The statutory tax burden and its avoidance in transitional Russia

Abstract

THE STATEMENT THAT A GOVERNMENT is a stationary (or even roving! See Olson (1993)) bandit has resonated soundly among scholars who studied taxation in the Russian transition, particularly prior to the implementation of the Tax Code in 2000. Many viewed the fiscal system that evolved in the country as repressive, inefficient and corrupt. The absence of political consensus among branches of the Russian government and active participation of the international financial organisations in the decision-making process politicised Russian public finance. There was no lack of advice that sought and found its way into the tax legislation of the early 1990s. Unexpected appearance of amendments to tax and budgetary laws, tax exemptions secretly granted to individual companies, and non-transparency of state spending procedures reinforced the general impression of a decaying state robbed by powerful interests. Field studies showing that tax developments could not be explained by the politics of interest groups alone (see, for example, Alfandari & Schaffer, 1996) were not within the mainstream.1 Left without empirical verification, policy makers at home and abroad were generally unable to interpret the situation and found guidance in the generalisations of that time such as the 'Washington Consensus'.2 This article aims to clarify the issue of tax burden in the Russian transition. It addresses three questions. First, the article provides details of the Russian tax system. Generally, a good exposition of the fiscal laws and regulations of that time is hard to find and a researcher cannot infer which part of a contradictory statement such as 'Russian taxation was a killer but we operated anyway' is correct.3 Actual numbers on tax rates and exemptions are scattered across a number of publications and are often incompatible. Time series are lacking. Thus the organisation of relevant information in a consistent manner is a specific contribution. Second, the article uses this account of the tax system to explore several issues that have contemporary implications. One relates to the estimation of statutory burden of taxation across sectors. Many believed that tax rates in Russia were excessive, possibly above 100%.4 While this statement looks implausible, one cannot reject it a priori. We find that statutory tax rates were reasonable for almost any sector apart from oil and gas. This finding suggests that these two sectors were treated differently from the rest of the economy. The article proposes an