By John Helmer in Moscow
A month ago, the Russian Market Research Company released results of an unusual nationwide survey of householders, suggesting Russians are better off than they admit, and spend much more money than their official income. This has bolstered government claims that the economy has begun to turn around, and that prosperity — real already for some — is just around the corner for most.
The central piece of evidence is what the panel of almost 4,000 people, from 2,000 households, admitted about their income and spending. Two groups of the population were identified as wealthy. One, well-educated, middle-aged professionals, amounted to 4% of the sample. The second group, much younger and more entrepreneurial, were almost 6%. Together, they claim to be
earning at least $400 a month in salary, not to mention business-paid perks, like cars, dachas and foreign travel.
It’s no surprise to find that these are the Russians who report the most rapid improvement in their standard of living; who are the
most optimistic for the future; and who think unemployment is, to use the interviewer’s phrase, “quite acceptable.”
But it’s a mistake to jump to the conclusion that this spending power, plus the gap between real and official spending of the rest of the population, reflects the turnaround government reformers are claiming.
What interpreters of the study have missed is a crucial admission that the Russians interviewed were blunt about. Tax avoidance. Most of the difference between the official calculation and the real level of their household income is the amount of income tax Russians would have had to pay, if the taxman could catch them. This is also why spending was greater than admitted income.
The big spenders identified in the survey withhold between 25% and 35% of their income from tax. If they paid what they owe, their disposable income would drop to between $200 and $300 per month. If, in addition, they paid rates or taxes on the value of their real estate, on their business car (the single most conspicuous form of consumption of the new Russian rich), and on other business perks, just as these things are taxed in the West, most of the air would go out of the balloon in Russian consumption that’s visible today.
When the Russian Market Research Co. asked whether this tax-free cash is saved or spent, they discovered the young spend everything they earn, as if there will be no future. They and the older members of the wealthy elite also spend as much as possible out of sight, and if possible, on the other side of the Russian border. After most of the Russian rich said they aren’t planning to invest any money in the future, the rest claimed their biggest investment is foreign currency.
One way of interpreting the evidence is to say the only reason there is any Russian consumer demand, or what the market researchers call prosperity, is that Russians avoid paying tax. Improve income tax collection, and you can kiss goodbye to the recovery.
Another way of saying the same thing is that the real reform in this country isn’t led by the government. It’s led by individuals who have no intention of letting the government get its hands on their money. This ought to be regarded as a massive vote of no-confidence. It is, and it isn’t. For what reform really means to most Russians is tax someone else. Elsewhere in Europe — for example in Italy and Greece — governments wink at income tax avoidance in order to stay in power. In Russia, this conservative appeal for votes is laissez-faire economics in its purest, most anarchic form.
For those who depend for their income on state enterprises, or on state budgets for public employment, they are taxed twice over; the first time when wages are delayed for months, because there isn’t enough revenue in the treasury to cover them; the second time, when there is automatic tax withholding at payment. According to the Russian Market Research Co., those who are vulnerable to this type of double-taxation make up at least one-third of the population; more, if pensioners are also counted.
Although the correlation isn’t calculated in the 5-volume study, it’s clear that optimism about Russia’s economic future is directly connected to the size of income tax avoidance. The bigger the steal, the more Russians believe the economic situation is improving. The survey does report that those who earn the most are also most likely to say tax avoidance isn’t a crime. Because they have more property, they are also the ones who resent the fact that they are victimized by criminals more often. That’s one indirect tax the rich can’t avoid.
What the survey reveals is that real savings accumulated in Russian households are going into consumer durables and entertainment machines that are imported; into dollars; into real estate for subsistence farming; and into safe haven abroad. It is not going into rouble deposits in Russian banks, except among the poorest. It is not going into government securities or shares.
There is no reason, either in economic theory or consumer psychology, to suppose this is a situation that will lead to investment in Russian agriculture, industry, or trade — the basis on which, in the absence of government financing, genuine economic recovery can take place.