The Russian Tea Party


On December 16, 1773 a group of people disguised as Mohawk Indians boarded ships belonging to East India Company and threw chests with tea into Boston Harbour. The incident, known as the Boston Tea Party, signalled the beginning of the American Revolution, the war with the British Empire and, in fact, the beginning of the United States of America.

One of many lessons from this event is that there is a link between taxation and democracy. To be more specific, there is a link between direct taxes – like taxes on income, property or that unfortunate stamp levy of George III – and democracy. In Russia, where the bulk of the state’s revenue comes from the export of raw resources, VAT and other indirect taxes, the government, it would seem, can do whatever it wants.

The reality is more complex than this. The covert tea party is in top gear – Russians quietly but fiercely resist paying taxes when they consider them excessive and unfair.

The Russian Pension system is funded by people currently at work. Those who work pay those who retired, so that when they retire the new generation of taxpayers will support them. The problem with such a system is that it works provided that the population is growing.

Yet Russia is shrinking at an accelerating rate. In 1992 the decrease in population was around 220,000 a year; now, it is almost 800,000. As a result, today there are about 1.6 working people for one retiree - four times less than in the 1970-s. What is more, according to the UN Population Division, 40 years from now Russia’s population will fall by a quarter from around 140 million today to 108 million.

This means that the State Pension Fund, which is already facing a deficit of nearly $40 billion, will inevitably go bankrupt. If there is a problem that is both urgent and important, then this is it.

In January 2011, the tax on payroll – comprising obligatory payments to the Pension Fund, Social Security Fund and the Fund of Compulsory Medical Insurance - went up from 26% to 34%.

In a rational world higher rates mean higher revenue; yet in Russia, tax collection has fallen. The drop is so substantial that it cannot be explained by the economic crisis. When rates were cut in 2005, revenue soared. Russians don’t want to pay more than they think is fair and there is nothing the authorities can do.

According to the Moscow think-tank ‘Centre for Strategic Studies’ in 2009 – 2010 the proportion of the payroll in production costs rose by a quarter as compared to 2008. On top of that the government has added higher taxes on salaries, making the workforce even more expensive. It is not surprising, then, that business considers this unfair and has quietly moved into the shadows.

In theory, taxes we pay should return to us in the form of a good health service when we become ill, a reasonable state pension when we grow old and competitive education for our children. If we don’t get what we have paid for we feel deceived.

Amazingly many Russians do not rely on the government at all. They do not need state health care – they buy private medical insurance, they do not want a state pension – they invest in real estate, they do not believe in free education – it just does not exist any more.

Russia’s expenditure on health care as a percentage of its GDP is less than in any OECD country, except Turkey, and as little as half the average. The situation as far as schools and universities are concerned is even worse – Russia spends only 3.8% of its GDP on education, less than Zimbabwe, Ethiopia or Côte d'Ivoire.

The middle class is no longer an active consumer of state services. What is more, it refuses to finance what it perceives as inefficient social programmes. What they are basically saying is, ‘We do not need the state, we do not believe government assurances and we are going to cope with all our social needs ourselves’.

The Soviet Union was one of the most paternalistic states with free education and health service, a comparatively high state pension. Those days have gone. Russia is now a country of pure laissez faire. And it is going to stay this way. The authorities have tried to raise taxes and failed – Russians simply ignored the changes. The good news is that taxes will remain low and not because the government doesn’t wish them to go higher, but because it can’t raise them.

Sergey Matyunin
picture: NatalyArt -

This article first appeared in The Moscow Times