Posted on 03/28/2002 2:50:01 PM PST by What Is Ain't
During the Cold War, there was a cabal of activists and intellectuals who believed the Russian economic model held the key to human salvation and worked tirelessly to impose that system upon the United States and the rest of the world. Those people were communists. In the time since the Soviet Union collapsed, there has been a shortage of intellectuals touting the superiority of the Russian economic model--that is, until now. The difference is that today these people are all conservatives.
The occasion for this turnabout is that Russia has instituted the holiest of conservative holy grails: a flat tax. Last year, President Bush praised Russian President Vladimir Putin, observing, "I am impressed by the fact that he has instituted tax reform--a flat tax." In the last month, National Review Online published two articles urging the United States to follow Russia's example. One was by columnist Deroy Murdock. (Headline: "Russians Do Taxes Right".) The other came from Heritage Foundation scholar and conservative movement apparatchik Daniel Mitchell. ("Russia: 1, U.S.: 0.") "Russia's flat tax already beats America's punitive redistribution-oriented tax code hands down..." gloats Mitchell, "[W]hile Russia enjoys its flat tax, Americans still have to navigate the hundreds of forms required by all 45,000 pages of our mind-numbing tax code." Murdock also glories in Russia's superiority. "While ex-Communist states confidently reject progressive taxation," he writes, "America remains plagued by Marxian class-warfare rhetoric." Don't you see, comrade? While America is brutalized by class warfare, Russians revel in their workers paradise!
The conservative argument--and I suspect we'll be hearing more of it in the coming years--is that the flat tax has worked in Russia, and it would work here, too. As Mitchell writes, "The Russian flat tax has proved a smashing success since it took effect in January 2001. Russia's economy grew by more than 5% last year." Therefore, "The Russian experience confirms--again--that revenues rise under a flat tax."
Like the rapturous accounts of Soviet industrialization produced by fellow travelers during the 1930s, the conservative glorification of Russia's flat tax requires a bit of scrutiny. It's true that Russia's economy and tax revenues have grown since it imposed a flat tax. But prior to the flat tax, Russia had a basket-case economy and one of the least effective tax systems in the world. Just because the flat tax represents an improvement on the Russian system, it does not necessarily follow that it would represent an improvement on the American system. Distributing sacks of grain has improved the quality of life in Afghanistan, but this hardly proves that the same policy would work just as well here.
Yet when Mitchell writes that Russia's case "confirms ... that revenues rise under a flat tax," he's suggesting it would have the same effect in America. Obviously, it depends on circumstances. The old Russian tax code was in a state of collapse--so riddled with loopholes, inconsistent enforcement, and corruption that rich, well-connected people paid almost nothing. It wasn't the flattening of the tax rates that made these people pay more taxes, it was the fact that Putin cracked down on favoritism and noncompliance. Any system that involved a strong central government rationalizing and enforcing tax laws would be more efficient than the old Russian system.
The situation in United States could not be more different. Although we have plenty of loopholes and tax evasion, we still have a functioning tax system that rich people have trouble avoiding. And right now the rich, contrary to popular myth, pay more of their income in taxes than the middle class or poor. Indeed, this is why Mitchell hates the American tax code so deeply. His life's work is finding ways to reduce the tax burden on the rich. When he's not advocating a flat tax, he's urging lower tax rates for capital gains (a kind of income that overwhelmingly accrues to the rich, and which is already taxed at half the rate of ordinary income), or lobbying the government not to crack down on offshore tax havens used by rich people and corporations to stiff the IRS. It's possible that one day our tax code will become so riddled with evasion and special loopholes that a flat tax would make it more progressive. But, if so, that would only be because Mitchell had worked so hard to cripple the existing system.
In the meantime, conservatives will pine away for their Russian paradise. Murdock laments, "Too bad this isn't Russia." If you like it so much, Deroy, why not just move there?
But not Marc Rich, the Clinton-Democratic campaign donor who was forgiven a quarter billion dollars in tax evasion by Clinton as the ex-President left office in January 2001. I've yet to hear any liberals calling for Clinton's head over that.
The reality is that the dramatic increase in tax revenue in Russia is the result of more cash in the economy, not a flat tax rate. Over the last few years there was such a lack of cash that most people in Russia were bartering with each other just to pay for their goods. Most of those transactions were not taxed because the government had no consistent way of determining their value and tracking them.
It's just that I read an interesting article
An article written by those who have actual experience with the Russian tax system as it currently exists
PART TWO OF THE RUSSIAN FEDERATION TAX CODE
by Alexander Chmelev and Evgeny Astakhov
It's a European style income tax with VAT on steroids, along with a 32% regressive Social Security tax plus 30-35% profits tax on individuals.
Nothing that is called a "flat" tax ever is.
Why Flat Tax Isn't A "True" Flat Tax
http://www.cac.psu.edu/ur/archives/BUSINESS/flattax.html
2-23-96
Charles R. Enis, Associate Professor of Accounting
Penn State's Smeal College of Business Administration
And have always includes a corporate VAT component just as the Russian system does whenever proposed.
The reports right. The increase of taxation was acheved indeed due to flat tax.
I suggest you read the following report on the Russian tax system as a whole written by those who actually have direct experience with it. The Russian "Flat" tax was specifically adjusted by additional product excise taxes as well as removal of many deductions that originally existed prior to their "Flat" tax. Their overall rate of taxation has actually increased, much of it has been hidden in "excess interest", "profits" & business taxes.
PART TWO OF THE RUSSIAN FEDERATION TAX CODE
"the Tax Code does not change VAT rates or the general VAT structure"
"Chapter 21 will repeal a number of long-standing and important VAT exemptions"
"will significantly narrow the VAT exemption for pharmaceuticals"
"As a countermeasure to reducing rates of other federal taxes, Chapter 22 of the Tax Code provides for an increase in excise tax rates for gasoline and other oil products by almost 300%."
Sounds like the tax burden is flat
You had better take a good look at what passes for their Social Security tax.
Secondly, any system that has a arbitary set of deductions is not flat in any real sense regardless of how the outward bracket rates may look. A system of deductions and exemptions can create a tax system that is anything but flat as regards differing segments of the population is concerned.
A good example is what our tax system would look like with the Armey "Flat" tax in place.
Refer ---> HR1040 the flat tax legislative summary, and An article on the business side of the Flat Tax by Vern Hoven
It really is just a shell game moving tax burden to business (individual & corporate) where it is more out of sight of the electorate.
Figuring from the Armey Flat Tax HR1040 as written with its 19% rate on individuals plus the 15.3% wage tax for SS/Mediscare we come out with:
Under our own verison of a "Flat" tax a single person would end up paying:
15.3% ---- 15.3%(SS/Medicare) on wages/salary below $12,300,
34.3% ---- 19.0% + 15.3% on wages/salary and other income from $12,301-$75,000;
19.0% ---- on wages/salaries and other income from $75,001 up.
0.0% ---- for those living on dividend & interest income alone, regardless of income amount.
Businesses (individual & corporate)would also pay,
19.0% --- on (Gross Receipts less allowed business costs);
on an expanded definition of business income.
Keyes on Taxes & Government Spending:
- "The income tax in effect makes us vassals to the government – the politicians decide how much income we can keep. No mere “reform” of this slave tax, such as flattening the rate, can correct its fundamental denial of control over our own money. Only the abolition of the income tax itself will restore the basic American principle that our income is both our own money and our own private business - not the government's."
- "Replacing the income tax with a national sales tax would rejuvenate independence and responsibility in our citizens. True economic liberty and moral revival go hand in hand."
- "A national sales tax would also put the American citizen back in control of national fiscal policy. The best way to curtail government spending is to cut taxes, because they can’t spend what they don’t get. But with a sales tax, we could deny funds to a spendthrift government – and give ourselves a tax cut – whenever we make the private choice to alter our spending and saving habits."
Alan Keyes Interview with Des Moines Register:
- Conservative commentator Alan Keyes said Thursday one of the first things he would do as president would be to replace the federal income tax with a national sales tax.
- The Republican presidential candidate said he favors a national sales tax of about 23 percent that would also replace the payroll tax that pays for Social Security.
The closest legislation to implementing the Keyes proposal appears to be:
H.R.2525
SPONSOR: Rep Linder, John (introduced 07/17/2001)
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.
Refer: http://www.fairtax.org & http://www.salestax.org
America have to catch up or will be behind.
I hope to change that by getting ahead of you again :O)
I would appreciate if you could provide a hyperlink or URL to any Russian material that is up to date and describes you system in detail. I would like to be accurate and uptodate for what is really happening there and here.
From what you descibe, it looks similar to what we, in effect, already have once deductability and exemption is taken into account.
Frankly, some of us are trying to get rid of the entire "income" based tax scheme altogether, while others try to make what they call a flat tax, to appear to be something other than an income tax + Value Added taxes + Social payroll taxes of Euopean systems.
The difference between a progressive income tax rate schedule of 5 brackets and a flat rate schedule of 2 brackets (0 and some %) is one of degree not kind, and any tax on a business is nothing more than smoke an mirrors hiding taxes from the view of most of the citizenry.
Business taxes are always paid out of sale revenue, and that comes from everyone in any situtation taxing business merely serves to obscure the real burdens on a society.
I'll go with our Mr. Alan Keyes on what is an appropriate tax for a free nation, a tax which every voter can see and experience directly, with no shell game hiding the burden of taxation from the voter's eyes.
As long as a government hides taxation behind a veil of inflation and prices it can play the political game by the prime maxim of all "democratic" politics:
A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw
I agree with Alan Keyes when he refers to the income tax as the slave tax that should be abolished as a moral imperative, and replaced with a National Sales Tax:
Keyes on Taxes & Government Spending:
Alan Keyes Interview with Des Moines Register:
The intent of the structure of the individual income tax is for political and social control not revenue collection. The Individual Income tax is maintained to establish and hold every person in the country perpetual legal jeopardy.
The bottomline of the income tax or any tax system that is perceived to let part of the electorate of the hook is will explained by Walter Williams:
Walter Williams, World Net Daily, 10-25-2000
According to the most recent U.S. Treasury Department figures, in 1997 the top 1 percent of income-earners (those with income of $250,000 and higher) paid 33 percent of all federal income taxes. The top 5 percent of income-earners ($108,000 and over) paid 52 percent, and the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?
If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
And the "Flat" tax schemes being proposed by politicians in this country do nothing but make that picture worse.
The following was published in the US just yesterday and describes a proposal for changes relative to small businesses only, about 10% of the Russian economy. According to the article if you have a business of more than 20 workers you appear to be stuck with the older tax system.
Could you enlighten us on this? It appears the system is becoming more complex as regards different sets of rules for different people, not less.
Though taxes may be somewhat lower for individuals' the larger businesses get hit with everything but the kitchen sink of the older laws, which comes out in prices paid by everyone for their products.
http://biz.yahoo.com/ap/020328/russia_tax_reform_3.html
Thursday March 28, 2:40 pm Eastern Time
Associated Press
Putin proposes tax cut to encourage small business
By JUDITH INGRAM
Associated Press WriterMOSCOW (AP) -- Russian President Vladimir Putin said Thursday that the Cabinet would send the parliament draft legislation on cutting and simplifying taxes for small businesses -- the second major tax reform step following the adoption of a flat, 13 percent income tax two years ago.
Putin announced the latest initiative at a meeting with scientists in the Siberian town of Baikalsk, where he is taking a working vacation with his family.
The new proposal "can be considered no less revolutionary in its essence than the decision on the flat, 13 percent income tax for individuals," Putin said.
Putin's proposal would cut the multiple taxes small businesses pay to just two: a tax of 20 percent on pure profits or 8 percent on turnover, and a pension tax, which would be reduced from 28 percent of salaries to 14 percent.
Certain service companies such as car repair shops, veterinary offices and cafeterias would be required to pay only a single, 15 percent income tax.
"It's a real holiday" for small business, said Arkady Volsky, the head of the Russian Union of Industrialists and Entrepreneurs. "Let's hope to God that it is carried through to the end."
Finance Minister Alexei Kudrin told state-controlled ORT television that the Cabinet would discuss the tax cut on Friday. Putin said that the bill would be sent to the lower house of parliament, the State Duma, on April 10.
The tax cuts would affect businesses that employ no more than 20 workers and have revenues of no more than 10 million rubles ( $322,580) a year. Like the flat income tax, they are intended to reduce the tax-dodging that has severely depleted state coffers.
Businesses operating in Russia have long complained of the heavy tax burden. They are required to pay 35 percent taxes on salaries, which cover contributions for medical and social insurance, five percent sales tax, about 17 percent in value-added taxes, and one percent in road taxes. Then they are supposed to pay 35 percent on net profits left after other taxes are paid, plus various fees for meeting regulatory requirements.
Small businesses account for 10-11 percent of Russia's gross domestic product and employ 12 million people, according to the Russian State Council working group on small business. Putin and other top officials say they are committed to increasing those numbers and helping to create a middle class that could fuel economic growth.
The AP story above appears to be an echo of this one from the St Petersburg Times, which lays out the same information but indicates some resistance in the Duma for some of the provisions regarding Social taxes. Seems some want to put the Social taxes on the business alone and leave elevated rates.
http://www.sptimesrussia.com/archive/times/757/top/t_6098.htm
I know for what I will be punished but for what they won't even bother to check me.
Which is a very good practical description of what is one of the worst characteristics of any individual income tax. Every individual is open to arbitrary enforcement.
For anyone of any political interest to a party in power, the hammer is ever present to be used.
Here, not only are individuals in jeopardy of such arbitary prosecutions, they are also subject to arbitrary audit procedures that can be triggered by a neighbor or ex wife with with a grudge. The complexity of tax law assures that anyone can be hit with some technicality or oversight or just audited on a random basis just to to keep people on their toes.
As far as I am concerned the income tax, in whatever form it may take (flat or otherwise), is one of the more diabolical tools for government to manipulate and control its citizens.
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