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A Flat Tax for Russia

Could it be that U.S. proponents of the flat tax have the right idea — only for the wrong country?

May 31, 2000

Could it be that U.S. proponents of the flat tax have the right idea — only for the wrong country?

You may find this hard to believe, but many Russians actually envy Americans for, of all things, the Internal Revenue Service. Why? One of Russia’s biggest problems is simply collecting taxes. Yes, Russian tax receipts have surged this year as commodity exporters have benefited from higher world prices. But the tax system remains overly complex, with hundreds of different taxes. And that doesn’t include a maze of uncodified local levies, which often overlap with federal and regional taxes.

Thus, if all Russian taxes presently on the books were actually paid, they would add up to more than 100% of the private sector’s business revenues. No wonder, too, that under these circumstances most Russians turn into complete tax refuseniks, leaving the Russian government chronically short of cash.

The resulting revenue shortfall is the main cause of Russia’s continuing financial ills. But there may be one way to solve Russia’s tax problem — with an idea made in the U.S. of A.

Remember the flat tax? As Republican proponents of the idea like to point out, taxing all income, no matter how it is earned, at a single low rate would create a tax system that is easy to follow— and easy to administer.

So, maybe it is time for the United States to help. Why not send a small army of Republican experts to assist Russia in adopting the flat tax system? Success would win a triple victory: for the Russians, for the Clinton administration and for Republican flat- tax advocates in the United States.

The flat tax has few supporters in the United States. For all the rhetoric attacking the IRS and the supposedly difficult tax regimen, the U.S. tax system is much simpler — and fairer — than Russia’s. After all, 40% of U.S. taxpayers filed simplified tax forms in 1997, which didn’t amount to much more than a post card.

In Russia, with its feeble system of tax collection, a flat tax would be more revolutionary than in the United States. Complicated tax systems presuppose a desire on the part of taxpayers to comply and the government’s ability to field a sophisticated staff of honest tax collectors. For all its faults, the U.S. system can depend on the basics. Russia’s cannot.

Although a succession of Russian prime ministers have promised to strengthen the hand of tax collectors, the nation’s revenue agents will always remain susceptible to bribes and threats. A complex tax system that puts a larger burden on the collectors simply increases the scope for corruption. Under these circumstances, putting tax returns on post cards would have a lot more impact than in the United States.

So my suggestion to the Clinton Administration is this: In the spirit of bipartisanship, send House Ways and Means Chairman Bill Archer — one of the most ardent proponents of a flat tax — to Moscow to persuade his counterparts in Russia’s parliament of the merits of a flat tax.

Russian tax receipts in 1998 were less than 11% of GDP, according to IMF data. With Archer’s help, a target of 20% of GDP — about the same as he envisions for a flat tax in the United States — would seem achievable. That would double Russia’s tax receipts in one fell swoop.

If this proposal became a reality, the flat-taxers would finally get to strut their stuff. They just may be onto a great policy idea that was proposed for the wrong country.