YOU ARE HERE: LAT HomeCollections

Rising Levies Tax Russians' Patience : Economy: Assessments climb daily and without warning. Government aims to offset deficit.


MOSCOW — A Russian businessman goes to Latvia for what he thinks is a good buy--a 1991 BMW for $7,000. But before he can drive it back to Russia, the government raises import taxes, adding $6,000 to the price. "They robbed me," he says.

The same surprise tax increase strands 200 Mercedes-Benz limousines in Germany because the city of Moscow, which ordered them for its beleaguered ambulance service, cannot fork over the extra duties.

Settling in Moscow, an American oil executive is shocked to learn of a new 63% tax on overseas household shipments. To retrieve his belongings, he must change $11,000 into rubles and empty his bulging pockets at the customs office.

Taxes here seem to rise daily, without warning, as the Russian government slashes away at a $36-billion budget deficit. Reluctant to cut deeper into subsidies for money-losing enterprises and face the anger of unemployed masses, authorities have instead provoked the ire of taxpayers.

The struggle over who gets taxed and who gets subsidized is moving to center stage in Russia--and intensifying. Under an agreement last week with the International Monetary Fund, President Boris N. Yeltsin's government has until April 15--a deadline familiar to American taxpayers--to design new levies that will reduce the budget deficit by half.

U.S. Commerce Secretary Ronald H. Brown weighed in on the matter Monday, calling recent increases of import duties "an impediment to economic growth in Russia" and trade with America.

Arriving here with 28 American executives on a weeklong trade mission, Brown also urged the Russians to reconsider a $5-a-barrel tax on exported oil that has soured many a deal with foreign prospectors. "I think it is unrealistic to expect people to come and do business if tax regimes change frequently," he said.

The conflicting pressures over taxes will determine not only how much free trade and foreign investment Russia gets but also whether it collects a promised $1.5-billion IMF loan that would unlock new aid from the West.

Since launching Western-style economic reforms in 1992, Russia has laid a growing tax burden on its people. The value-added sales tax is 23%. The tax on personal income is 30% of anything earned over $2,850 a year. Employers pay the Treasury an additional 39% of their total payroll. If a company manages a profit, the government can take up to 38% of it.

Duties on most imports have doubled in recent weeks. There is now a 15% tax on all imported food, most of which had been exempt, and a 20% tax on imported sugar.

Then comes a host of local taxes, levied as Russia's cities and regions gain more autonomy. In Moscow, property taxes have tripled this year and businesses are subject to 50 other taxes, including one for every stock exchange transaction.

"In such a system," Yeltsin admitted last month, "any enterprise or entrepreneur can honestly only die." But he added, "To gather everything that belongs to the state is also impossible." Last year, the Russians collected only about two-thirds of the budget revenues they should have.

Lashed by a storm of protest over import duties as he vacationed by the Black Sea, Yeltsin returned to Moscow on Sunday promising to review them.

One looming fight is over imported food. The 15% tax was imposed to protect Russia's unreformed agro-industrial complex and has been resisted by big-city mayors who fear it will cut food supplies and drive up prices.

As the government's draft 1994 budget undergoes parliamentary hearings, a parallel struggle is under way over spending. Officials responsible for defense, farming, science, education, culture and the environment have predicted ruin for their respective domains if such a tight budget passes.

In talks with the IMF last week, Prime Minister Viktor S. Chernomyrdin agreed to hold spending to the equivalent of $107 billion--as laid out in his proposed budget--and to limit deficit financing to the IMF target of 5% of gross domestic product, or about $18 billion.

He promised to make up the rest of the expected deficit--another $18 billion--with more new taxes and better tax collection.

This is a daunting task. Even while accepting the Russian plan, IMF Managing Director Michel Camdessus noted that the efficiency of Russia's State Taxation Service "is declining rapidly." Indeed, tax collection is not what it was here 600 years ago when the Mongol Golden Horde ruled by pillage, or two centuries ago when Peter the Great taxed everything from beards to kitchen chimneys.

Tax evasion is on the rise, and so is organized crime.

"Our premises are bombed, our personnel sustain serious bodily injuries and their property is destroyed," Vladimir V. Gusev, head of the Taxation Service, told reporters recently.

The government has created a Tax Police force to give tax collectors muscle. Last year, the Tax Police helped disclose 32,000 violations, charged 617 taxpayers with crimes and convicted 59; that, however, yielded less than 2% of the total tax revenues.

While Economy Minister Alexander N. Shokhin defends new import duties as "a difficult compromise between consumers' and producers' interests," critics here and abroad say the duties will kill incentives for Russian businesses to modernize and compete in the world market.

"The taxation yoke has reached its limit, and I don't imagine it can be tightened any further without dangerous and unpredictable consequences," said Russian economist Gennady S. Lisichkin.

Los Angeles Times Articles