| The shadow (or latent) economy accounts for an estimated
25 per cent of gross national product. The question is: Is the shadow economy
a negative economic factor that has to be eliminated?
Yes, it must be eliminated, the majority of experts say. A clandestine
economic sector that is so large is bound to lead not only to a shrinkage
of budgets at all levels, but also to smaller pensions than they could
have been. This concerns both the fighters against the shadow economy
and every inhabitant of the country.
Two methods are usually put forward to bring the shadow economy out
into the open: the stick and the carrot. The first signifies tougher sanctions
against covert economic activities; the second implies lower tax rates
as an incentive to legalize such activities.
The stick is unlikely to produce the desired effect. The Russian entrepreneur
has long learned how to circumvent any barrier. If the worst came to the
worst, he would avoid severe punishment by bribing the taxman.
Things are more complicated with the carrot. It is true that lower taxes
or the abolition of poorly collected taxes help to render some of the
shadow economy transparent. For example, there are plans to lower the
single social tax rate from the present 35.6% to 26% from 2005 - a measure
that is hoped will make many entrepreneurs record the actual wages of
their workers. True wage accounting is bound have positive results, given
that up to 40% of wages in Russia have yet to be legalized, experts say.
But at what price? Through a sharp drop in single social tax receipts,
which would lead to lower pensions.
Here we perceive an obvious contradiction between the state’s
long-standing lack of credibility, which dissuades citizens from paying
their taxes, and the desire of the same citizens to get the state to resolve
their problems. How can this contradiction be overcome?
The first thing is to make people see that the tax rates are just. For
example an individual agrees to pay a 13% income tax, but flatly refuses
to pay property tax assessed on the market (and not book) value of his
apartment, as proposed by the Economic Development and Trade Ministry.
If the tax is assessed on the market value of an individual’s apartment
at the current rate, the individual will have to pay a property tax of
$1,000 a year on a medium-sized apartment located in Moscow or St. Petersburg.
Secondly, state expenditures must be seen to be just. Unless citizens
understand how their tax money is spent , and unless they believe the
spending to be justified, no income tax reduction will help.
The situation can be rectified by making state expenditures transparent
and by substantiating the need for various budgetary expenditure items.
When the government’s priorities do not include higher pay for state-paid
workers and proper funding of education and public health, and focus instead
on the speediest possible repayment of foreign debt, citizens can hardly
be expected to pay as much money as possible into the state coffers.
See also:
Tax Legislation
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