66.9 48.7 58.4 Unemployment Benefit 0.8 21.7 0.4 17.8 0.3 9.8 Subsidies from Local Authorities 100.4 9.6 10.4 9.6 14.5 8.1 Subsidies from Enterprises 55 9.4 8.7 10.8 17.7 11.7 Scholarships 50.2 17.8 6.2 18.2 6.7 8.7 All Transfers 666.8 58.5 70.9 48.4 74.4 42.6 All transfers includes those listed except subsidies from enterprises, which are included with subsidies from local authorities plus welfare.

Note that the overall average percent of the household income can be calculated form the two values reported for each poverty status. Source RLMS. Round 4. October 1993- February 1994. A6 List of Goods in Everyday Demand and Services to the Population which are Exempt from the Sales Tax Children s food, meat, meat products except delicatessen products, milk and milk products, margarine, fats, bakery products, flour, pasta products, eggs, tea, sugar, salt, vegetables cabbage, carrots, beet, onions, potatoes, fish and fish products, vegetable oil, mineral water, children s items, textbooks for general education schools, specialist educational and medical equipment and medical supplies Children s items, including clothing, footwear, furniture, bed-linen, school uniform, toys and sports items Consumer goods on lists approved by the councils of ministers of the republics within the USSR, kray soviet executive committees, oblast soviet executive committees, Moscow and Leningrad city soviet executive committees and executive committees of autonomous oblast and autonomous okrug soviets of people s deputies A7 USSR SALES TAX DECREE Full text of instruction issued by USSR Ministry of Finance and dated February 11, 1991 . The provisions include some of the following 1. Liability extends to joint ventures and Soviet organizations engaged in importing 2. Joint ventures will pay tax on hard currency sales in rubles, converted at the prevailing commercial rate of exchange fixed by USSR Gosbank 3. Liability extends over a wide range of supply, including professional, informational, communication, etc. services 4. The tax rate is 5 5. Tax exemption applies to sales of precious metals, coal shale, export services, trade between parts of a constituted enterprise.

SOURCE EKONOMIKA I ZHIZN February 23, 199. P19 A8 Taxable income received in calendar year. Source Tax 96 TNI 4-1 Foreign Taxation Doc 96-947 less than 12 million Rubles 12 from 12 million Rubles 1, 44 million Rubles to 24 million Rubles 20 of the sum exceeding 12 million Rubles from 24 million Rubles 3.84 million Rubles to 36 million Rbls, 25 percent of the sum exceeding 24 million Rubles above 48 million Rubles 10.44 million Rubles 35 percent of the sum exceeding 48 million Rubles 1. Isaak I. Dore , 1995 Distribution of Governmental Power Under the Constitution of Russia in Parker School Journal of Eastern European Law v. 2 p. 675 2. ibid p. 681 3. ibid p. 865 4. ibid p. 691 5. ibid p. 678 6. ibid p. 688 7. With the current political situation we can say that the budget as a whole, without doubt, will not pass the Duma by the end of the year. 8. The Moscow Times May 21, 1996. p. 54. 9. World Paper. September, 1996 p. 33 10. TNI 73-22, 1996 11. TNI 22 16, 1992, John Turro 12. Joint Letter No VG-4-12 25N of June 16, 1995 13. Doc 96-947 14. Much of the literature on tax assignment argues that the personal income tax PIT , generally one of the more important taxes in revenue terms, should be retained by the central government, largely for redistributional and stabilization reasons.

Nevertheless, the central government may give local governments a share in the PIT. 15. Tax Analysts, Tax Notes International.

January 25, 1993 16. NOVECONCOMMERSANT. July 28, 1994. p. 2 17. In Russia, this tax is mostly levied at a national level because of the administrative convenience, these taxes have been levied at the producer level, not the retail level and in the transition economy context this often translates into a tax on a few manufacturers as in Russia, for example, there are cigarette factories in only 21 of its 2000 raions Comparative Economic Studies Winter 1994, Vol. 36, No. 4 , or sometimes on the single monopoly producer.

Thus, only a few producing districts would benefit from levying these taxes and revenues from them would accrue to only a few localities 18. Tax Analysts, Tax Notes International.

January 25, 1993 19. Tax Analysts, Tax Notes International.

January 25, 1993 20. Tax Analysts, Tax Notes International. January 25, 1993 21. The British Broadcasting Corporation March 15, 1991 22. Scot Antel. The Moscow Times. May 21, 1996 23. Though temporary steps were made like creating special colleges that are attached to courts of arbitration, we suppose that creating a special tax courts is essential here 24. Of course, taxes existed but people could not evade them as they were centralized and in theory all means of production were owned by the state. 25. Washington Post. October 12, 1996. p. A25 26. But we are afraid that this provision will not benefit the economy 27. Betsy McKay. The Wall Street Journal. October 29, 1996. p. A12 28. Comment Analysis Statistics Forecast November 1996 p. 2 29. Information Services Quest Economics Database Credit Suisse Financial Forecast, 1996 30. Reuter Textline Reinsurance, October 31, 1996 31. In our opinion, inflation will come down further in 1997, to approximately 15 percent.

Also, Russia continues to fail in its economic performance of it fiscal and monetary policy within the framework established by the International Monetary Fund. 32. The Moscow Times. March 27, 1996 33. Dmitry Falcovich, head of the macroeconomic department with Alliance-Menatep 34. Russian Federation Toward Medium-Term Viability. 1996. IBRD World Bank p.39 35. Fiscal Management in Russia. 1996. IBRD p. 39 36. Fiscal Management in Russia. p. 22 37. John E. Elliot and A.F. Dowla. Gorbachev, Perestroika and Democratizing Socialism in International Journal of Social Economi.