"Russia’s Taxing Problem" by Daniel Treisman, in Foreign Policy (Fall 1998), Carnegie Endowment for International Peace, 1779 Massachusetts Ave. N.W., Washington, D.C. 20036.

"Russia’s inability to collect taxes is rapidly becoming the greatest threat to its economic and political stability," writes Treisman, a political scientist at the University of California, Los Angeles. The desperate Russian State Tax Service has even aired a TV ad showing a businessman whose libido has deserted him because of anxiety about his firm’s tax evasion—"probably the first time in history that an honestly completed tax form has been touted as an aphrodisiac."

Needless to say, the ad did not work.

Federal tax revenues fell from 18 percent of gross domestic product in 1992 to 10 percent in 1997. The Asian financial crisis and plummeting world oil prices compounded the government’s financial woes. As a result, public agencies can’t pay their bills. Teachers and laborers wait months or even years for their wages. In July, coal miners in Kemerovo protested by blocking the Trans-Siberian Railway for 16 days.

Tax rates were slashed during the "shock therapy" that began in 1992, but while revenues later bounced back in Poland and other ex-communist shock therapy patients, they didn’t in Russia. Russia’s problem, Treisman believes, stems from the "perverse incentives" in its evolving federal tax system, which have governments at different levels competing with one another "to conceal and divert revenues that they would otherwise have to share."

Moscow typically is supposed to get 75 percent of the revenues from the national 20 percent value-added tax (VAT), and 35 percent of the revenues from the tax on corporate profits. The regional governments get the rest. In many regions, a few large enterprises predominate, and governors can look the other way when profits are kept off the books—in return for a "contribution" to off-budget funds for local development or to the governor’s personal retirement fund.

Most—about 70 percent—of the decline in federal tax revenues between 1994 and ’96 resulted from falling profit-tax receipts. Moscow’s VAT receipts, by contrast, were relatively stable, reflecting the fact that the VAT is much harder for firms to evade.

To get more rubles flowing into federal coffers, Treisman suggests assigning all of the easier-to-collect VAT revenues to the federal government, and leaving all of the profit-tax money to the regional governments.

Similar proposals, he notes, have been thwarted because they would have left most regions with less revenue. His solution: give the regional governments enough taxes to make up for their expected losses. In that way, he says, Moscow "could make the political arithmetic add up."