Tax Hell in Russia Is Really Hell

Life in the New Russia is hard on Yelena Vorsina. Her monthly salary--the equivalent of $122--is three months overdue, and last payday she received only $40. Adding to her misery, she must cough up 12% of her meager income in taxes.

She and her co-workers threatened to strike but realized they would be severely punished. Instead, she planted vegetables to feed her family.

“It is impossible to live, but what can you do?” asked the 35-year-old mother of two. “We must plan how to spend every kopeck.”

But if her plight seems difficult, consider this: Vorsina is one of the top tax officials in this district of small towns, farms and lakes 200 miles northwest of Moscow.

As deputy chief tax collector of Ostashkov, she is part of a tax system gone so badly awry that it is strangling the nation’s commerce, delaying the salaries of millions of workers and inducing entrepreneurs to operate in Russia’s vast shadow economy.

Beleaguered U.S. taxpayers can take solace from the fact that the Internal Revenue Service is a model of fairness compared with the Russian State Tax Service. Here, the system is a through-the-looking-glass world where financial incentives seem designed to halt production and taxpayers are punished for their honesty.

The inability of the government to raise enough revenue to pay salaries, pensions and debts to contractors is bringing much of Russia’s legitimate economy to a standstill.

The country’s new capitalist tax system has been modified in a haphazard fashion over the past six years with little thought to the havoc that hundreds of new levies and tax breaks would wreak on the economy. Now, special-interest tax breaks cost the government an estimated $28.6 billion a year in revenue--and have created a large community of enterprises likely to oppose efforts to overhaul the tax system.

Under one bizarre rule, businesses are routinely taxed on income they have not yet received--including money they are owed by the government itself. Another tax on the use of factory equipment is so onerous that many struggling companies leave machinery idle rather than pay the government.

Some favored businesses have used political clout to win huge exemptions, while other firms pay as much as 80% of their revenues in taxes.

A few companies are so strapped for cash that they pay in lumber and sugar--”wooden rubles” and “sweet rubles,” as they have come to be known.

Most Russians, convinced that any taxes will find their way into the pocket of one corrupt bureaucrat or another, conceal as much of their income as possible. Officials estimate that more than 80% of Russians cheat on their taxes or avoid them entirely.

“I don’t see anything good coming my way from the government as a result of paying taxes,” said Vera G. Kiselyova, technical chief of the Ostashkov Tannery. “I don’t see where the government spends my money. I think a major part of taxes was blown up in smoke in the war in Chechnya. It’s not that the government doesn’t like me personally--it’s just that they don’t care.”

An estimated 40% of Russia’s economy is controlled by organized crime, and some tax inspectors have learned the hard way not to look at that share too closely: In 1996, 26 tax collectors were killed, six more disappeared after being kidnapped, and the homes of 41 others were set on fire.

Armor-Suited Officials

The government has intensified its effort to collect taxes from organized criminals and other scofflaws--even deploying armor-suited officials who resemble Darth Vader. Still, Russia brought in only 39% of the tax revenue it expected in the first quarter of this year.

The tax service itself is so pressed for cash that collectors have few resources at their command. Computerized records are just a dream; in some regions, the agency cannot even afford electricity or telephone service for its offices.

“We don’t have the system you have in America,” Vorsina said. “People are not afraid of the tax collector. They don’t wake up with perspiration on their foreheads because they saw a tax collector in their dreams.”

Tax evasion is so widespread that many companies see it as their duty to conceal the income of their workers from the government. Crooked enterprises outsmart tax inspectors by setting up hundreds of bank accounts and shifting money among them. Firms are created for one transaction, then disappear. In recent years, Russian businesses have transferred more than $100 billion abroad--a major factor in the nation’s cash crisis.

Compared with America’s, Russia’s income tax rate is steep. People who make the equivalent of less than $2,100 a year must pay income tax of 12%. The average annual income in Russia is just $1,730. Anyone making more than $8,400 a year must pay the top income tax rate of 35%.

But the inability of the government to collect sufficient taxes contributes to a circle of nonpayment that has helped bring the legitimate sector of the economy to its knees. Companies awaiting payment from the government cannot buy raw materials or pay bills. Workers waiting for salaries and retirees waiting for pensions cannot buy goods. Production has fallen, making it even harder for the government to collect revenues and meet its obligations.

“How can I collect a tax from someone who did not get his salary?” asked Max P. Sokol, a State Tax Service department head for income tax collection. “Of course we lose a lot because people try to avoid paying taxes. But we lose a lot more because salaries are not paid.”

Confounding the tax collector further, barter has become a way of life for many Russians. Even businesses trade raw materials and finished products among themselves in hopes of remaining solvent. One manufacturer of missile parts became well known for paying its workers in underwear it acquired in a trade.

In years past, Russia would have solved its problem simply by printing more money. But it stopped that practice in a bid to curb inflation and attract foreign investment. Now, inflation remains modest, but the government does not have enough money to meet its commitments.

Government Proposal

President Boris N. Yeltsin’s government has drafted a tax plan soon to be submitted to parliament that is designed to be simpler and fairer. Under the proposal, the 180 federal, regional and local taxes now on the books would be reduced to no more than 30, and many breaks for special interests would be eliminated.

The International Monetary Fund has delayed disbursement of a much-needed $10-billion loan to Russia until it sees progress in enacting the proposal. But whether the measure can win passage in the lower house of parliament is unclear, given that the chamber is controlled by Communists whose chances of returning to power are much greater if the economy remains in chaos.

The extent of the depression that has taken hold of Russia becomes apparent in towns like Ostashkov, far from the affluence and bright lights of Moscow.

Ostashkov, home to 25,000 people, dates to 1371. Clustered around an ancient convent on the shore of Lake Seliger, the town is not far from the headwaters of the Volga and Dnieper rivers. People here think of their region as the heart of Russia.

But these days, the town looks shabby. Century-old wooden houses thirst for paint. The potholed streets are almost empty of cars. Residents wear threadbare coats to ward off the cold. Ugly, Soviet-style apartments built on the edge of town only a decade ago are decaying so quickly they look 50 years old.

While few people would return to the Soviet system, most here blame their ills on the current government. And almost everyone, it seems, has a grievance against the tax system.

Ivan Smirnov, a former Communist Party member, owns a small bakery and a gravel business that supplies material for road building. Last year, he delivered $11,000 worth of gravel to the government. The transportation agency could not afford to pay him but reported the gravel purchase to the tax collector, who insisted that Smirnov had to hand over $3,200 in taxes.

He had enough money on hand to pay either the tax bill or the salaries of his 16 workers. If he did not choose the former, he faced a fine of 0.3% a day--110% annually--that he feared would bankrupt him. He paid his taxes.

“The absurdity of the situation is,” he said, “I did the work for the government and the government punishes me for not paying taxes on the money it did not pay me.”

The town’s biggest enterprise is the tannery, founded in 1729. It survived feudalism and communism, but it may not survive capitalism. Rebuilt just before the collapse of the Soviet Union, the factory can process 5,500 cowhides a day, but it now operates at less than 20% capacity.

The tannery once contributed 60% of Ostashkov’s tax revenues. Now, it is the town’s biggest tax debtor. Last year, the firm did not pay a ruble in taxes. As required by law, the tannery withholds income tax from the pay of its workers--but it hasn’t been giving that to the government either.

Veniamin A. Lebedev, acting general director of the plant, blames the government for not paying the equivalent of $1.2 million it owes the tannery--depriving it of the cash it needs to buy cowhides for processing.

“It is the state itself who virtually made us insolvent,” he said. “If they had paid us on time, we wouldn’t have to go begging now and could at least pay our workers regularly.”

Down the street at the SeligerLes lumber company, officials are also angry at the government. Besides selling lumber, the firm supplies wood chips and coal to the town for heat. But because of government price-setting, it must sell the fuel at about 10% of the cost of producing it. The government, by law, is supposed to pay the difference, but it fell $96,000 behind in payments.

At the same time, the lumberyard owed the government $99,000 in taxes. The company hoped the two debts would cancel each other out. But the government penalized the company $156,000 in interest--and refused to pay interest on the money it owed the lumberyard.

When the government finally paid its $96,000 debt, it paid in coal instead of cash. The government set the value of the coal using the higher rate--then required the company to sell it at the lower price.

Desperate Business

“Before the reforms, we lived quite well,” said general director Pyotr V. Krylatykh. “We were considered to be a very profitable enterprise. We had money. We had profits. We paid good salaries on time to our workers.”

In an attempt to stay in business, the company raised its lumber prices but then lost customers because no one could afford them. In desperation, the company shut its workshops and made its employees work outdoors so the firm would not have to pay the hefty tax on use of equipment.

“It’s cheaper to have the workers work outside, even in the winter, than in the shop,” Krylatykh said. “We would love to work, but I think the only thing we can do now is die.”

To win favor with voters in his reelection campaign last year, Yeltsin issued a decree increasing the number of special groups of people who can ride buses in Russia for free. Now, 57 such groups get a free ride, including veterans, old people, mothers with large numbers of children--and tax collectors. But for Ostashkov Transportation Co., the law means 80% of its passengers ride its buses without paying.

The company, which also runs a trucking operation, is losing additional business because its record-keeping is too good: Inspectors have found they can locate tax cheats by searching the firm’s records of the cargo it has hauled. Not surprisingly, most of its clients have switched to trucking companies whose records are not so detailed.

Ostashkov Transportation’s aging buses and trucks barely run; it is three months behind in paying salaries. But the workers keep showing up.

“They have no choice,” said general director Yevgeny Y. Sotnik. “Today, in this city, it is one of the few enterprises that still work. There will be no public transit if we close down. I tell my workers here, if everybody dies, we should die last so somebody can carry the corpses away.”

In Moscow, Deputy Finance Minister Sergei D. Shatalov hopes to end the chaos that afflicts towns like Ostashkov and produce a rational tax structure for Russia. As part of Yeltsin’s administration, he has helped draft a new tax code that would finance the government primarily through an income tax, a value-added tax, an excise tax and a property tax.

Attempt at Fairness

The current tax on revenues would be replaced by a tax on profit that would let companies write off expenses and depreciate equipment. Taxes that are incentives to halt production would be eliminated, along with taxes applied retroactively.

“Our task is to make the burden of taxation more fair and more equal . . . to make it stable, clear and foreseeable,” Shatalov said.

The high interest rate and fines assessed for errors and evasion would be reduced, he said, and would no longer “be equal to the immediate scalping of the taxpayer.”

The biggest battle is likely to be over the proposed elimination of breaks for favored companies, industries and classes of people, including agricultural production and members of the armed forces.

“Because of tax breaks, about 163 trillion rubles [$28.6 billion] is not collected” annually, Shatalov said. “It’s a huge sum. That’s why we are attempting to cancel very many privileges. Some will be canceled immediately, some over many years.”

Overall, the revenue that could be raised under the revised system would be reduced from what theoretically could be raised now. Shatalov hopes the shortfall would be more than offset by simpler collection and the willingness of taxpayers to contribute to a fairer system.

But changing the Russian tax culture will be difficult. Under the Soviet system, citizens paid token taxes and were taught that in the coming utopian Communist society, such levies would not exist.

“It was declared by the past leaders that in 20 years, we would be living in a society where we wouldn’t have to pay taxes,” said Sokol, the income tax department head. “Today, we have entered market conditions, but the psychology has remained on the same level.”

Sergei Loiko of The Times’ Moscow Bureau contributed to this report.