Throughout the first half of the 1990s, international financial institutions warned Russia that major adjustments were needed in the structure and the administration of the country's tax-collection system. However, in 1996 few meaningful changes had emerged. Tax reforms until that time had emphasized revenue from income, consumption, and trade, with the value-added tax (VAT--see Glossary), corporate profits taxes, and personal income taxes accounting for 60 to 70 percent of total revenue (see table 16, Appendix). Beginning in 1993, experts have pointed to changes in the bases and rates of the profit tax and the VAT as a major cause of declining revenues. Between 1993 and 1994, the ratio of taxes collected to GDP declined from 41 percent to 36 percent, although the percentage of GDP paid in taxes already was lower in Russia than in any of the Western market economies. In the first quarter of 1996, only 56 percent of planned tax revenue was realized.
The system in place in 1996 taxed the profits of enterprises heavily, especially in comparison with the tax burden of personal income. In 1993 business profit taxes were three to seven times higher than in Western economies, and personal income taxes were two to four times lower. That emphasis was not conducive to expanding investment, and many non-wage sources of income were not captured by personal income tax standards. According to a 1996 estimate, Russians kept US$30 billion to US$60 billion in foreign banks to avoid taxation.
The VAT, which is levied on imported and domestic goods, is set at 21.5 percent for most purchases and 10 percent for a specified list of foods. Administration of that tax is complicated by uneven compliance and accounting rules that do not define clearly the amounts to be classified as value added. Taxation on the extraction and sale of natural resources is a major revenue source, but the current system yields disproportionately little revenue from the energy sector, especially the natural gas industry. Excise taxes are levied on merchandise of both domestic and foreign origin. The tax on imported luxury items ranges from 10 to 400 percent, and the rate on imports has been kept higher than for domestic products in order to protect domestic industries.
Taxes on trade are a major revenue source. In the mid-1990s, export taxes became a more important source of revenue as other types of trade control were eliminated. Frequent changes in the tariff schedule for imported goods have led to confusion among importers. The average tariff rate in mid-1995 was 17 percent, but a reduction of maximum rates was announced for the medium term.
Russia's taxation agency is the State Taxation Service (STS), which was established to administer the new market-based tax system installed in 1991 and 1992. Although in the mid-1990s its staff of 162,000 employees was much larger than tax agencies in Western countries, the STS has been hampered by poor organization, inadequate automation, and an untrained staff. Training and reorganization programs were announced in 1995, and some streamlining has resulted in separating the roles of various levels of government, identification of tax-eligible individuals and corporations, and application of penalties for tax evasion and tax arrears.
Experts have identified the most serious defect of the tax administration system as the ad hoc granting of tax exemptions, which distorts the overall revenue system and undermines the authority of administrators. The most problematic examples of this practice are exemptions granted to agricultural producers and the oil and natural gas industries.
Literacy and education levels among the Russian population (148 million in 1996) are relatively high, largely because the Soviet system placed great emphasis on education (see The Soviet Heritage, ch. 5). Some 92 percent of the Russian people have completed at least secondary school, and 11 percent have completed some form of higher education (university and above). In 1995 about 57 percent of the Russian population was of working age, which the government defined as between the ages of sixteen and fifty-five for women and between the ages of sixteen and sixty for men, and 20 percent had passed working age. Women make up more than half the work force.
Although size, age, and education would seem to place the Russian labor force in a good position to participate in developing a modern, industrialized economy, it is not clear that the skills that Russian workers attained during the Soviet period are those required for a market economy. In 1994 the construction, industry, and agriculture sectors employed 53.5 percent of the work force, and the services sector employed 37 percent, a distribution typical of developing economies. By contrast, 67 percent of the United States labor force is in the services sector, and 22 percent is in agriculture, industry, and construction, a configuration typical of modern industrialized market economies. The Russian pattern reflects the emphasis that Soviet economic planners placed on the nonservice sectors. Even among the highly skilled labor force, the Soviet economy (and the national education system as a whole) skewed training toward the sciences, mathematics, and engineering and gave little attention to education in management and entrepreneurship. This pattern of work training and general education has continued in the 1990s; according to experts, its continued presence indicates that the economy may not be able to depend on younger workers to expand the fund of service-sector skills needed for a modern market economy. In any case, as the Russian economy progresses toward a market structure, middle-aged and older workers will increasingly find themselves playing a marginal role.
The living standards of Russia's workers have been eroded by two factors. First, the severe depression of the country's extended economic transition has left a large share of the work force either unemployed, underemployed, or receiving reduced wages. Second, labor lacks an effective organization to protect its interests. Neither trade unions from the Soviet era nor new, independent organizations have provided effective, united representation. As of mid-1996, negative conditions had not yielded the large-scale unrest that many experts had predicted in the working class.
Data as of July 1996