“The Comparison Analyses of the USA and Russian Tax Systems: Fiscal and Monetary Policy”
Natalia Ermasova
Doctoral Student, Research Assistant
School of Public and Environmental Affairs
Indiana University
Professor of Saratov State University (Russia)
Indiana University
1315 E 10th Street, SPEA 452
Bloomington, IN 47405
21st Annual Association for Budgeting and Financial Management Conference
Washington D.C.
Abstract
Before discussing whether Russia needs to change the tax policy, it will be useful to consider the history and basic features of the system Russia already have. First, we'll take a glance at the overall tax picture for the Russia; surveying how much revenue governments at all levels take in, what kinds of taxes they use, and how these compare to the USA. Next, we offer a bit of historical background on Russian and American taxation, in order to put the current debate in perspective. Finally, we'll explain the essentials of how these consumption and income taxation work and clarify some of the terminology that you'll be hearing repeatedly whenever tax reform is discussed. Both theory and experience in a variety of circumstances around the world suggest strongly that if fiscal decentralization is to produce sustainable net benefits in Russia, regional and local governments require much more real taxing power than they now have. The intention of this paper is to improve the knowledge about the attributes of a high-quality revenue system in Russia and thereby help to build momentum for improving income and consumption taxation for Russia and the USA.
Introduction
Though effective revenue systems have certain common elements, they also differ in many aspects due to variations in system of taxation: income taxation and consumption taxation. Some countries prefer to use income taxation (the USA, Canada), other countries prefer to use consumption taxation (Russia, Ukraine, Kirgizia, e.g.) (Appendix 1). The tax shift is one of the great games of government. The government uses the prospect of lowering one tax in order to buy support for raising another. The proposal to move from an income tax to a consumption tax is a good example of this prospect. In this paper we try to analyze facts and outline the possibilities for tax policy improvement in Russia. The purpose of this research is to improve the knowledge about the effective taxation in the USA and Russia.
At the federal level in USA, personal income tax are now the largest source of receipts, providing just over 45 percent of total federal revenues[i]. Corporate income taxes contribute another 15 percent. Excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts (earnings of the Federal Reserve System and various fees and charges) make up the balance. The composition of tax revenue has changed markedly over the past half century, with payroll taxes contributing an increasing, and corporate income and excise taxes a decreasing, share of the total, but the share provided by individual income taxes has remained roughly constant.
The big difference is in consumption taxes; the USA collects 4.5 percent of GDP in consumption taxes, compared to an 11.0 percent OECD average. Moreover, the United States is unusual in the kinds of consumption taxes it uses. Retail sales taxes are now rare outside the United States; only 5 of the other 23 OECD member countries still had them in 1993. The value-added tax (VAT), a close cousin to the retail sales tax, is the most common variety of consumption tax. As of 1993, all OECD nations except the United States, Australia, and Switzerland had VATs, which on average raised 6.7 percent of GDP[ii]. According Hines, Lawrence (2009) expenditure-type taxes have risen in popularity everywhere in the world, as reflected in the fact that more than 130 countries now impose significant value-added taxes, and there is widespread reliance on excise taxes on gasoline and other commodities. The popularity of expenditure taxes is due in part to their administrative and enforcement features, and in part to their efficiency properties. In a globalizing world, expenditures have relatively clear geographic associations, reducing the potential for international tax avoidance and generally reducing the mobility of the tax base compared to alternatives such as personal income taxes or source-based business taxes including the corporate income tax.
By Martin J. McMahon Jr. is the Clarence J. TeSelle (2006) the welfare is measured better by income than by consumption, because apart from current consumption, higher income provides prestige, power, and wealth accumulations that confer disproportionately the ability to increase disproportionately one’s future income and consumption, as well as improve the welfare of one’s family. Consumption and wage tax advocates argue that taxing capital income is inefficient, and thus undesirable, because it reduces savings compared with a world without taxes or with a tax system that exempts capital income. The economic efficiency is elevated to a preferred position over equity among the criteria of sound tax policy. Advocates also argue that under a wage or consumption tax, savings and investment will increase, the additional capital investment will stimulate labor productivity, and everyone will share in the bounteous gains in real production. Consumption and wage tax advocates also claim that a wage tax or consumption tax is more equitable than an income tax, because taxing capital income ‘‘discriminates’’ against saving, thereby distorting the choice between current consumption and saving for future consumption. In reality, however, that horizontal equity argument is merely the economic efficiency argument.
Don Fullerton, John B. Shoven,John Whalley (1983) examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. They compute a sequence of single period equilibrium in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations.
By Richard M. Bird and Pierre-Pascal Gendron (2009)Canada's 15 years of experience demonstrates conclusively that this view is incorrect: not only can it be done, it has been done, and well. Moreover, and perhaps most immediately relevant to the United States, Canadian experience also demonstrates that a federal VAT can work perfectly well in a country in which some subnational units have their own VATs, some have their own retail sales taxes (RSTs), and some have no sales tax at all. In their opinion, the facts are thus on the ground and visible: the Canadian system not only works but works fairly well -- at least in Canada. A similar system could in principle work equally well in the United States. Indeed, the US could not only learn from Canadian experience but it could also do better in a number of ways if it wished to do so.
In contradiction, Llewellyn H. Rockwell (2002) think, that the switch from income taxation to consumption taxation is unrealistic. The income tax this year will yield $1 trillion for the federal government. Cutting that amount gives us a budget equal to the federal budget of 1987. In addition, in his opinion, thereplacement the federal tax with a national consumption tax would require a tax approaching 20%. This would throw markets into chaos, create an overnight black market in everything, and give a great excuse for massive despotism and mandatory record keeping.
Consumption taxes are thought to contribute to economic efficiency by discouraging consumption and encouraging savings. Since the poor spend a greater share of their incomes on consumption than the rich, consumption taxes are considered regressive. The nation's income tax system in USA, which collects most Government revenues, has long been progressive, levying higher rates on higher incomes. In contradiction, the Russian tax system, which collects consumption taxes around 39% of total government revenue, has long been regressive, levying higher rates on lower incomes. In this case, there is high level of inequity in Russia.
II Comparative analysis of Tax system in USA and Russia
The purpose of comparing of the USA and Russian tax system is to find the recommendation to improve revenue system in Russia. The USA have certain common elements (big territory, variations in regional economies, and high level of horizontal inequity), they also differ in many aspects due to decentralization, resource endowments, demographics, history, and, among other factors. Most local government authorities n the USA and Russia rely heavily on intergovernmental transfers (more so for smaller units than larger ones)[iii]. Some tax in the USA and Russia looks like similar but there are absolutely different (tax rate, tax administration, and the system of exemption and deduction). The USA and Russia choose various intergovernmental administrative assignments for collection of taxes to tiers of government below the central level - regional and local.
Russia is a federal state with high degree of centralization[iv]. The single, central government agency administers all taxes levied by any level of government in the Russian. A centralized administration provides a single structure for dealing with all taxpayers throughout the country. With good administrative control in the central system, the same procedures and processes will be followed everywhere in the nation. That permits a single information system for tracking taxpayers and their economic activities and a single taxpayer identification number for all taxes. A single master file with all relevant data would provide a strong tool for enforcement and collection through matching across tax types. Central administration may facilitate transfers of revenues to mitigate horizontal fiscal disparity across regional and local units of government. Revenue from taxes administered by regional and local governments almost always stays with the government collecting the revenue, leaving great disparity between regions with high endowment of the tax base, e. g., natural resources, heavy industry, etc., and those lacking such an endowment[v]. It is the effects of Communism and long history of taxation in Russia since 11 Century.
Government finances in the United States are generally driven by the principle that the government wishing to deliver government services should be prepared to raise the necessary revenues and generally to administer the revenue system that has been selected to finance those services.21 With some few exceptions, including those piggybacked arrangements previously noted and some instances of intergovernmental cooperation, tax authorities are independent operations. In general, both large and small subnational governments in the United States manage independent tax collection duties, not perfectly and sometimes with quite notorious errors and instances of blatant corruption, but well enough that reports of these problems are newsworthy because of their rarity.
Familiarity with local conditions and easy adaptability to those local conditions can facilitate registration of taxpayers, collection, and enforcement of many taxes. Indeed, when local governments have designed their own tax base and structures, local administration can be designed specifically for the tax in that application and policy and administration can be fully merged. Independent regional and local tax authorities can act as "insulated chambers of experimentation" for tax administration. They can innovate new approaches and techniques, exploiting the nimbleness that often characterizes smaller organizations. For example, state revenue departments in the United States have been leaders in the application of new information technology, bar-coding, and imaging to tax administration[vi].
The USA and Russia tax system has different priority of tax. The main tax for USA is personal income tax; for Russia - VAT (Table 1).
The USA and Russian tax system in 2009[vii]
Tax / The USA / RussiaFederal level
VAT / - / +
Personal Income tax / + / +
Corporate Income tax / + / +
Import and exports tariffs (other than oil and gas) / + / +
Excise taxes / + / +
Taxes on natural resources (other than oil and gas) / _ / +
Contributions for social insurance / + / + (Unified social tax)
Water tax / _ / +
Regional level (state level)
Property tax / + / + (only for business property)
Gambling tax / + / +
Sales tax / 45 states / _
Gross receipts (Business and Occupation) tax / 1 state (Washington state) / _
Personal income tax / 43 states / +
Corporate income tax / 46 states / +
Excise taxes / 50 states / +
Vehicle tax / + / +
Local level
Land tax / + / +
Property tax / + / + (property of household)
Excise tax / In some local government / _
Sales tax / 36 states levy local retail sales taxes / _
Many different tax / + / Before 1999
The Russian tax system on regional and local level is unified by Tax code and Budget Code of Russian Federation. All regions and local governments have the same taxes with different tax rates. The variation of tax rates on regional and local level have strict borders by tax law and Budget code of Russian Federation. There are absolutely different situation in the USA. All states and local governments use different tax, tax rates, and system of tax exemptions and deduction in USA. For example, forty-seven states in the USA tax corporate net income. Only Nevada, Washington, and Wyoming do not impose any taxes on corporate income. Washington’s business and occupation tax is viewed as a business activity tax on gross income. Texas imposes a franchise tax on net worth or earned surplus. The three states most dependent on corporate income taxes are Alaska, New Hampshire, and Delaware; in this states, the tax accounts for 28.5, 20.3, and 9.1 percent of total state revenue[viii]. Alaska and New Hampshire also do not tax personal income.
The United States raises significantly lower tax revenues as a percentage of gross domestic product than do most other countries in the OECD. In 2003 taxes in the United States, including all levels of government, amounted to 25.6 percent of GDP, down from 29.6 percent of GDP in 2000.1 Other countries in the G7 raised 33.9 percent of GDP, while non-G7 OECD countries raised 34.7 percent. Within the OECD, Mexico raised the least tax revenues at 19 percent and Sweden the most at 50.6 percent[ix]. Changes in the shares of the various taxes in total federal revenue reflect these historical shifts.
Figure 1 demonstrates revenue sources in USA in 2007.
The individual income tax has consistently provided nearly half of total federal revenue since 1950, while other revenue sources have waxed and waned. Excise taxes brought in 19 percent of total revenue in 1950 but only about 3 percent in recent years. The share of revenue coming from the corporate income tax dropped from about one-third in the early 1950s to less than one-sixth in 2007. In contrast, payroll taxes provided more than one-third of revenue in 2007, compared with just one-tenth in the early 1950s.
The Figure 2 shows the Dynamics of Revenue sources in 1950- 2007 in USA[x]
Russian tax system tends to use moderate, flat or regressive tax rates. It is highly centralized for a federal state and relies heavily on proceeds from oil and natural gas corporations. In 2006 tax burden on oil companies exceeded 45% of net sales (compared to 12% in construction and 16.5% in telecommunications)[xi].
Rates for oil-related taxes and tariffs, unlike regular taxes, are set not by Tax Code but by government decrees. Russian Ministry of Finance estimates that revenues regulated by the Tax Code will account for 68% of federal revenue in 2008 fiscal year, rising to 73% in 2010[xii] (Table 2).
Structure of federal revenue of Russia for 2008-2010
Type of federal revenue / 2008 FY / 2009 FY / 2010 FY / Regulated byTotal revenue, billion roubles / 6,673 / 7,421 / 8,035
Oil and gas related revenue / 37% / 32% / 30%
Tax on mineral resources / 13% / 11% / 11% / Tax Code
Export tariff / 24% / 21% / 19% / Government decrees
Other revenue / 63% / 68% / 70%
VAT on domestic sales / 19% / 24% / 25% / Tax Code
VAT on imports / 13% / 13% / 14% / Tax Code
Corporate profit tax / 8% / 8% / 8% / Tax Code
Import and exports tariffs (other than oil and gas) / 8% / 8% / 8% / Government decrees
Excise taxes / 2% / 2% / 2% / Tax Code
Taxes on natural resources (other than oil and gas) / 1% / 1% / <1% / Tax Code
All other taxes (including collection of arrears) / 7% / 7% / 7% / Tax Code
Dividends and other non-tax revenue / 5% / 5% / 5% / Civil and international law
Total / 100% / 100% / 100%
including revenue regulated by Tax Code / 68% / 71% / 73%
The most important tax is VAT (32% of total federal revenue n 2008) in Russia. There is not VAT on federal level in USA. High income countries raise a lower share of their total tax revenue from consumption taxes than do low income countries – high income OECD countries median of 28.4%, larger developing countries median of 38.5% (Russia – 39% in 2009). High income countries raise lower share of total tax revenue from taxes on international trade (tariffs) than do low income countries – high income OECD countries median of 0.05%, the larger developing countries median of 8.1%. U.S. raises lower share of total tax revenue from G&S taxes than high income median – 15.9%. U.S. only country of OECD (and almost only country in the world) without VAT or any other national general consumption tax (Figure 3)[xiii]. VAT on imports (13% of federal revenue) is paid at 18% (10% on selected foodstuffs) prior to releasing cargoes from the bonded customs warehouse in Russia. VAT on domestic revenues is calculated as the difference of VAT on sales (at the earliest of cash receipt or shipment of goods on credit) and input VAT on accrued costs.