Russian Budget Chief Outlines Tax Policies

Tax-News.com, Moscow

07 January 2002

In an interview with Russian newspaper Nezavisimaya Gazeta, Chairman of the Russian State Duma Committee on the Budget and Taxes Aleksandr Zhukov answered questions concerning the future taxation policies of the Russian Government.

Aleksandr Dmitriyevich Zhukov was born in Moscow in 1956. In 1978, he graduated from the Economic Faculty of Moscow State University. In 1991, he acquired a diploma at Harvard. Since 1997 he has been chairman of the Committee for Budget, Taxes, Banks, and Finance renamed the Committee for Budget and Taxes in January 2000.

[Correspondent] Does the inflation forecast factored in the 2002 budget correspond to economic realities?

[Zhukov] I think that the government itself currently understands that the inflation rate of 12-14 per cent factored in the budget was understated. This is primarily due to the growth of tariffs for natural monopoly services. The Cabinet of Ministers has already made the decision on a 35-per cent increase in prices for services rendered by all monopolists. This level is higher than the one on which the budget is based. I think that deputies' estimates were more realistic: During the discussion of the draft law we cited the inflation rate of 15-17 per cent. Having said that, the government believes that goals that are a priori easily attainable should not be set at the forecast stage. If the government undertakes the ambitious commitment to lower inflation why should the legislative branch dissuade the government? It would be politically incorrect. Of course, high inflation yields additional budget revenues. On the other hand, it restrains economic growth in general.

[Correspondent] Will we be able to create a financial reserve to live as painlessly as possible through 2003, the peak year in terms of foreign debt repayment, since, as you pointed out, the implementation of the budget may encounter problems?

[Zhukov] The problem of debt repayment in 2003 is indeed very acute: We will have to pay around 19bn dollars. The financial reserve is being created for this very purpose. It should reach 3bn dollars by the end of 2001. The reserve is also envisioned in the 2002 budget - R120bn or around 4bn dollars. We will receive this money provided the budget is fulfilled according to the plan. At the same time there is no doubt the reserve will be created by the end of 2001.

[Correspondent] This year, your committee did not manage to achieve the lowering of the minimum single social tax, which, many people believe, prevents salaries from leaving the shadow... [newspaper ellipses]

[Zhukov] The government, particularly the Pension Fund, is afraid that a shortage of funds may be experienced after the adoption of the new pension system. According to their estimates, the 2002-2003 period is less favourable in demographic terms and therefore, they are not ready to countenance a substantial lowering of the tax rate. It is difficult to say how the situation is going to develop in reality. After all, wages are being substantially raised and, in principle, funds obtained through the levying of the social tax should increase. However, this cannot be said with absolute certainty. Those kinds of risks always exist and are combined with the possible lowering of economic growth rates, with uncertainty in the implementation of the budget as a whole due to major fluctuations in prices for oil, gas, and metals. If the government's position were not so strict we would countenance the lowering [of the social tax rate]. However, in this situation we cannot act against the will of the executive branch and all those responsible for compliance with the state's commitments with regard to pensioners.

[Correspondent] Will enterprises try to evade the single social tax by artificially reducing their wage pool and paying the profit tax instead, which was lowered this year?

[Zhukov] It is very difficult to make forecasts. What does the payment of a higher profit tax mean? It means that people will be paid money but will not be able to form their pensions. Initially people may not understand the meaning of the accrual pension system, but sooner or later it will become obvious that the payment of wages without the payment of the single social tax means that the money bypass their pensions. Of course, enterprises will be looking for some kinds of schemes to evade taxes. However, we have facilitated access to the regressive single social tax scale, which should encourage many enterprises to report actual wages.

[Correspondent] The sharing of the 2002 budget's tax revenues by the centre and the provinces in line with the 63:37 correlation triggered heated debates...

[Zhukov] A clear-cut solution to this problem does not exist. In recent years the correlation, indeed, has been changing in favour of the centre, which is part of the government's absolutely intentional policy. The point is that differences in the development of regions are very big, and this gap should be mended. To some extent it is so. However, such policy has its downside also, for it is funded by donor regions, which lose motivation for economic development if they are deprived of more and more money. At the same time world practice shows that the 70:30 correlation is typical not of a federal state but of a unitary one. When we say that we have a federation we should not deprive regions of their own economic basis. A transition to the 60:40 correlation entails political consequences in the state system.

[Correspondent] Next year the committee will discuss the draft chapter of the Tax Code tackling the taxation principles applied to small businesses. On what principles should it be based?

[Zhukov] The simpler the taxation system applied to small businesses the better. Generally speaking, I believe that it is an artificial problem. We have much lower taxes than many other countries. The problem of small businesses is rather administrative. In addition, there is one more aspect, which for some reason is being ignored. Small business is the most difficult kind of business. In order to keep afloat one has to work very strenuously for 15-16 hours a day. Meanwhile, we do not have this kind of tradition.

Duma cooperation with government reasonable

[Correspondent] When you spoke about the discussion regarding the single social tax you pointed out the committee could not act against the government's will. Did you often have to act this way this year, when the Duma discussed a great number of draft laws submitted by the government?

[Zhukov] I am happy with our collaboration with the government, particularly its economic component. In strategic terms our interests coincided. Nor did conceptual issues - tax reform or budget policy - evoke fundamental conflicts. Although, naturally, we happen to have different standpoints. Including on the budget, for instance, regarding its main parameters. The government is always trying to understate revenues. However, we managed to find a reasonable compromise. Naturally, not everything that we proposed was put into practice, but in most cases we managed to find solutions. For instance, on the financial reserve. Our concern that it is not transparent was removed: We set detailed rules in line with which the reserve is formed. The same can be said about tax laws. The government finally agreed to our approach to the draft law on the profit tax, although it was initially against it.

[Correspondent] Is it difficult to reach agreement with the government?

[Zhukov] Sometimes it is very difficult. And it is not at once that we manage to persuade our counterparts that we are right.

[Correspondent] Presidential representative to the Duma Aleksandr Kotenkov recently stated in his TV interview that the Presidential Staff has mechanisms to influence deputies and it is successfully using such mechanisms. Have you happened to experience this kind of pressure?

[Zhukov] What does pressure mean? It is clear that the Duma is mostly pro-presidential. The government also has the possibility to win a majority in the Duma. These are issues of political coordination.

[Correspondent] Are you not upset that the lawmaking process in the Duma is virtually devoid of drama?

[Zhukov] I would not say so. We manage to achieve a compromise on many issues. I do not remember any laws that we passed against our will or that were pushed through [the Duma] by the government.

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