Letter from Moscow Jude Wanniski June 8, 1998

Memo To: Website fans, browsers, clients
From: Jude Wanniski
Re: E-mail from Moscow

In all the confusion about the Russian economy and financial markets recently, I gave up trying to find out in Washington what was going on and e-mailed a Russian, an old friend who spent 20 years in the USSR foreign service and now lives in Moscow as a business consultant to foreign companies. Here is the e-mail reply I received Saturday:

Jude,

Thank you for thinking of Russia. There is a lot of confusion in the minds of those who are advising the Government of Russia on economic issues. They focus on the issue of balancing the budget by raising all kind of taxes, mostly indirect taxes, such as VAT on imported equipment, taxes on the rich, enforcing the collection by KGB-type methods. Nobody, however, since you have been here last time, is recommending to encourage economic growth; this concept is not fashionable in Moscow, and GNP is falling since 1988. This is not IMF fault only. All "advisors" from Washington, Berlin, Paris, etc., are unanimous in their recommendations -- cut spending and improve tax collection. The tax burden in Russia is absurd; the income or profit is practically non-existent in Russian economy, as different taxes and fees are eating up everything the company can theoretically earn.

Private income in excess of $12,000 a year is taxed at 50%; higher earnings are basically confiscated. As a result, nobody shows real income and the black [underground] economy is now bigger than the official one. What needs to be done? Any commonsense solution that would let people pay real taxes on real income. As a major supply-side measure I would recommend abolition of all protectionist taxes and duties on imported equipment. That would give a major impetus to Russian businesses to import equipment that is necessary to modernize Russian economy. Reducing income tax is an excellent idea but in Russia one must be sure that its positive effect on the economy will not be offset by other measures going in a different direction. Let me know what you think of the official U.S. advice to the Russian government on economic issues. Are there any supply-siders still alive in America?

Regards, Georgiy