Chapter III.1 Structural Fiscal Issues

International Monetary Fund
Published Date:
December 1991
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The evolution of the public finances in the USSR has been dominated for decades by allocative and distributional concerns, with little weight attached to macroeconomic stability considerations. In the traditional system, the state budget and the centralized funds of branch ministries effected a massive reallocation of resources among state enterprises, in accordance with the dictates of the national economic plan. At the same time, the elaborate system of product-specific turnover taxes and subsidies resulted in a large and growing redistribution of resources among households. The planned environment—involving guaranteed job security, wage, price and external trade controls—virtually obviated the use of fiscal instruments for macroeconomic stabilization. Close adherence to the plan in the preparation and execution of the budget, and strict controls of the government authorities over the finances of enterprises—often through discretionary ad hoc measures—helped ensure broad balance in the public sector finances until the mid-1980’s.

In the second half of the decade, the relaxation of the planning process and increased autonomy of state enterprises, in combination with adverse external shocks and growing macroeconomic disequilibria, led to a progressive deterioration of the public finances. While profit remittances by enterprises to the budget and receipts from the turnover tax—the major sources of revenue—declined in relation to GDP, social spending and price subsidies rose rapidly, the defense burden remained high, and the authorities found it difficult to cut back investment significantly. As a result, the fiscal imbalance widened rapidly, peaking in 1988 with an adjusted deficit equivalent to some 11 percent of GDP (Table II.2.3).

More recently, significant efforts have been made to reduce the budget deficit and its contribution to liquidity creation (Chapter II.2). At the same time, a beginning has been made toward structural reform in various areas of the public finances, to adapt them progressively to a more market-oriented economy. In the revenue area, these reforms have centered on the taxation of enterprises and individual incomes. Although these initial reforms involve some progress in the direction of neutrality and transparency of income taxation, they will need to be followed by additional steps to broaden their base and eliminate remaining distortions and preferences. They will also need to be complemented by an early and wide-ranging reform of the taxation of goods and services, to ensure adequate elasticity of revenue with respect to income and output in the years ahead. A substantial strengthening of tax administration will be essential to ensure that legislative reforms of the tax system are implemented effectively, and that capabilities to collect and enforce taxes are adapted to the requirements of a more market-oriented economy.

Economic reform will require a substantial restructuring of governmental spending over the next few years. On the one hand, the imposition of a hard budget constraint on enterprises will require the elimination of budgetary and extrabudgetary support to loss-making enterprises, although it may be necessary to provide temporary aid to enterprises and banks undergoing well defined and closely monitored restructuring programs. Price reform should entail a major cutback of budgetary subsidies, which in 1989 amounted to over 13 percent of GDP (Table III. 1.9). The social acceptability of these reforms will, however, require the early implementation of an effective safety net, involving unemployment compensation and other targeted income support schemes. The authorities have already introduced an ambitious program of reforms of pensions and other welfare benefits. While adequate funding appears to have been secured for these schemes in the short run, illustrative scenarios point to significant risks to their financial viability over the medium term, in the absence of steps to tighten eligibility requirements and/or to raise contribution rates (Appendix III. 1-3).

Table III.1.1.USSR: Breakdown of State Budget Revenue of Union Republics, by Republic, 1990 1
Turnover TaxPersonal Income TaxGrants

from Union

Total RevenueEnterprise Taxes 2
Union Republic(Billions





of total



of total



1990 3

of total


of total


of total

All republics 4248.7100.0748237.551578.2146.63.544.2
Sources: Ministry of Finance and estimates.

Consolidated budget of union republics and local soviets of people’s deputies. Data refer to budget plan for 1990, unless otherwise noted. Allocation refers to the proportion of revenue to be retained by union republic from revenue collected within the republic in a given revenue category.

Revenue from profits of union-subordinated state enterprises from: allocation of profit tax, as shown; 100 percent allocation of tax on labor resources; and 100 percent of water charges.

Profit tax only.

Weighted average of republic amounts, except for first two columns which represent totals.

Sources: Ministry of Finance and estimates.

Consolidated budget of union republics and local soviets of people’s deputies. Data refer to budget plan for 1990, unless otherwise noted. Allocation refers to the proportion of revenue to be retained by union republic from revenue collected within the republic in a given revenue category.

Revenue from profits of union-subordinated state enterprises from: allocation of profit tax, as shown; 100 percent allocation of tax on labor resources; and 100 percent of water charges.

Profit tax only.

Weighted average of republic amounts, except for first two columns which represent totals.

Table III.1.2.USSR: Breakdown of State Budget Revenue, by Government Level, 1989
State Budgets of

Union Republics
State Budgets of

Union Republics



TotalRepublics 1LocalUnion

TotalRepublics 1Local
(In billions of rubles)(Percent of state budget)
Total revenue 2393.9208.6185.3103.581.853472621
Tax revenue372.8196.8176.099.576.553472720
Income taxes and transfers161.486.774.728.146.654461729
Profit taxes and transfers119.770.449.323.525.859412022
State enterprises115.570.145.423.521.961392019
Personal income tax41.716.325.44.620.839611150
Turnover tax111.
Social insurance contributions33.127.85.3 35.3841616
Foreign activity 267.267.2100
Nontax revenue21.
Memorandum items:
Financial revenue
Lottery loan2.
Surplus from republics6.
Intergovernmental transfers8.531.3
Transfers from union31.3
Livestock and milk subsidy13.4
Republic-specific grants5.9
Other transfers 412.0
Transfers from republics 48.5
Sources: Ministry of Finance; and estimates.

Calculated as a residual from the data for state budgets of union republics and local budgets.

Net of intergovernmental transfers, but includes financing from abroad.

Calculated as a residual from state budget of USSR and union budget.

Largely lending from, or repayments to, the union.

Sources: Ministry of Finance; and estimates.

Calculated as a residual from the data for state budgets of union republics and local budgets.

Net of intergovernmental transfers, but includes financing from abroad.

Calculated as a residual from state budget of USSR and union budget.

Largely lending from, or repayments to, the union.

Table III.1.3.USSR: Breakdown of State Budget Expenditure, by Government Level, 1989
State Budgets of

Union Republics
State Budgets of

Union Republics




(In billions of rubles)(Percent of state budget)
Total expenditure 1480.1242.3237.8157.979.951493316
Operational expenditures8.
Price compensation66.319.546.844.62.22971673
Procurement prices31.631.631.6100100
Social and cultural activities139.235.8103.451.152.326743737
Social insurance25.225.2100
Social security pensions35.835.835.8100100
Other benefits9.
Justice and internal security8.28.2100
Other expenditures 218.711.
Foreign activity 128.428.20.20.29911
Memorandum item:
Intergovernmental transfers31.38.5
Transfers to union 38.5
Transfers to republics31.3
Livestock and milk subsidy13.4
Republic-specific grants5.9
Other transfers 312.0
Source: Ministry of Finance; and estimates.

Net of intergovernmental transfers, but including financing flows to abroad.

Including administration.

Largely repayments by, and lending to, union republics.

Source: Ministry of Finance; and estimates.

Net of intergovernmental transfers, but including financing flows to abroad.

Including administration.

Largely repayments by, and lending to, union republics.

Table III.1.4.USSR: State Budget Revenue, 1985-90(In billions of rubles; percent of GDP in parentheses)


Total revenue367.7366.0360.1365.1384.9410.1
Tax revenue337.1335.6342.9340.0361.6387.8
Income taxes and transfers 1148.4159.7158.8154.3157.3168.0
Individual income taxes30.031.232.535.941.743.5
Income tax28.329.530.933.937.540.2
Agriculture tax0.
Tax on adults without children1.
Patents and other income taxes0.42.51.6
Profit taxes and transfers118.4128.5126.3118.4115.6124.5
Profit transfers and deductions30.243.466.761.066.078.8
Fixed payments0.
Residual profit payments Wage taxes 247.138.512.89.54.8
Wage taxes 2-
On fixed and working capital38.140.841.739.533.838.6
Cooperatives and social
Collective farms1.
Cooperatives, other1.
Social insurance contributions25.426.528.
Turnover tax97.791.594.4101.0111.1121.9
Taxes on foreign trade65.057.360.953.958.249.4
Of which: oil & gas14.011.5
Revenue from other foreign activity0.
Of which: foreign exchange1.0
Tax on owners of vehicles1.11.3
Nontax revenue30.630.417.225.123.322.3
Geological fees3.
Levies and other nontax revenues24.023.610.117.815.915.0
Sources: Ministry of Finance; and estimates.

Includes revenue from sources other than fixed-rate taxes.

Refers to the labor resource tax in 1988 and to the excess wage tax in 1989-90.

Sources: Ministry of Finance; and estimates.

Includes revenue from sources other than fixed-rate taxes.

Refers to the labor resource tax in 1988 and to the excess wage tax in 1989-90.

Table III.1.5.USSR: Summary of the 1990-91 Tax Reform
TaxBefore ReformAfter Reform
1.1 On enterprises

Enterprises would pay to the budget part of the planned profit, fixed payments for the use of labor and natural resources, payment on the value of fixed and working capital, and residual profit payments. The enterprise would also make payments to centralized funds managed by the corresponding branch ministry.

Uniform transfer to the budget, on the base of a 45 percent (normal rate) tax on profit. No payments to centralized funds.
R&D and environment-protection expenses: not deductible.30 percent deductible.
1.2 On joint ventures

Profit taxed at 30 percent.

Joint ventures with at least 30 percent foreign capital: profit taxed at 30 percent (10 percent in the Far East economic region);
Other joint ventures: profit taxed at the same rate as enterprises.
Two-year tax holiday.Two-year tax holiday for joint ventures with at least 30 percent foreign capital.
Uniform taxation.Excess profits taxed at 80-90 percent.
Dividend distribution: not taxed (there were no joint stock companies).

Remittances of profit abroad: taxed at 20 percent.
Dividend distribution: a tax of 15 percent is withheld at source.

taxed at 15 percent.
Repayment of principal of bank loans: deductible.not deductible.
Bonuses paid to employees, interest on long-term bank loans: not deductible.deductible.
R & D expenditure, environment-protection expenses, capital investment: deductible.deductible.
1.3 On cooperatives
No tax on profit at Union level. A tax on gross income.No tax on gross income.

Profit taxed on the same basis as profit of enterprises.
1.4 On the net income of public entertainment
Not taxed in separate.Taxed at 70 percent.
1.5 On foreign companies with a permanent establishment
Profit taxed at 40 percent.Profit taxed at 30 percent.
2.1 Wage income tax
First rub 70 per month exempt.

Marginal rate of 13 percent on monthly income over rub 100.

Tax reduced by 30 percent if employee has four or more dependents.
First rub 100 per month exempt.

Marginal rate of 60 percent on monthly income over rub 3,000.

Tax reduced by 30 percent if employee has three or more dependents.
2.2 Tax on the income of the self-employed
Marginal rates ranging from 1.5 percent to 13 percent.Marginal rates ranging from 1.5 percent to 60 percent.
2.3 Tax on the income from intellectual property
Works intended for use inside the country: marginal rates ranging from 1.5 percent to 13 percent.Marginal rates ranging from 1.5 percent to 60 percent.
Works intended for use abroad: marginal rates ranging from 30 percent to 75 percent.

Heirs of authors taxed at rates ranging from 60 percent to 90 percent.
Heirs of authors taxed at rates ranging from 60 percent to 90 percent.
2.4 Tax on other income of individual activity
Handicraft and artisanal activities: annual income over rub 840 taxed at rates up to 65 percent.Annual income taxed at rates up to 60 percent.
Professional and religious activities: annual income over rub 300 taxed at rates up to 69 percent.
Other activities:
annual income over rub 300 taxed at rates up to 81 percent.
Rates of 100, 200, and 300 percent.Rates of 100, 125, 150, and 200 percent.
In general calculated as the difference between administratively-fixed retail and wholesale prices, minus trading marginsIn general expressed in ad valorem rates.
Joint ventures exempt.Joint ventures taxed at rates ranging from 15 percent to 90 percent.
5.1 Customs duties
A tariff on 300 items of import, averaging 3.5 percent.A modern tariff on 10,000 items, with rates up to 100 percent and average below 10 percent.
5.2 Import and export tax
Tax computed as the difference between the fixed domestic price and the world price.Rates up to 2,090 percent (to be reduced to 500 percent when the exchange rate is unified) on 200 items of import.
Old system of price differentials to be used only for some government transactions.
Joint ventures operations exempt.Joint ventures operations taxed.
Source: Ministry of Finance.
Source: Ministry of Finance.
Table III.1.6.USSR: Turnover Tax Revenue, 1989
In Billions

of Rubles
As Percent

of Total
As Percent of

Net Output 1
Heavy industry36.532.9
Petroleum products12.010.860.9
Chemical and petrochemical4.33.824.6
Chemical industry2.01.8
Electric power2.42.125.9
Machine building6.66.07.0
Forestry industry0.40.32.4
Building materials1.31.211.3
Other 29.08.1
Light industry19.817.968.4
Food and beverages industry52.046.8227.9
Fats and oils1.61.4
Alcoholic beverages41.937.7
Tobacco products1.81.6
Grain products1.91.7
Other industry3.43.0
Sources: Ministry of Finance; Goskomstat; and estimates.

In wholesale prices of enterprises, excluding turnover tax.

Includes Main Directorate for Diamonds and Gold.

Sources: Ministry of Finance; Goskomstat; and estimates.

In wholesale prices of enterprises, excluding turnover tax.

Includes Main Directorate for Diamonds and Gold.

Table III.1.7.USSR: Summary of Budget Preparation Process1
Principal ActivitiesInstitutionsTimetable
I. USSR State Budget
1. Union budget
a. The USSR Ministry of Finance prepares instructions, forms, and schedules for the forthcoming budget year. The Ministry also prepares a preliminary balance of revenues and expenditure using estimates provided by the Gosplan. The preliminary balance accompanied by comments and explanation and instructions is sent to the all-union ministries and to the ministries of finance of union republics.Gosplan,

USSR Ministry of Finance
b. Union branch ministries and spending agencies prepare budget estimates based on information received from lower level units but within the framework of the preliminary balance provided by the USSR Ministry of Finance.Union republic ministries of finance; branch ministries; spending agenciesApril-May
c. Preliminary draft of the consolidated state budgets of union republics are analyzed in the USSR Ministry of Finance.USSR Ministry of FinanceMay-July
d. Exchange of additional information between the USSR Ministry of Finance and the ministries of finance of union republics.USSR Ministry of Finance; Union-republic ministries of financeMay-July
e. Budget negotiations between the USSR Ministry of Finance and the ministries of finance of union republicsUSSR Ministry of Finance; Union-republic ministries of financeMay-July
f. Preparation of the draft of the consolidated state union budget and submission to the Council of MinistersUSSR Ministry of Finance;

USSR Council of Ministers
g. Submission of the draft of the consolidated state union budget to the Economic Committees of the Supreme SovietUSSR Council of Ministers;

USSR Supreme Soviet
h. Review of the draft in the committees prior to submission to the plenary services of the two houses of the Supreme SovietEconomic Committees of USSR Supreme SovietDecember
i. Adoption of the USSR state budget law.USSR Supreme SovietDecember
2. State budgets of union republics
The stages in the preparation of union republican budgets are the same as the ones of the all-union budget. One important difference is that the first input for the preparation process comes from the USSR Ministry of Finance and not from Gosplan.USSR Ministry of Finance; ministries of finance of union republics; department of finances of oblasts and krays; supreme soviets of union republicsMarch-December
II. Local Budgets
The finance departments of oblasts, krays, rayons and cities (fourth-level governments) as well as the finance committees of small cities and rural settlements (fifth-level governments) prepare budget estimates based on information received from lower level units but within the framework of the preliminary balance provided by an upper level unit.Ministries of finance of union-republics; departments of finance of oblasts and krays; finance offices of lower-level governmentsMarch-May
Steps c, d, e, and f are the same as the steps of the union or the union republican budgets. Budget preparation as well as budget negotiations follow much simplified procedures.Departments of finance of oblasts and krays; finance offices of lower-level governmentsSeptember-December
Steps g, h, and i are the same as for the union or the union republican budgets. Submission for review and adoption is effected by the relevant institutions or organizations.Executive committees of lower-level governmentsSeptember-December
Source: Ministry of Finance.

With respect to 1990 budget.

Source: Ministry of Finance.

With respect to 1990 budget.

Table III.1.8.USSR: State Budget Expenditure, 1985-90(In billions of rubles)


Total expenditure386.0415.6429.3445.9465.1485.6
(in percent of GDP)(49.7)(52.0)(52.0)(51.0)(49.5)(50.6)
Operational expenditures13.213.613.
Price differentials65.873.074.964.366.395.9
Increases in procurement prices21.931.6
R&D (including space)15.313.2
Wages and salaries19.
Military construction4.63.7
Justice and internal security5.
Social and cultural activities111.9119.3127.6134.3139.3160.5
Health and physical cultural17.618.019.521.924.627.6
Budget of national social insurance22.823.624.025.525.34.9
Grant to central collective
farm insurance3.
Social security31.935.037.340.140.271.0
On account of national
social insurance25.828.730.835.841.2
Foreign economic activity2.24.911.915.615.414.9
Trade subsidies0.
Subsidies to industry2.
Unilateral aid1.
Interest payments0.81.31.9
Other expenditures13.014.613.99.113.727.3
Internal interest payments4.55.36.3
Price diff. on agricultural products0.4
Reserve funds0.44.54.1
USSR Council of Ministers0.41.81.0
Republic Council of Ministers2.22.6
Ministry of Finance0.50.5
Source: Ministry of Finance; and estimates.

Including exchange rate-related expenditure.

Source: Ministry of Finance; and estimates.

Including exchange rate-related expenditure.

Table III.1.9.USSR: Subsidy Payments, 1988-90

(In billions of rubles)
Total subsidies131.5126.5129.4
Budget subsidies to domestic producers and consumers102.1103.0112.8
Agro-industrial complex89.691.1100.4
Food production57.355.662.7
Livestock prices26.822.728.2
Milk products16.417.118.1
Grain and oilseed prices6.06.86.8
Grain and bread products0.20.30.3
Potatoes and vegetables2.02.32.4
Conserved fruits and vegetables1.31.41.5
Supplies to public cafeterias0.1
Potatoes for alcohol/starch products0.20.30.3
Low profit1.8
Other agro-industrial subsidies5.23.54.7
Animal fodder and seeds0.10.10.1
Light industry (textiles)
Fish meal0.1
Tractors and fertilizers1.8
Other subsidies to consumers5.94.43.9
Central Cooperative Union0.10.1
Housing and utilities (operational costs)
Housing (local soviets)
Municipal utilities of local soviets1.00.90.4
Other public consumption goods1.11.31.4
Subsidies to heavy industry6.77.58.5
Thermal energy1.31.01.1
Subsidies financed by tax offsets or outside
the budget
Construction of farmers’ markets0.20.20.2
Clothes for children1.62.12.0
Ministry of non-ferrous metals0.30.20.3
Agricultural support fund15.49.34.4
Subsidies for foreign activity11.911.79.7
Trade subsidies9.79.67.4
Subsidies to foreign exchange using industries2.22.12.3
(In percent of GDP)
Total subsidies15.013.513.5
To domestic producers and consumers11.711.011.8
Agro-industrial complex10.29.710.5
Of which:
Food production6.55.96.5
Other subsidies to consumers0.70.50.4
Subsidies to heavy industry0.80.80.9
Subsidies financed by tax offsets
or outside the budget
Agricultural price support fund1.81.00.5
Subsidies for foreign activity1.11.00.8
Trade subsidies1.11.00.8
(In billions of rubles)
Memorandum item:
Domestic subsidies 2119.6114.8119.7
State budget subsidies 3114.0114.7122.5
Source: Ministry of Finance; and Gosbank.

Farmers’ markets are offset against income tax; children’s clothes are offset against turnover tax; and presumably the subsidy to the Ministry of Non-Ferrous Metals is financed by enterprise payments. Excluding cross-subsidies provided through centralized funds.

Domestic subsidies to producers and consumers, plus subsidies financed by tax offsets or outside the budget, plus agricultural price support fund.

Domestic subsidies to producers and consumers plus subsidies for foreign activity.

Source: Ministry of Finance; and Gosbank.

Farmers’ markets are offset against income tax; children’s clothes are offset against turnover tax; and presumably the subsidy to the Ministry of Non-Ferrous Metals is financed by enterprise payments. Excluding cross-subsidies provided through centralized funds.

Domestic subsidies to producers and consumers, plus subsidies financed by tax offsets or outside the budget, plus agricultural price support fund.

Domestic subsidies to producers and consumers plus subsidies for foreign activity.

An active monetary policy, involving flexible interest rates, will inevitably increase substantially the burden of servicing the domestic public debt in the years ahead. These foreseeable pressures on public spending, plus large needs for investment in a deteriorated public infrastructure, will require a determined effort to cut back other more discretionary spending, if the overall deficit is to be adequately reduced. In particular, it will be important to carry out fully the proposed reductions in defense expenditures, which remain significantly higher in relation to GDP than in most large industrial countries.

The restructuring of expenditures should be accompanied by wide ranging reforms of the budgetary process, in order to improve coordination between various levels of government, introduce effectively macroeconomic analysis in the budget preparation, strengthen expenditure control and introduce modern cash management procedures. It would also be important, for purposes of transparency and financial discipline, to minimize the use of extrabudgetary funds.

A precondition for effective reforms of the public finances is an early definition of respective responsibilities and powers in taxation and expenditure for different levels of government, as well as of the scope of budgetary transfers among these levels. Also essential to the maintenance of a unified economic space—involving a single currency and consequently a unified monetary policy—is the acceptance by all levels of government of strict and effective limits, and preferably a ban, on monetary financing of budget deficits. Admittedly, however, intergovernmental fiscal relations, particularly in a large country encompassing a multitude of ethnic and cultural differences, cannot be decided on efficiency considerations alone. Indeed, a conclusive and durable settlement of this issue must be based on a broad consensus, taking fully into account trade-offs between regional or local socio-political preferences and economic efficiency.


a. Past relations

The general government of the USSR encompasses the union and 15 union republics, which in turn include 20 autonomous republics and more than 52,000 local governments (oblasts, okrugs, krays, rayons, cities) headed by soviets of people’s deputies. The autonomous republics, concentrated mainly in the Russian Republic, are established along minority nationality lines.1 The administrative status of cities depends on size, as well as political and economic importance.2

The state budget is a consolidation of the union budget, including the social security accounts, and the state budgets of the union republics. Likewise, the state budget of each level of government is a consolidation of its own budget and the budgets of all lower levels of government under its jurisdiction (Chart 1). Traditionally, despite the formal federal structure of public administration, the formulation and execution of fiscal policy has been highly centralized to ensure full conformity with the plan.

In essence, the minimum level of revenue and maximum expenditure (by category and program, respectively) were determined at each level of government for the budgets of the immediately lower level under its jurisdiction, with the global amounts being set for the state budget by the union authorities. Deficits at any level could be covered with transfers from the budget of the next higher level government, as in principle there was no recourse to transfers between budgets at the same level or from a lower level. Some of the transfers from the union to the republican governments consisted of loans subject to repayment by the republics. Also, republic or local budget surpluses could be transferred to higher levels or carried over to the following year, upon approval by the central authorities. The high degree of centralization is evident from the almost complete control that the union authorities have exercised over the imposition of taxes (or requisition of enterprise profits) at various levels of government. Similarly, spending directives were issued by the union authorities—specifically by Gosplan—and then delegated consecutively to each level of government.


1. Constructed similarly to the state budgets of the union republics.

As regards the mechanics of intergovernmental relations, each year governments at every level were allocated a certain proportion of tax or nontax revenue in a given category collected within their territory. The allocations were more or less linked to the expenditure directives for that year. In 1990, the allocations were clustered in the 70-100 percent range for turnover tax revenue, were raised from around 50 percent to 100 percent for personal income tax revenue in half of the republics, and were kept at 20 percent or less for union-subordinated enterprise profit tax revenue, except in the Baltic republics where allocations exceeded 50 percent (Table III. 1.1). Revenues from most other tax and nontax sources (especially local charges, profits of regionally-subordinated enterprises and cooperatives, and the agricultural tax) were allocated fully to republic or local budgets. Although financing normally was obtained only to cover deficits at the union level, 50 percent of the proceeds from the sale of “lottery loans” accrued to the union republics.3 In addition, the republics received from the union budget transfers for meat and milk subsidy payments, while Central Asian republics also received regional grants—totaling up to almost one third of total budgetary revenue in the case of Turkmenistan (Tables III. 1.1 and III. 1.2).

In the aggregate, in 1989, the state budgets of the union republics (i.e., republic plus local budgets) obtained the bulk of the revenue from the turnover tax (86 percent), and from income taxation of individuals (61 percent) and cooperatives (93 percent), while the union budget received all foreign trade revenue, including external financing, and the major share of revenue from state enterprise profits (61 percent). Revenue from social security contributions—assisted with general revenue—was channeled to beneficiaries through both the union and the union republic budgets (Table III. 1.3).

On the expenditure side, the picture that emerges is one of a division of fiscal responsibilities, broadly along functional lines, under tight centralized control: union republics and the local soviets being responsible for social expenditures, and the union government for defense, foreign economic relations and support of state enterprises. The principal items financed solely from the union budget were defense, justice, internal security, subsidies to the external sector, and most budgetary investment in the economy (61 percent). By contrast, given their firsthand contact with the community, local governments were primarily responsible for outlays on health (86 percent) and education (66 percent), while union republics disbursed most price subsidies (78 percent) and the majority of social security benefits (Table III. 1.3).

To this effect, roughly in line with the balance between economic endowment and social needs, union republics have been permitted to retain a certain proportion of revenue allocations. This is best illustrated by the full turnover tax retention in Central Asian republics—with the lowest per capita income—supplemented with grants from the union budget, with allocation subject to yearly variations depending largely on changing needs.

b. Recent developments

Fueled by ethnic, cultural, and political differences, pressures have been building in recent years toward substantial regional fiscal decentralization. These pressures led to outright declaration of sovereignty by union republics, and in several instances, by autonomous republics and local governments. To contain this centrifugal trend, in April 1990 a law was enacted on the basic principles that would govern relations between the union and the republics.4

The law confirms union jurisdiction in the following areas involving fiscal policy: determination and administration of the Soviet tax system, including tax rates and bases, as well as other mandatory payments to the union budget; determination of customs duties; and preparation, approval and execution of the union budget, including expenditures on subsidies to the republics. In addition, the union would retain responsibilities for many areas that have fiscal implications.5

The law entrusts the union republics and autonomous republics with the fiscal responsibilities within their territory, subject to compliance with USSR legislation, relating to determination of republic taxes and other mandatory payments (including for natural resources) levied on their territory and entered in their budgets, and the preparation, approval, and execution of the republic budgets by the legislature of each republic.6

In conjunction with the republics, the union authorities are authorized to form regional development funds, as well as reserve, innovation, environmental protection and other union-level funds, to finance economic and social programs. Furthermore, the law calls for the preservation of a common union-wide market, above all by prohibiting the erection of barriers or discrimination against interrepublican commodity and financial flows. However, it allows republics to tax and to control the price of goods and services within their territory and to provide incentives or subsidies for the production or sale of specific commodities, from their own budgetary resources. Republics are also empowered, within their territory, to set rules regarding investment or acquisition of property and disposal of profits.

This enabling legislation was, in many respects, reaffirmed by the presidential guidelines issued in October 1990. Once again, the union was entrusted with the tasks of, among others: drawing up long-term forecasts; developing and implementing a uniform customs legislation; managing and financing common functions (defense, energy, transport, etc.); and servicing foreign and domestic government debt. To meet the corresponding expenditure responsibilities, the union budget would be financed from union taxes and from other revenue sources under direct union control. Meanwhile, the republics would be expected to promote the development of their territories, conduct economic policy, determine their systems of republic and local tax and nontax payments, and regulate prices, income and social protection within their boundaries.

If there is a difference between the law of April 1990 and the presidential guidelines, it is that the guidelines seem to stress rule by consensus among the republics, focusing on organizational rather than substantive aspects. This approach is evidenced,7 for example, by the proposal that union tax rates and taxable objects be determined by agreement with the republics. More broadly, the guidelines envisage creation of an Interrepublic Economic Committee—composed of plenipotentiary representatives of the republics, under the Federation Council8 to coordinate measures introduced by all republics. Coordinated and prompt implementation of financial measures is called for, including curtailment of the state budget deficit, to a target of 2½ to 3 percent of GDP for 1991.

In addition, a number of regulatory agencies and extrabudgetary funds (including a State Property Fund, a Regional Development Investment Fund, an Employment Promotion Fund, and an unspecified number of stabilization funds) is to be established at the union and republic levels to carry out new functions emerging from the increased market orientation (for instance, privatization, infrastructure investment, and enterprise restructuring). From an efficiency viewpoint, it is difficult to justify the creation of these funds with distinct policy goals, to be financed through earmarked taxes; moreover, such extrabudgetary funds are bound to weaken budgetary control. Yet, one possible explanation for establishing some of them is to counteract, in part, what may be viewed as a process of excessive regional decentralization.

On the whole, although they represent a step toward a genuine federal structure, neither the enabling legislation nor the presidential guidelines offer a detailed solution for the reform of intergovernmental fiscal relations. Presumably, the extent and limits of union authority in fiscal matters, as well as intergovernmental relations, would be decided through a constitutionally binding union treaty. There are, however, a few initiatives that are likely to shape these relations at least in the near term. For 1991, the union and republic budgets have been prepared on separate tracks—following to an extent the familiar functional division—with considerable ad hoc coordination among different levels of government. Revenue sharing remains one of the most contentious issues, and some republic and local governments are reportedly embarking on their own tax reform programs. In general, however, as the republics retain an increased portion of revenue, some of them will make negotiated upward transfers to the union budget. Should these transfers prove to be insufficient, it will be necessary to reopen negotiations.

The past formula for the central allocation of revenue shares to the republics no longer appears politically tenable. In fact, in 1990, several republics and local governments already retained a higher share of turnover and income tax revenue than allocated. According to the tax reform enacted at the union level, from 1991 onward revenue from the new 45 percent enterprise income tax is to be divided between the union and republic budgets, with 22 percentage points accruing to the former and 23 percentage points to the latter. Foreign trade tax revenue has been assigned to the union and revenue from property taxes and local levies to the republics and local governments. In addition, agreement appears to have been reached to the effect that the republics will receive all turnover tax revenue but that the union will receive the entire proceeds from a newly-introduced 5 percent sales tax.

c. Options and constraints

If the USSR is to move to a federal fiscal system, a number of issues would need to be dealt with in the context of a union treaty or some other agreement between the union and the republics. These issues include the assignment of budget revenue and expenditure flows as well as the stock of government assets and liabilities. Furthermore, clear rules must be set on intergovernmental transfers and on permissible financial operations, i.e., lending and borrowing. It is important to recognize that the alternatives under consideration would be limited if consensus is reached to maintain an open and integrated economic space and to preserve a central role for fiscal policy as an instrument of macroeconomic stabilization within that space.

More generally, whereas there are many potentially useful lessons to be derived from international experience in fiscal federalism, ultimately each country must find its own unique approach that is most suitable for satisfying not only efficiency criteria, but national, cultural, or linguistic aspirations as well. A common lesson from various country experiences is that the most durable federal fiscal systems are those characterized by objective, transparent, and accepted rules for allocating revenue and expenditures among government levels, for determining intergovernmental transfers, and for limiting financial activities at lower levels of government.

(1) Division of government assets and liabilities

As regards public nonfinancial assets, there seems to be broad agreement—whatever the nature of the union—on explicitly assigning the ownership of real property: housing to local governments; nonrenewable resources to union republics and autonomous republics; state enterprises, including unfinished construction and inventories, to the corresponding government of subordination, except that many union-subordinated enterprises are being claimed by republic or local governments; while pipelines and transport facilities could probably remain under union jurisdiction. In any event, most of these assets—except for public utilities—are likely to be partially or wholly offered or transferred to private owners as privatization proceeds, with any proceeds accruing to the budget of the selling government.

More controversial is the status of financial assets, especially official foreign exchange and gold reserves, to which some republics apparently want to establish a direct ownership claim. By contrast, joint responsibility for the servicing of outstanding public debt, including external obligations, has been widely accepted among the republics—although without agreement as to the basis for determining each republic’s share in these obligations. Joint debt service and unified monetary control imply the need for joint ownership of external reserves under central bank management.

(2) Assignment of budget revenues and expenditures

On expenditure responsibilities, most republics—except those that favor secession—recognize the union’s role in assuming certain common functions, such as defense, energy, space activities, and foreign economic relations—albeit without prejudice to direct foreign contacts by republic governments—while decisions concerning all other programs would be left to republic and local levels of government. On the revenue side, however, controversy reigns. Most republics want to dispose freely of the bulk of revenue from taxes and from property (including asset sales), leaving locally-raised revenue to local governments.9 The final outcome will probably lie somewhere between, on the one hand, the present revenue allocations as a minimum—including perhaps the split of the enterprise income tax—and, on the other, full accrual of revenue to the republic and local budgets.

Besides the determination of revenue shares among various government levels, agreement is necessary on the definition of tax bases and on tax rates and on the latitude for variation that may prevail among jurisdictions. The new enterprise income tax already allows for variations in the republic revenue shares for incentive purposes through a reduced tax rate and a narrower base.

In this respect, it is worth recalling that arrangements for tax assignment in other countries with a federal system can be classified under three approaches: tax sharing (with revenues from a single tax being divided among various levels of government, as in Germany), tax overlapping (under which different levels of government compete in the same tax field, allowing for some variation in the determination of tax bases, exemptions and tax rates, as in Canada and the United States), and tax separation (where each level of government raises revenue from separate tax categories, as in Switzerland and Yugoslavia).

In Germany, most of the major taxes and the largest component of the local business tax are shared between two or three levels of government. The rates and bases of the shared taxes are uniform, with the respective shares of the Federal Government, the Länder and the municipalities being fixed in the constitution at 43-43-14 percentage points for the personal income tax and 50-50-0 percentage points for the corporation income tax. These shares are applied to income taxes collected at the Land level, corrected by a measure of the “true effective tax capacity” of a Land before sharing the revenue with the Bund, and before equalizing the tax capacity across Länder. The VAT shares, distributed among Länder according to population and fiscal capacity, are frequently changed by the Federal Government. The main exclusively federal taxes are customs duties and excises. Although there are some distortions arising from the way taxes are collected, the German system has proved quite effective in providing stability and transparency to government finances.

Canada has tried many forms of tax sharing and tax overlapping arrangements in the past. When the provinces gained more legislative autonomy in the 1970s, they became free under the tax overlapping approach to set their own rates as long as they conformed to the federal base; later, a tax supplement method was introduced whereby provincial taxes were calculated as an additional percentage to the federal rates. Tax collection arrangements between the federal and provincial authorities are extensive, although some provinces collect their own personal or corporation income taxes. The system allows decentralized fiscal macro-economic policy; provinces can, for example, reduce their sales tax rates in order to stimulate consumer spending. Also relevant for the Soviet case is the role of natural resource taxes. In Canada, the central government is given authority to raise revenue from export taxes on oil, but because the ownership of natural resources is held by the provinces through their retention of subsurface mineral rights when surface rights are sold, the provinces also derive revenue from resource rents. This gives a much higher revenue raising capacity to resource-rich provinces, and the existing fiscal equalization program has been inadequate to keep fiscal disparities within an acceptable range.

In Yugoslavia, a notable example of tax separation, the only tax whose proceeds are shared between republics and the federal government is the general sales tax, which also happens to be the single most important revenue source, accounting for nearly one half of total budget revenues. However, unlike in Germany, there are no predetermined shares for this tax and the republics exercise considerable autonomy over its disposition. All other taxes are effectively controlled by one or the other level of government, so the degree of tax separation is nearly complete.

In the USSR, if consensus on revenue assignment in the framework of a Union Treaty were not attainable, at a minimum interrepublic differences in effective tax rates on income or goods and services, or differences in subsidy rates, would be constrained by the desired preservation of a common economic space, especially since the transition to a market economy would entail integration of currently segmented commodity and factor markets. Otherwise, with the economy becoming increasingly market-oriented, active arbitrage by consumers, producers and investors would develop across republic boundaries, in response to tax rate or subsidy differentials.10 The erosion of tax revenue ensuing either from such tax avoidance or evasion practices, or from the tax competition, mainly on the part of economically less developed jurisdictions which experience the most acute revenue need and seek to attract investment inflows (by offering tax holidays, reduced tax rates, etc.), could only be prevented through elaborate administrative arrangements among republics.11

(3) Intergovernmental transfers

Apart from tax and expenditure assignment, an essential aspect of federal structures involves intergovernmental transfers to satisfy vertical and/or horizontal redistribution criteria. Whereas vertical redistribution is usually directed at compensating for imbalances at a given level of government (due to a mismatch between revenue and expenditure at that level), horizontal redistribution is aimed specifically at reducing inequities among regions. In practice, the two criteria are not really separable. It can be argued that, under the existing system, the USSR has actually been applying both criteria through union transfers to the republics in connection with meat and milk subsidies and through republic-specific grants.

Interestingly, however, neither the enabling legislation nor the presidential guidelines focus on the scope for compensatory intergovernmental transfers, presumably leaving this matter to negotiation between the union and the republics, while perhaps (by omission) attempting to preserve downward transfers from higher to lower levels of government.12

In theory, the direction, mechanics, and criteria governing intergovernmental transfers may have no bearing on the global budgetary outcome, and specifically on the state budget balance. In practice, however, fiscal discipline can be affected adversely by the nature of such transfers. The experience of other federal fiscal structures indicates that revenue sharing rules must be accompanied by transparent ex ante rules on compensatory transfers among different levels of government. Moreover, although in principle the direction of the transfers is immaterial, upward transfer schemes are particularly vulnerable to negotiation, and are likely to have a destabilizing effect on government finances, unless they are buttressed by an objective and solid enforcement mechanism. In addition, lack of a centralized revenue raising power is likely to deprive the federal government of an important tool for macroeconomic stabilization.

There are several examples that serve to illustrate these views. In Spain, for instance, upward yearly transfers from the Basque Country to the central government have been subject to protracted negotiations that, despite their relatively small size, have contributed to uncertainty in the budgetary outcome. Perhaps even more instructive is the experience of Yugoslavia, where republics regularly transferred to the federation an amount almost equal to two fifths of federal budget revenues and shared with the federation the general sales tax revenue in about the same proportion. The amounts of these upward transfers were subject to annual negotiation, and until recently there was no effective enforcement of a republic’s payment once the agreement on the distribution of tax burden was reached. As a result, the federation often had to resort to borrowing, with negative consequences for macroeconomic stability. Since 1989, upward transfers have declined in relative importance due to the introduction of a special defense tax at the federal level and a rule whereby payment to the federation of sales tax shares became automatic. With these changes, the revenue assignment seems more stable, although republics often still exercise their discretionary control of fiscal revenue as a powerful bargaining tool. On a far smaller relative scale, the system of upward and downward transfers within the European Community—viewed as having a federal fiscal structure—is among the most stable. All EC member countries are required to transfer a small percentage of their VAT base to the Community budget, from which, in turn, structural funds are disbursed to economically backward regions on the basis of objective formula of need.

A critical aspect of a federal system is the extent to which lower level governments are able to finance their deficits at home or abroad. In most countries, such financing is ordinarily subject to statutory limits; in others it is preempted by stop-gap budgetary transfers from the central government. Rarely can lower level governments resort directly to central bank or even commercial bank financing; in the USSR, the enabling law and the presidential guidelines are silent on this issue.13 Nonetheless, financial discipline requires that lower level governments be barred from borrowing from the banking system.14 As an extension of this argument, both the extent and terms of borrowing from the nonbank public should be freely dictated by the borrowing government’s rating in financial markets, without guarantees from a higher level of government,15 unless on an exceptional basis to secure external credits for sound infrastructure projects. There is considerable accumulated evidence that countries can face both substantial fiscal imbalances and external debt problems because of easy access to foreign borrowing by lower level governments (as well as state enterprises) under liberal central government guarantees.


a. Introduction

The USSR state budget relies on four major revenue sources. Since the tax consolidation of 1930,16 state enterprise profits and the turnover tax have been the most important sources of expenditure financing, followed in importance by foreign trade taxes and taxes on households. State budget revenue as a percentage of GDP fell steadily from 47 percent in 1985 to 41 percent in 1989 (Table III. 1.4). The decline in revenue is largely due to the reduction in transfers from state enterprises, and would have been larger were it not for the recovery over the period of the turnover tax on alcoholic beverages. As of 1989, revenue from state enterprises and turnover tax each accounted for less than one third of budget revenue, while foreign trade taxes provided about one eighth, and individual income taxes one tenth of revenue.

Transfers from state enterprises, which had several different components prior to the recent introduction of the enterprise income tax, consist of distribution to the budget of part of enterprise profits; in the past, substantial amounts of enterprise income were also earmarked for extrabudgetary centralized funds under the control of industrial branch ministries. Most of these transfers—just like reverse transfers from the budget and centralized funds—have been largely a matter of negotiation. As a rule, the turnover tax consists of commodity-specific wedges between administratively fixed retail and wholesale prices, minus notional wholesale and retail margins. In other words, it lacks explicit fixed rates and is not comparable to any conventional turnover tax found in a market-oriented economy. Similarly, taxes on foreign trade generally have arisen from the price equalization system which effectively taxes away the profits of enterprises arising from the difference between the foreign prices of traded goods converted into valuta rubles at the official exchange rate, and the fixed domestic wholesale prices.17

Around 90 percent of the revenue from the income tax on households is composed of a withholding tax on wage income.18 The remainder is composed of schedular income taxes, levied mainly on self-employment income, taxes on personal property (land, buildings, and motor vehicles), and other receipts. The relatively small weight of taxes on households is confirmed by the fact that altogether they provide almost the same amount of receipts as the turnover tax on alcoholic beverages alone.

b. Taxes on business income

(1) Transfers from state enterprises

Transfers from state enterprises to the budget and to the extrabudgetary centralized funds have been regulated since 1987 under the system of enterprise self-accounting.19 According to the system, which ultimately is to be fully replaced by the profit tax, profits of a state enterprise were apportioned to the centralized funds under the control of its branch ministry and to the state budget. The enterprise would pay to the centralized funds about one half the amount of recorded depreciation, in principle to finance investment within the same industrial branch, and an enterprise-specific amount, used by the branch ministry to cover its running expenses and to cross-subsidize loss-making enterprises.20 The transfers to the state budget consisted of: (1) payments from profits, corresponding to the planned profit of the enterprise, after certain allocations (mostly for fixed investments and loan repayments); (2) fixed payments, levied as specific amounts or as a percentage of profits, on enterprises deemed to have made extraordinary profits from favorable natural resource or transport conditions; (3) a contribution (introduced in 1988) based on the use of labor resources, amounting each year to rub 200-300 per manual worker and rub 600 per white-collar worker; (4) a contribution (introduced in 1965) on “basic production funds and normalized circulating capital,” ranging from 2 percent to 8 percent of fixed assets and working capital, the rates increasing with the profitability of the firm; and (5) residual profit payments, representing the transfer to the budget of remaining actual profits after all other authorized profit allocations.21 Enterprises made these payments monthly, sometimes even three times per month, depending on the annual cash plan, revised quarterly. Since 1988, state enterprises were no longer required to surrender depreciation allowances and were allowed to retain a larger share of earnings, while enjoying increased freedom in distributing profits among various funds.22

(2) The enterprise income tax

With the advent of foreign investment in 1987, in the form of joint ventures, the authorities realized the inadequacy of the existing profit transfers, geared to the state enterprise sector, for the taxation of the emerging private enterprises. Accordingly, a special tax treatment was created for joint ventures under which book profits would be liable to a 30 percent tax, and dividend remittances abroad were taxed at 20 percent.23 A two year tax holiday was granted from the time the joint venture first netted a profit,24 and the Ministry of Finance was empowered to grant partial or total exemption to specific taxpayers.25 In order to promote foreign investment and reinvestment, generous rules were established for the determination of the tax base. Most accounting criteria—including depreciation methods and rates—were acceptable if established under the joint venture’s statute. Also, a number of items, not fully deductible by state enterprises, could be deducted by joint ventures: R&D expenditure, interest and principal paid on bank loans, and capital expenditures (in addition to depreciation). Finally, the tax could be reduced further for retaining profits in a general reserve, up to the equivalent of 25 percent of equity, and for unlimited allocations to investment. Also, joint ventures, like state enterprises, could not deduct bonuses paid to employees.

The purpose of the new enterprise income tax law,26 which entered fully into force in January 1991, was to establish a uniform tax environment for all state-, cooperative-, or privately-owned enterprises. In preparing for the transition to the generation of budget revenues on the basis of taxes rather than transfers, the Government attempted during 1988-90 to reduce the degree of discretion and to stabilize the contributions of state enterprises to the budget and funds at around 50 percent of the net profit. Under the new legislation, state enterprises are subject to a basic 45 percent statutory rate on profits, plus a progressive rate of up to 90 percent on “excess profits,” payable to the budget.27 The substitution of the 45 percent profit tax for the system of transfers is likely to cause ceteris paribus a significant loss of revenue, on the order of rub 30-40 billion in constant prices. A revenue neutral changeover would have required a 55 percent profit tax rate. Although the initial draft law envisaged such a statutory rate, the USSR Supreme Soviet reduced the rate to 45 percent. According to official estimates, this measure implies a cut from 49 percent to 37 percent in the average effective tax rate. (Table III. 1.5 summarizes the main features of the tax reform initiated in 1990 and extending through 1991.)

Besides replacing the system of profit transfers, the reform sought to put state enterprises on an equal competitive footing with the emerging private sector, including joint ventures (except those with significant foreign participation) and cooperatives, which had been subject to a relatively low tax on gross profits and had expanded rapidly since mid-1988. Although the new law has removed the preference enjoyed by joint ventures in deducting the amortization of bank loans, it allows for the first time the deduction of bonuses paid to employees and interest on long-term bank loans, in addition to standard depreciation. Also, joint ventures with foreign participation continue to be subject to the reduced 30 percent profit tax rate, while the withholding tax on dividend remittances was cut from 20 percent to 15 percent on July 1, 1990.28

The enterprise tax law represents a step in the direction of uniform and transparent treatment of profits. However, serious obstacles remain to revenue neutrality and to allocative efficiency. The tax base is either not yet well defined or determined in an arbitrary manner, incorporating conservative depreciation rates, notional deduction of wages and salaries calculated on the basis of industry-specific coefficients, and limitation on interest deductions; also, the criteria for assessment of “excess profits” have not been set. The law creates an excessive number of tax preferences (exemptions, credits, special regimes, and reduced rates differentiated according to the type of activity or legal form).29 These preferences narrow the coverage of the tax, making it complex and difficult to administer, while at the same time reducing its effective rate and hence its revenue yield. Statutory tax rates of up to 90 percent on excess profits may not deter state enterprises from exploiting a monopoly position, but certainly provide a strong incentive for tax evasion. Furthermore, the tax liability is reduced by deductions of, or credits which are not permitted in most other countries.30 Yet, except for joint ventures, rates for straight-line depreciation—the only method permitted—are lower than those common in other countries, and loss carryover is not allowed. The lack of uniform accounting standards contributes to the creation of uncertainty about the taxable base. In particular, the current tax structure lacks a definition of profit which could be consistently applied to both state enterprises and private businesses.

Finally, the present structure of the profit tax lacks any adjustment for inflation. Although the real value of revenue is reasonably protected by short collection lags,31 the effective tax rate is influenced by the rate of inflation inasmuch as the determination of taxable income does not recognize gains and losses for inflation on an accrual basis. Distortions arise, for example, from depreciation based on historical costs, incomplete recognition of exchange gains and losses on liabilities or assets denominated in foreign currency, and presumptive taxation of gains from inventory revaluation. As a result, the real tax burden becomes volatile in an inflationary environment, placing an unintended tax liability on the enterprise.

(3) Scope for a compulsory dividend

Under a uniform enterprise income tax, state enterprises would enjoy a competitive advantage vis-à-vis privately-owned enterprises that are expected to pay some rate of return to their owners in addition to tax payments to the budget. Therefore, there is a strong case for imposing on state enterprises an obligatory dividend payout to the budget, so as to place them on a comparable footing with private enterprises. One approach would be to predetermine the dividend as a uniform proportion of the government’s paid-in capital in all enterprises. However, in view of the practical problems of valuing the equity of Soviet state enterprises, and the arbitrariness of profits in a system full of price distortions, as well as the remarkable stability of corporate dividend-profit ratios in market economies, such an approach would appear to be less preferable than one which sets the dividend at a uniform predetermined percentage (say, 25 percent) of after-tax profit of state enterprises in all industrial branches.

(4) Tax on excess wage increases

The present tax on the growth of the wage fund is a regulatory device intended to constrain wage increases that exceed official guidelines. It represents the latest in a series of schemes since 1989 designed to indirectly control the growth of wages (see Chapter II.2). According to legislation of June 1990, effective January 1, 1991, a modified excess wage tax was to apply which would make increases in enterprise wage bills subject to taxation if the resulting share of labor remuneration in value added were not to decline by a specified margin, which would vary across sectors. The tax rate schedule is steeply progressive, with a maximum rate of 200 percent if the threshold for tax-free wage increases is exceeded by more than 3 percent.32

c. Taxes on personal income

The income tax consists of a set of schedules for various types of personal income. The present system, overhauled in April 1990, is characterized by progressive rates, reaching a top 60 percent marginal rate for most kinds of income. With regard to both wage and nonwage incomes, there are a large number of exemptions, credits and other kinds of benefits, the most significant being the personal exemptions. The executive committees of regional and local soviets of people’s deputies may grant partial or complete exemption for a certain type of income or class of taxpayer, and even to a particular taxpayer. As a result, effective tax rates depend not so much on the level of income as on the kinds of activity through which the income is earned. Due to the overwhelming state control of economic activity, until recently the actual income tax base was very narrow, consisting of not much more than wage income, subject to withholding tax. Other individual income taxes include those on income of residents from self-employment, intellectual property, household business activity, peasant farm activity, and foreign sources,33 and on domestic source income earned by foreign residents.

A recent change in the tax system, effective July 1990, increased the progressivity of the wage tax, set a maximum marginal rate of 60 percent for most kinds of income, and increased the already large number of brackets. Thus, in many respects, this reform was no more than an updating of the old tax system. New elements were introduced, however, in line with the emergence of new forms (e.g., profits of cooperatives) and levels of income, and with the objective of attracting foreign investment. Under the new system, the tax from family business income is collected under a separate schedule; the taxation of foreign residents is simplified; the treatment of royalty income is unified; and the tax on single individuals and childless persons is to be phased out.34

However, over the medium term, and until the development of other tax bases with more effective administrative mechanisms, the most important schedule, in terms of both coverage and revenue, will remain the withholding tax on wage income. Until June 1990, the withholding tax on wages was set at moderate average rates, with a top marginal rate of 13 percent applicable to wages over rub 100 per month, and an exemption limit of rub 70, equivalent to the minimum wage. Since July 1990, the first 100 rubles of wage income are exempt from the tax, but marginal rates of about 30 percent apply to wages between rub 100-150;35 for earnings between rub 150-700 per month the marginal rate is a modest 13 percent; and it rises in the following six income brackets and reaches 60 percent for wages exceeding rub 3,000 per month (Chart 2).


(percent of taxable income)

1. Old rates refer to those prior to july 1990, while the new rates have been effective thereafter.

Traditionally, wages have been strictly regulated, allowing for small differentials. In mid-1990, the average wage was about rub 260 per month. The emergence of highly differentiated wages in the private sector, however, prompted lawmakers to increase taxation on higher incomes, partly as a response to popular perceptions of the need for greater equity. The U-shaped marginal rate structure, already present in the earlier schedule, was preserved, perhaps on revenue grounds.

The taxation of personal income continues to be applied strictly on an individual basis. The new legislation retains the tax credit for wage earners having many dependents,36 which may be claimed by both working spouses, without adjustment for global family income. As the value of the credit (set at 30 percent of the tax due) rises with income, it provides an increasingly larger relief to high income taxpayers.

The taxation of self-employment income incorporates a negligible basic exemption (up to rub 5 per month), but has low marginal rates from 1.5 percent to 13 percent on monthly income up to rub 700. For incomes exceeding rub 700, the rates are the same as for wages, but rise continuously over 14 income brackets, or twice as many as those for the tax on wages, running counter to tax simplicity.37

The authorities’ avowed aim regarding personal taxation is to introduce within a few years a comprehensive personal income tax with the various rate schedules converging to a single rate structure, although some schedular elements may be preserved, especially in relation to capital income. Notwithstanding the progress this would represent in many respects, as compared with the current situation, the introduction of an annual declaration for wage earners who are currently subject to withholding would, at this stage, increase costs and administrative complexity without a significant increase in revenues.

d. Taxes on domestic sales of goods and services

Since the beginning of the 1930s, the turnover tax has been an integral part of the system of centrally fixed prices. It is levied at a single stage on the production of a few intermediate and most final goods (excluding domestic services and imports) and consists of the difference between retail and wholesale prices, minus a notional trade margin. More than four fifths of turnover tax revenue is generated from the sale of products for which the tax is simply the residual between administratively fixed retail and wholesale prices. For a minority of products—most petroleum derivatives, tobacco products, matches, and bread and other wheat products—the turnover tax is calculated at specific rates (i.e., a fixed amount per unit of the commodity). Finally, for a few goods produced under a local jurisdiction (e.g., agricultural inputs) or subject to local price regulations, the rates are ad valorem, ranging from 5 to 50 percent of the retail price net of a trade margin.38

Almost one half of the revenue from the turnover tax is raised in the food and beverages industry (Table III. 1.6), with the bulk provided by alcoholic beverages, mainly vodka. Estimates for 1989 indicate that on the average the turnover tax amounted to 27.5 percent of gross retail commodity sales; for alcoholic beverages, the tax revenue was equivalent to 82.4 percent of recorded sales.

Besides an unknown number of implicit rates (probably in the thousands), the turnover tax contains a large number of tax preferences. Some incentives are provided to encourage compliance. For instance, enterprises are allowed to retain 30 percent of the increase in turnover tax payments above the previous year’s level. Other preferences are granted for social purposes; for example, 30 percent of the increase in turnover tax can also be retained to provide social benefits to employees. The turnover tax has been dispensed with altogether for certain enterprises that keep wholesale markups below 20 percent.

Under the reform of June 1990, joint ventures and other private businesses were made liable to an ad valorem turnover tax, beginning July 1990.39 The base of the tax is defined as the retail price minus wholesale and retail margins, with rates ranging from 15 percent on unlisted goods to 90 percent on liquor. While the number of these rates (eight) is still too large, the definition of the base and the use of different rates for the same goods—depending on whether they are produced by joint ventures or by state enterprises—are likely to introduce serious distortions.

The authorities envisage the adoption over the medium term—at the earliest in 1993—of a general tax on the sales of goods and services, preferably of the value-added type. Initial steps towards that objective should be taken in the near future by transforming the present turnover tax into a fixed rate ad valorem tax, drastically simplifying its rate structure and broadening its base. Specifically, at the very outset, the turnover tax rate should be recalculated as a percentage of the price at the wholesale or production/import stage—without discounts for trade margins or other notional allowances. This initial recalculation into an explicit ad valorem rate need not be accompanied by any price adjustment, but would ensure in the transition period a certain degree of elasticity of the tax with respect to any price changes. Subsequently, the desirable progressive reduction in the number of rates (eventually to one or two only) would require a realignment of relative prices. Thereafter, the maintenance of the resulting fixed ad valorem tax rates would, of course, require that retail prices be adjusted to reflect changes in wholesale prices, as a precondition for the eventual transformation of the turnover tax into a general sales tax. The coverage of the tax should be progressively extended to encompass all domestic production and imports, while exempting exports. The shift from the present turnover tax toward a general sales tax should be accompanied by the introduction of excise duties—at relatively high rates—on selected “nonmerit” or luxury goods, such as cigarettes, distilled spirits, automobiles and a few other high price items.

e. Taxes on international trade

Traditionally, so-called valuta prices (foreign currency prices converted at the official exchange rate) have differed—often significantly—from domestic wholesale prices for traded goods. The difference between the valuta and domestic values for traded goods was largely offset by so-called price equalization taxes paid by trading enterprises to the budget or subsidies received from the budget.40 Part of the difference was also accounted for by customs duties and explicit import taxes levied on certain consumer goods. Import tax rates ranged up to over 2,000 percent. In recent years, the customs tariff has been based on the 1984 version of the CMEA Unified Classification System—a nomenclature consisting of only about 300 three-digit entries. In principle, duty rates are applied to the valuta value, with rates varying between zero and 70 percent, but with an average—on an unweighted basis—of only 3.5 percent. Raw materials were exempt from duty, while equipment was mostly exempt or subject to low rates. The higher rates were imposed on foodstuffs and consumer durables.

The authorities intend over time to adopt international trade practices, including the Harmonized System of the Customs Cooperation Council (CCC), and to join the GATT.41 As a step towards replacing quantitative controls and administrative allocation of foreign exchange with explicit taxes, a new tax regime for some exports and imports was created effective from January 1, 1991. Ad valorem taxes now apply to the main energy and raw material exports at rates ranging between 5-50 percent of the ruble value, converted at the new commercial exchange rate.42 The new import tax rate schedule covers about 200 items classified in 95 commodity groups under two separate columns depending on whether the goods are imported from the CMEA countries or from other origins;43 the CMEA rates are lower, except for citrus fruits and sugar. Effective November 1, 1990, when the new commercial exchange rate was set at rub 1.66 per U.S. dollar (three times the former official rate), import tax rates were reduced correspondingly, and now range between 10-630 percent.

As groundwork for trade liberalization, a new classification, in line with the Brussels Tariff Nomenclature (BTN), is under preparation to replace the CMEA classification. The new customs tariff is envisaged to cover up to 10,000 items with rates averaging 7-10 percent, under MFN treatment, and ranging up to 100 percent on a few goods. Semifinished goods bear lower rates and consumption goods the highest.

f. Taxes on natural resources

Since the USSR is well endowed with natural resources, the value of their extraction and sale constitutes an important potential tax base, which has not been fully tapped. Until recently the extraction of natural resources was taxed with some degree of discretion in the form of rental payments from the extraction enterprises to the budget. Although usually set as a fixed rate per unit of output,44 these payments were intended to capture profits which were derived from especially favorable natural, transportation, technical, and other economic conditions. The revenue system also included charges for water use and forest exploitation, which do not generate significant receipts.

The presidential guidelines contemplate an updating of the charges for water use and forestry and the taxation of land and natural resources, both to raise revenue and to encourage environmental protection. The budget envisages that in 1991 substantial additional revenue will be collected from rental payments on the use of natural resources.

g. Tax and customs administration

(1) Organization

To the extent that under central planning most revenues were transferred directly to the budget through debiting of enterprise accounts at Gosbank or its branches, tax administration weakened over time, culminating in the dismantling of the tax administration system in the 1960s. Since then, tax administration has been performed by the finance departments of the ministries of finance at various levels of government. The fact that these departments had a number of other responsibilities, mostly related to budget execution, and that tax officers were poorly rewarded, hindered the development of expertise in tax administration.

With the movement toward decentralization and market-oriented policies, the need arise for the establishment of specialized services to administer the existing taxes and those anticipated in connection with the process of economic reform. In January 1990, the USSR Council of Ministers created the State Tax Service (STS), which encompasses republic and local tax offices (Chart 3). To manage the system, the Main State Tax Inspectorate (MSTI) was installed on July 1, 1990 as a new department in the Ministry of Finance of the USSR, with jurisdiction over tax offices at all levels of government (Chart 4). The personnel of the STS, most of them former employees of finance ministries or departments at lower levels of governments, totaled 40,000 initially, and was supplemented by another 25,000 by the end of 1990. The authorities foresee the need to employ as many as 100,000 people when the STS is fully operative, possibly within one year.


(*) Whenever the city or rayon belongs to an autonomous republic, the corresponding tax inspectorate reports to the tax inspectorate of that republic’s ministry of finance. Otherwise the tax inspectorate reports to the tax inspectorate of the kray or oblast to which it belongs.


The very short time spent on the organization of the STS may explain the impractical configuration given to the organizational structure. The various departments are not organized along functional lines (technical, collection, information processing, auditing, etc.), but according to the taxes they are assigned to administer, and this structure is replicated at all levels of the organization. This structure is conducive to duplication of work, poor coordination, and higher costs.

(2) Procedures45

The “taxes on the population” are well established in the USSR and their collection on a withholding basis is fairly efficient. However, Soviet tax agencies have yet to develop basic skills in tax administration for an environment of unregulated prices and private activity. Although in principle the current network of services reaches quite a wide universe of taxpayers, its approach relies on procedures built on the assumption that all operations take place within the public sector. For instance, in the case of workers holding two jobs, the tax adjustment is made by one of the employers, not by the taxpayer or the tax office. Such an arrangement places on the enterprises the costs and responsibility for an activity which, in market-oriented economies, would be regarded as onerous for taxpayers and withholding agents alike.

In fact, the STS is far from prepared to handle a large number of taxpayers independent from the Government. Problems of tax evasion and tax fraud, which currently are not serious, will over time oblige the tax authorities to develop adequate enforcement mechanisms and techniques of desk and field audits. The setting up of independent accounting and auditing companies, an idea under examination by the authorities, could certainly improve the quality of accounting, but would not substitute for in-house audit and investigative capacity.

Finally, the resource base of the tax administration is still fragile. Most of the recently recruited staff lack skills in tax matters, and the improvement of the situation will be hampered, at least in the immediate future, by the lack of resources for in-house training. On the positive side, the recent doubling of wages paid to tax officers should help to attract and retain qualified staff, thus modifying the perception that jobs in the tax area are not sufficiently remunerative. Inadequate physical installations of tax offices are a major obstacle to efficient operation; this problem will become more acute as important tax reforms take place, requiring extensive education of taxpayers and more intensive contacts with tax offices. Current procedures for tax administration are based on manual control and paperwork. There are plans for the introduction of personal computers; the few now available are outdated and do not play an important role in tax administration. Modernization of routines and procedures will require not only adequate equipment but also the design of a system of information, linking processing to reporting and control, as well as a sizable investment in training.

Since the effectiveness of any tax system is limited by the ability of the tax administration to implement it, insufficient preparation both of the administrative apparatus and the taxpayers is likely to represent a major weakness of the recent tax reform. The design of a specific and effective program to strengthen tax administration would, however, need to await the definition of respective responsibilities of the union and subnational levels of government in the collection of tax revenues.

(3) Customs

Although the foreign trade organizations are still conducting most functions of processing, clearance and tariff collection for most imports, the Customs Department will be responsible increasingly for the collection of customs duties and the import and export taxes. The Customs Department is four years old, and still being set up. Currently there are 104 customhouses, operating in four regions. Further expansion depends on the stabilization of the relations between the union government and the various republics, as a number of republics seem to be intent on creating their own customs, and some (Ukraine, Belorussia) have reportedly already done so. A single customs service for the country, under a single customs code, would be necessary if agreement is reached for the preservation of an all-union market.

The authorities intend to expand rapidly the current manpower strength of the all-union customs service (some 9,000 persons), to reach as many as 20,000-25,000 officers when the setup is complete. The authorities have actively sought foreign assistance, and the CCC and the EC Commission have provided seminars and technical assistance, contributing to the preparation of new tariff classification and law. The organization and procedures largely draw on CCC conventions and recommendations.


a. Institutions

In the USSR, budget preparation, implementation, accounting, reporting, and audit involve a large number of institutions at various levels of government. The main participants in the budget process are: the ministries of finance at the union and republican levels, and finance departments at local levels; the councils of ministers of the union and each republic; the supreme soviets of the union and each republic; the local soviets of people’s deputies; Gosplan; Goskomstat; Gosbank, including 200 regional offices and more than 6,000 branches; Promstroibank and Vneshekonombank.

Traditionally, as the principal fiscal agent of the government, the USSR Ministry of Finance has played a key role in the budget process. In general, it has been responsible for carrying out the national economic plan and the government’s financial policies, as well as for supervising all financial operations of lower-level governments. After approval by the USSR Council of Ministers and enactment by the USSR Supreme Soviet of the budget, the Ministry of Finance monitors its implementation. The responsibilities of the republican ministries of finance, as well as their organizational structure, are very similar to those of the Ministry of Finance. At lower levels of government, these functions are assumed by finance departments, with a much simpler organizational structure.

Responsibility for accounting is exercised jointly by the ministries of finance or finance departments, at each level of government, and Goskomstat. The Ministry of Finance, through its Directorate for Accounting, is the authority in accounting practices and methods. Goskomstat has responsibility for preparing reports on the operations of budgetary institutions and state enterprises with regard to real variables (such as material stocks, employment, wages and salaries, and fixed assets).

Until 1987, Gosplan controlled virtually all major budgetary decisions; it was in charge of the preparation of the plan and in this capacity it was the essential link between the economic directives set by the USSR Council of Ministers and preparation of the state budget. Budgets of all levels of government were prepared following the directives of Gosplan, consistent with the targets and limits in the plan. After July 1987, Gosplan’s role in the budget process became less prominent. It began to issue estimates and suggestions instead of the earlier plan directives. Until July 1989, however, spending ministries continued to be rewarded according to the fulfillment of plan objectives. During this period, the Ministry of Finance has progressively displaced Gosplan in the formulation of the budget for enactment by the Supreme Soviet. For 1991, the Ministry has been responsible for the preparation of the draft union budget, while the ministries of finance of each republic assumed responsibility for preparing their respective draft budgets for legislative action at the republican level.

Gosbank, the government’s banker, and in some important respects also its fiscal and accounting agent—sharing the role of fiscal agent with the Ministry of Finance—has primary responsibility for intermediating all financial transactions involving domestic current operations in the state budget. As part of these functions, Gosbank acts as the depository of budget revenue collected at all levels of government, and maintains the government accounts. Promstroibank performs the same functions for financial transactions relating to investment operations in the budget. Vneshekonombank is in charge of all foreign transactions recorded in the budget.

Budget expenditures are actually undertaken by two kinds of spending units: directly by budgetary institutions, and indirectly by state enterprises, to the extent that expenditures of the latter are supported by transfers from the budget. Budgetary institutions carry out spending functions in the administrative, defense, social, cultural, and scientific areas. Altogether, 90 percent or more of their activities is financed with general budget revenue, while the remainder—mainly in the health, educational, and other cultural areas—is financed from own resources. By contrast, state enterprises are increasingly expected to operate with economic and financial autonomy and to generate profits. Nevertheless, several state enterprises continue to receive significant support from the government, especially for investment outlays, but also for certain (social, educational, and cultural) expenditures for their employees.

b. Budget preparation

Until 1987, the USSR state budget was an integral part of the consolidated financial plan for the economy, which included also the financial plans of extrabudgetary funds and state enterprises. Prepared jointly by Gosplan and the Ministry of Finance in a highly aggregated form, it was used to establish the financial consistency of the economic plan. A first draft of the state budget was derived on the basis of indicators contained in the preliminary draft of the plan elaborated by Gosplan. Gosplan was also responsible for ensuring the conformity of the budget with the plan, and for submitting the resulting draft budget with recommendations to the Council of Ministers. As noted, the role of Gosplan in budget preparation has been reduced while that of the ministries of finance has been progressively enhanced in recent years (Table III. 1.7).

Until recently, due to the consolidated nature of the state budget, two budgets were prepared at each level of government (with the exception of the lowest one): the budget of the government at that level and the consolidated budget of all lower-level governments. Each budget was scrutinized and approved by administrative and legislative organs at different levels of government. For instance, the budget of a local government was examined not only by its local finance department, but also by the ministry of finance of its union republic. Similarly, each local budget needed approval by the local soviet of people’s deputies and by the republic’s supreme soviet. An important feature of the budget preparation process has been the incremental nature of the annual budget. Budget instructions sent by the USSR Ministry of Finance to various levels of government and subsequent negotiations required that estimates for the coming year be compared to those of the current year. Some of the features of budget preparation, particularly insofar as relations between the union and union republics are concerned, have begun to break down as republican ministries of finance have acquired considerable independence in formulating their own 1991 budgets.

The enhanced role of the Ministry of Finance and of the ministries of finance at lower levels of government in the budget preparation process has not been accompanied by desirable changes in complementary areas. In an increasingly market oriented setting, macroeconomic analysis for revenue and expenditure forecasting should be developed and applied on a routine basis by the Ministry of Finance, and within their respective territorial context, by the republican ministries of finance. In addition, a reorganization of the Ministry of Finance may be appropriate, especially involving a restructuring of the Main Budget Directorate along functional lines which would replace the division between the so-called productive and nonproductive sectors (Charts 5 and 6), and assign the responsibility to the Directorate for the preparation of both the current and investment budgets. But probably the most difficult, yet necessary, task ahead will be to install a mechanism for technical coordination of budget preparation among various levels of government—in particular between union and republican ministries of finance—within an agreed macroeconomic framework,46 in place of the relatively weak ad hoc intergovernmental contacts that seem to prevail at present.



c. Budget implementation

Normally, the implementation of the state budget begins before its formal enactment by the USSR Supreme Soviet. Such a procedure reflects the necessity of transmitting information through five levels of government. In principle, the Ministry of Finance would complete preparation of the draft budget by the first week of October, so as to permit timely communication of the necessary information to all levels of government. After receiving this information, the ministries of finance of republics would break down their approved consolidated budgets into the republican and local budgets. A similar process would take place at lower levels of government. Thus, by the time the state budget was approved by the Supreme Soviet, detailed budgets at each level of government would be ready for implementation. It is unclear how this process has been evolving for the 1991 budgets, given the difficulties in reaching agreement between the union and the republics on their respective budgets. The following subsections describe procedures in effect through 1990.

(1) The budget schedule

At each level of government, the detailed budget is the basic input for preparing the budget schedule, namely, the operational version of the budget. The budget schedule shows not only the full detail of the budget classification, but also the quarterly apportionment of expenditures in the course of the fiscal year. It is, therefore, the principal instrument of budget execution and monitoring. The budget schedule is usually prepared in a very short period of time and is made available to spending ministries in February. At each government level, the budget schedule is subject to approval by the legislative organ of that level.

(2) Expenditure authorizations

Each spending unit, regardless of size, has an account with a Gosbank branch. At the beginning of each year, a line of credit is opened for the spending unit within the limits of the budget appropriation for that unit. In most cases, these credits can be regarded simply as expenditure authorizations. However, credit is in fact granted by each branch of Gosbank if at that branch, in any period, there are no revenue accounts or if deposits are insufficient for financing expenditures. For the state budget as a whole, Gosbank is in a net creditor position when revenues deposited therein are less than disbursements effected on account of the budget. To the extent that receipts in the revenue account may offset expenditures, budgetary credits or expenditure authorizations are not recorded as assets on the balance sheet of Gosbank, but in single-entry accounts. Only when there is genuine financing of budget expenditures will these operations be reflected in the monetary accounts. Before July 1990, the consolidation of budget operations in the Gosbank’s accounts took place once a year. Since then, subject to technical feasibility, the authorities intend to undertake a monthly consolidation.

As the budget schedule contains quarterly apportionments, expenditure authorizations are granted for each quarter.47 Expenditures are authorized by so-called credit administrators.48 Each spending ministry has a chief credit administrator and subordinated credit administrators to whom he may delegate parts of his responsibilities, which may in part be delegated further to a lower level administrator. Following this mechanism, the Ministry of Finance authorizes spending only at the top level. The allocation of credits or expenditure authorizations to other budgetary institutions is accomplished through the above mechanism of delegation of expenditure administration.

(3) Payments

As each spending unit has its own bank account, the bulk of payments, other than for salaries and wages, is effected through bank transfers. One method consists of a payment request sent by the supplier of goods and services to his bank branch for collection; after confirmation of the transaction by the payer, the payer’s branch makes the necessary payment. Another method involves a payment authorization, that is, a document prepared by the spending unit authorizing its bank branch to make a noncash transfer of funds to the payee’s account. Although available for any kind of payment, it is mostly used for payments where, due to the nature of the transaction (e.g., payment for invoiced deliveries, prepayment for delivery of goods and services, debt amortization, payment of insurance premia), a payment request is not expected. Other less widely used methods of noncash payments are letters of credit and settlement checks. Cash payments are strictly limited to wages and salaries.

(4) Expenditure control

The Ministry of Finance monitors the realization of revenues and expenditures on a continuous basis, and if necessary, it restricts expenditure authorizations. Specifically, expenditure control is exercised through quarterly release of funds, credit or expenditure authorizations, and exceptional expenditure restriction measures. The quarterly release of funds ensures that they are made available according to an appropriate expenditure pattern and with due regard to the availability of funds. Credit or expenditure authorizations granted to each spending unit, through Gosbank, sets an automatic control under the limit of budget appropriations. Although control is effected through the services of the Gosbank network, any decision as to the timing or the level of authorized expenditure remains with the Ministry of Finance.

In case of a revenue shortfall, the Ministry of Finance has a limited number of options for restraining expenditures. Modification of the approved budget is not an often used option, since it requires a decision of the Council of Ministers. Another technique, which can be used at the discretion of the Ministry of Finance, involves freezing expenditure authorizations for selected ministries. This option has been used frequently because the budget classification permits identification of ministries that are lagging behind in revenue collection and thus can be easily selected for expenditure restriction. Although in the past such ministries were not always singled out for restriction, it is intended that from 1991 onward expenditure authorizations for these ministries be automatically restricted until revenue collections catch up with targets.

(5) Cash management

At present, spending units are not concerned with the management of financial resources mainly because short-term investment of cash resources is not rewarded by interest income, and the cost of borrowing is not borne by the spending units. Clearly, such behavior is incompatible with the increasing market orientation of the economy which would imply, inter alia, an active interest rate policy. Gosbank’s responsibility for budget revenue and expenditure accounting—inherited from the period when Gosbank was effectively an integral part of the Ministry of Finance—continues to impede the development of a cash management capacity in the Ministry. Therefore, the fiscal and accounting functions of Gosbank, Promstroibank, and Vneshekonombank should be shifted to the Ministry of Finance.

d. Accounting and financial reporting

The authority of the Ministry of Finance over general accounting practices extends in principle to lower-level governments. However, detailed rules and regulations are developed at the republic level with due regard for local needs, and are subject to approval by the council of ministers of the republic. At the union and republican budget levels, each spending ministry has its own accounting service. Accounting for local budgetary institutions is provided by 66,000 local offices of the Central Accounting Service.

(1) Classification of accounts

The standard classification of double-entry accounts, introduced in the early 1960s, provides a comprehensive coverage of budgetary institutions and of types of operations—that is, operations financed with budgetary as well as nonbudgetary resources. Although accounts are usually aggregated at three levels (summary or first-order accounts, second-order accounts, and analytical or detailed accounts), it appears that for budgetary institutions no analytic or detailed accounts are provided. Small budgetary institutions having a limited volume of transactions tend to use single-entry accounts.

(2) Centralization of accounting data

Accounting data are centralized through the network of Gosbank’s regional offices and branches. Information collected at the local level is first centralized at the oblast level, then at the republic level, before being sent to Gosbank’s head office. Reporting is by telex or cable, as the system is not yet linked with a computer network. In order not to overload the information system, centralization is carried out at a high level of aggregation. For the union and republican budgets, the preparation of consolidated monthly budget balances, showing only total revenues and total expenditures, requires about eight to ten days. At the end of the year a provisional annual balance is prepared in five days. Revenue and expenditure operations which cannot be classified in such a short time period are accounted for in a transit account, and then classified in the final balance prepared before the end of January. Surplus funds at a given level of government are not necessarily transferred to a higher level. Subject to prior authorization by the Council of Ministers or the appropriate executive authority at the local level, they may be used for financing an eventual deficit during the following year.

(3) Reporting

Reporting is restricted to external reports, that is, excluding operational reports intended for internal use. External reports of primary budgetary units are divided into statistical and accounting reports. Statistical reports are primarily concerned with plan-fulfillment control. Accounting reports are used for the control of budget operations or enterprise financial flows.

Although reports are compiled quarterly, no report is prepared for the first quarter of the year because results for that quarter are considered unreliable. In some cases, cumulative data is incorporated into quarterly reports so that the report prepared at the end of December will become the annual report. A complete annual report, prepared at a later date, will also include statistical data obtained from extra accounting sources. Reports prepared at organizational levels lower than that of a republic follow simplified procedures. Accounting reports of primary units are submitted to the higher-level government, where they are consolidated and sent to the next higher-level organization for further consolidation. The USSR Ministry of Finance prepares a union-wide consolidated annual report and submits it to the Council of Ministers and the Supreme Soviet.

e. Control and audit

The control and audit functions are entrusted to the ministries of finance at the union and republican levels and to the appropriate financial authorities at the lower levels of government. At all levels of government, there are about 9,000 auditors who perform work in three different areas. First, they inspect and audit financial documents in ministries and other administrative units at their respective levels. Second, they audit the operation of the finance ministry or financial administration immediately below their own level, paying particular attention to budget implementation. Third, they audit the operations of Gosbank pertaining to budget execution. The extent to which these functions (especially the third one) will continue to be carried out in the future is unclear.

The frequency of audit varies according to the economic activity and the importance of financial operations carried out by a given entity. For instance, state enterprises are to be audited once a year and budgetary institutions once every two years. It appears, however, that the prescribed frequency is not observed at present because of the limited number of auditors, or because audits of agencies that do not meet their budgetary obligations are thorough and time-consuming.49

Controller-auditors are authorized to: inspect economic and monetary transactions, all supporting documents, including books of account, cash on hand and other assets; take inventories; seal cash on hand, warehouses, stores and archives; obtain all bank documents connected with financial operations of any enterprise or institution where the operations are conducted; obtain all bank documents of enterprises doing business with the enterprise under investigation; obtain from other enterprises and institutions documents concerning transactions between them and the enterprise or institution under investigation; and propose and/or adopt measures to eliminate shortcomings and to stop deliberate violation of financial discipline.

Audit reports prepared on the activities of specific state enterprises and budgetary institutions are submitted to the corresponding branch ministry and the Ministry of Finance. A general report pertaining to a given sector of the economy is submitted to the Council of Ministers. If there is evidence of willful wrongdoing, the report will be automatically submitted to the judiciary.


The proportion of government expenditure to aggregate income or output does not fully reflect the overwhelming presence of the public sector in the Soviet economy. Indeed, state budget outlays amount to about one half of GDP, which is broadly comparable to the corresponding share in a number of European countries. More informative is the composition of outlays. Subsidies and social security transfers are the largest components, accounting respectively for one fourth and nearly one fifth of global budget expenditure in 1990. Recorded expenditures on defense, justice, and internal security represent about one sixth of the total. Outside the state budget, cross subsidies have been provided within the state enterprise sector through the centralized funds of the branch ministries; in 1989, gross flows through these funds were equivalent to nearly 5½ percent of GDP (Table J.4, Appendix II-1). Similarly, quasi-fiscal operations of official financial institutions, in the form of implicitly subsidized credit to government, appear to be substantial. Interest payments recorded in the state budget grossly understate the true cost of government borrowing.

This section focuses on three areas of special interest in the transition to a market economy, namely, expenditure on defense, producer and consumer subsidies, and social security.

a. Defense

(1) Definition and measurement

Defense expenditure in 1989, as recorded in the state budget, amounted to 8 percent of GDP, and was expected to fall to 7.4 percent of GDP in 1990.50 Of this amount, two thirds consists of material procurement, R&D and construction, while one third represents personnel costs, including wages and pensions (Table III. 1.8). While these data are not comparable to those of previous years,51 questions arise as to the extent to which the magnitudes currently presented fully reflect Soviet defense expenditures. First, it can be argued that state budget coverage of defense is narrower than that of the U.N. classification of military expenditures. Elements of civilian R & D (in particular, on the space program) and of internal security spending may be in many respects indistinguishable from defense-related items. If all R & D and internal security were to be defined as defense outlays, defense spending in 1990 would amount to rub 92 billion (9.6 percent of GDP). While for budgetary analysis it is important that all defense be appropriately categorized, it should be noted that application of the U.N. classification has remained a grey area for many U.N. member countries.52

A second question concerns the possible substantial underpricing of defense goods and activities. Weapon procurement prices are apparently out of line with other durables because prices of raw materials, land use, and other inputs are set very low, or because defense industries are permitted to operate at low or negative profit margins.53 Furthermore, military pay, while in some respects higher than in other sectors, is on average very low, reflecting the widespread use of conscripts. In addition, state enterprises engaged in civilian production may be providing part of their output (e.g., uniforms, shoes) free of charge, and thus cross-subsidizing the military. Correcting for these distortions, estimates of the defense burden of as high as rub 200 billion have been made; yet any estimate of this burden is subject to considerable controversy even among non-Soviet analysts.

From the standpoint of the financial impact of the budget, these arguments would appear to have limited relevance. For instance, it would be meaningless to include in the state budget the imputation of a market wage for conscripts, to the extent the government does not need to finance such imputed costs.54 Thus, the presentation of defense expenditure in the state budget seems to be the correct basis for financial management purposes, and adjustments to the budget because of price distortions should take place only for explicit cross subsidies.55

Besides possible cross-subsidization throughout the enterprise sector in general, defense-related enterprises and their suppliers may be allowed to operate on low or negative profit margins, with subsidies from non-defense enterprises to cover these losses. However, neither these cross subsidies nor direct budget subsidies to defense-related enterprises can be identified in the state budget as presented.56

(2) Policy prospects

In his December 1988 U.N. speech, President Gorbachev announced cuts in defense spending to begin in January 1989. Military personnel were to be cut by 500,000, overall outlays to drop by 14.2 percent, and procurement to be reduced 19.5 percent. It has generally been understood that these cuts were to take place in real terms, by the end of 1991, on the base of 1988 spending.57 However, it is not clear whether the 39 percent nominal increase in defense allocations contained in the draft budget for 1991 is in line with the targeted cuts.58

The envisaged conversion of military industry into civilian production, and repatriation of Soviet troops from Central and Eastern Europe, complicate any discussion of the defense budget for 1991 and beyond. Their combined impact on the 1991 fiscal deficit has been initially anticipated at around rub 9 billion. Production in the defense complex has always included output of civilian goods, a share estimated at around 50 percent in 1990. The target of the conversion program is to raise that share to 60 percent or above by the mid-1990s.59 According to preliminary official views, nearly rub 8 billion (in end-1990 prices) would be allocated to the conversion program. Clearly, the cost of the conversion program will depend on the nature of the projects involved. Conversion has been targeted to ten priority areas: food, consumer goods, light industry, electronics, computers, medical equipment, communications, civil aircraft, shipbuilding, trade and catering. However, domestic pressures to avoid a shift from high- to low-tech industry appear to have retarded restructuring in some sectors.

Insufficient information is available on either the timing or cost of troop withdrawal. The German aid package, intended to finance some or all of the withdrawal, is to amount to rub 18 billion over the period 1990-94, with some rub 5 billion to be disbursed in 1991.60 The net adverse impact on the budget deficit would be reduced insofar as rub 4 billion of the assistance comes in the form of a grant, covering troop withdrawal, transportation, housing and manpower retraining.

b. Subsidies

In an economy where practically all commodity and factor prices are administered, the economic concepts of subsidies and taxes can become so broad as almost to lose their meaning, insofar as administered prices, wages, interest rates, and the exchange rate all deviate from market-clearing values. Similarly, there are serious difficulties in measuring the resulting distortions, as there are no market benchmarks against which equilibrium prices or economic costs can be constructed. Explicit subsidies, measured by money transfers (or tax preferences) from government to enterprises or consumers, provide a poor approximation of total price support in the economy. And the measurement even of explicit subsidies is incomplete as it is limited to those financed from the state budget and from certain extrabudgetary operations, excluding cross subsidies among enterprises through the centralized funds controlled by branch ministries, and subsidized transactions (partly through preferential interest rates) in the financial sector. However, as the economy moves toward the market, an increasingly clear subsidy accounting should emerge.

Budgetary subsidies in the 1990 plan amounted to around 13 percent of GDP (Table III. 1.9). The changes in procurement prices in 1990 not foreseen in the plan suggested that the 1990 subsidy outturn would be higher still.61 Four fifths of budgetary subsidies go to agriculture; nearly two thirds of agricultural subsidies are used to support basic food prices, with most of the remainder provided directly to farmers. Subsidies for milk and meat products alone account for almost two fifths of budgetary subsidies. However, food subsidy rates by commodity are very dispersed. The average subsidy rate (measured in reference to retail price) is estimated at around 65 percent; as of 1988, meat was subsidized by at least 230 percent, butter 240 percent, and milk 170 percent,62 and since then subsidy rates have risen.

By contrast, subsidies to heavy industry (for which typically the price structure is more consistent with costs than for goods where social considerations are dominant), amount to some 7 percent of budgetary subsidies, and four fifths of these are to the coal industry, for which the subsidy has risen markedly over the last two years. Other domestic subsidies for services, mainly housing and culture, have remained relatively small.63 Around 8 percent of budgetary subsidies support foreign trade and industries, such as tourism, that use foreign exchange intensively. These subsidies, which are largely related to exports, were expected to fall in connection with the November 1990 devaluation.

Gross budget figures mask some small implicit subsidies (that for children’s clothes being the most significant), financed by tax offsets or outside the budget. Extrabudgetary agricultural price support administered by Gosbank, which supplements the budgetary allocation for essential commodities, totaled rub 9.3 billion in 1989 but was estimated to drop to rub 4.4 in 1990. The authorities planned to raise agricultural procurement prices on average by about 32 percent from the beginning of 1991 (for grain and meat already in the second half of 1990), and industrial wholesale prices by 50-60 percent. Unless a comparable retail price increase takes place, budget subsidies—as price differentials widen and profit margins remain unchanged—are estimated to rise by 50 percent in 1991.64

While the containment of subsidies is recognized as a key component of any reform effort, subsidy growth has become so rapid as to create a short-term dilemma for policymakers. If subsidies are removed, retail prices will have to move upwards significantly, with a disproportionate adjustment falling on basic foods whose subsidy rates are high. If they are maintained, however, the fiscal deficit is likely to require inflationary financing. In principle, the presidential guidelines envisage a gradual dismantling of subsidies, along with at least partial income compensation to the population. Indeed, the phaseout of price subsidies, as well as industrial restructuring, can be discussed only in the context of social security reform.

c. Social security

Social security reform is in many ways at the center of the economic and social policy agenda. Besides addressing the need to restore some of the loss in real benefits that resulted from accelerating rates of inflation, the reform is crucial to a successful transition to a market economy. Changes are needed, for instance, to avoid a future systematic decline in real (and relative) benefits as wages and prices rise, to enhance the mobility of labor, and to increase the tax-benefit linkage that would confer transparency on the social security system. Of paramount importance is the need to implement an unemployment compensation scheme designed as a catalyst to a more efficient allocation of resources in the economy. The often overly tight dependency on specific occupations for eligibility for various social insurance allowances also should to be reconsidered in the move toward a market economy.

Accordingly, 1990 witnessed adoption of a broad reform of public pensions, modification of existing allowances and the introduction of some new ones, and a major restructuring of the financing of social security. According to the draft Employment Law approved by the Supreme Soviet in October 1990, an unemployment compensation scheme was to be introduced beginning in 1991. It was also anticipated that some form of compensation of low-income persons for the effect of the much-needed price adjustments would be adopted as an integral part of economic reform.

(1) The existing system65

Social security in the USSR is a pay-as-you-go scheme which provides old-age, disability and survivors’ pensions to workers, self-employed and state farm workers, and sick pay, maternity benefits and family allowances. More than two thirds of expenditures is for pensions (72 percent in 1990), with sick pay representing the largest of the allowances (Table III.1.10).66 The historically large contribution of general revenues to the financing of social security is also evident.67 Social security contributions—all from employers—varied across enterprises from 4 percent to 14 percent of total wages, in part depending on the degree of hardship associated with the location and nature of the employment. In 1989, the average payroll tax rate for the system as a whole was 9 percent, and was expected to increase to 12 percent in 1990.

Table III.1.10.USSR: Social Security Operations, 1985-90(In billions of rubles; in percent of GDP in parentheses)


From the union budget54.459.161.567.6
Social insurance contributions25.426.528.
General revenue29.032.633.437.5
From budgets of union republics4.
Other revenue2.
Old-age, disability and
survivors’ pensions45.049.351.754.958.665.6
Allowances14.414.615.216.417.824.0 1
Of which:
Sick pay7.
Family allowances3.
Other expenditure1.
Source: Ministry of Finance; and estimates.

Disaggregated data for some of the allowances (temporary disability, maternity and childbirth, and sanitaria visits) are not available for 1990 and the allocation shown in this column has been made using the shares of each of these in the previous year.

Separate data were not available for these benefits for collective farmworkers, and therefore the figure for this year should be considered with caution.

Source: Ministry of Finance; and estimates.

Disaggregated data for some of the allowances (temporary disability, maternity and childbirth, and sanitaria visits) are not available for 1990 and the allocation shown in this column has been made using the shares of each of these in the previous year.

Separate data were not available for these benefits for collective farmworkers, and therefore the figure for this year should be considered with caution.

(2) Recent and prospective reforms

The pension reform enacted in May 1990 was aimed explicitly at increasing the share of national income allocated to pensioners, both by raising benefits and by expanding eligibility. Significantly, beginning in 1991, the government is to provide a basic social pension to retirees without any work history. This represents a notable departure from the traditional employment-benefit linkage which has characterized social security in the USSR.

The reform explicitly raises pension benefits on a permanent basis via an increase in the replacement rate (defined as the percentage of average past earnings replaced by the pension following retirement) from 50 percent to 55 percent; by working beyond the minimum required time, the rate can be raised to 75 percent. The reform appropriately enhances the actuarial basis of the pension by lengthening the effective period to 15 years from 10 years over which the 5 consecutive years with the highest earnings are averaged;68 however, a longer period could be justified. The monthly benefit is to be equal at least to the minimum wage, and is subject to a maximum of five times the latter, resulting in a somewhat progressive benefit formula.

The statutory retirement age, 55 for women and 60 for men, low in comparison with those of most OECD countries, is left unchanged. This and other eligibility requirements warrant review in the near future in light of the eventual aging of the Soviet population (see Appendix III. 1-3). However, two features of the new pension law will operate in opposite ways to influence incentives to retire and, therefore, the effective retirement age. While higher benefits provide an inducement to retire, removal of the ceiling on post-retirement earnings provides an incentive to remain in the labor force. It is, therefore, difficult to ascertain the net effect of these changes on the labor force activity of the elderly.

Perhaps the most significant provision introduced by the pension reform is the full indexation of benefits to changes in the cost of living, beginning in January 1992, aimed at both preserving the purchasing power of retirees and assuring greater stability of the overall replacement rate (or in the relative incomes of pensioners and workers). If the minimum wage relative to the average wage remains constant, then the earnings base will effectively also be indexed. Although the introduction of automatic indexation is crucial for limiting the decline in the real incomes of pensioners in the future, such a measure must be implemented in close concert with wage policies. In effect, indexation of pensions but not of wages might over time lead to increases in the average replacement rate beyond those explicitly sought in the reform. With perhaps the exception of very low-income pensioners, there is little justification for insulating fully the population of retirees from the real income changes needed to restore equilibrium to the Soviet economy.

Eligibility for full sick pay has been further broadened to all workers regardless of work affiliation or trade union membership. During 1990, a number of measures were adopted which aim to improve the size and scope of family allowances. First, a grant for each birth equal to three times the minimum wage (currently rub 70 per month) replaces the birth grant that has been provided heretofore, which ranged from rub 50 to rub 250 per child. Second, the previously available allowance for raising children to age one is to be extended to age one and a half, and is to be raised to 100 percent of the minimum wage for working mothers and 50 percent for nonworking mothers. Third, a monthly allowance equal to 50 percent of the minimum wage is to be paid for each child age one and a half to age six in families in which the family income is less than twice the minimum wage; and for each child of single mothers until the child reaches 16 years of age. Fourth, an allowance equal to the minimum wage is to be paid for each child of military personnel serving fixed tours of duty, as well as to foster children under age 16.69

A draft law instituting an unemployment insurance scheme has been approved on a first reading in the USSR Supreme Soviet. Under this law, unemployment compensation would be normally provided for up to 26 weeks, and up to 39 weeks for workers of pre-retirement age. During this time, the beneficiary will be required to search for a job commensurate with his or her experience and skill level. The program will provide tax exempt benefits equal to 50 percent of the wages (excluding bonus payments) earned by an unemployed worker at his last job, or the minimum wage, whichever is greater. In addition to unemployment compensation, the program would provide public works jobs as well, at not less than half the wage earned in the previous employment or the minimum wage.

An area of considerable uncertainty at the current stage of reform is the scope of income protection and the manner in which it would be administered, both in terms of new social assistance programs and for indexation of existing social security benefits. On the one hand, the presidential guidelines call for the establishment in 1991 of an index of a consumer basket, composed of selected essential goods and eventually to be broadened to include other goods, and adjustment of most social security benefits by changes in this index;70 wage and salary increases would be limited to no more than 70 percent of the rise in the cost of the minimum consumer budget. At the same time, the guidelines envisage maintenance of relatively low fixed prices on essential goods during the transition. Moreover, the guidelines also explicitly reject the idea of extending direct material assistance and support to households, except in special cases.

Three important objectives should guide the design of an income protection scheme.71 First, to maximize its cost effectiveness, the program should be targeted as much as possible to the households in need.72 The whole population should not and cannot be compensated for price increases. Second, the removal of consumer subsidies should not be offset by the increased compensation of the needy. Thus, besides the welfare gains due to the removal of distortions, the scheme can be expected to yield net budgetary savings. A third objective must be to avoid using schemes that would perpetuate or compound the existing distortions, except during brief emergency situations.

A major additional goal of social security reform has been to move its financing to an extrabudgetary basis, establishing a greater degree of transparency in the tax-transfer nature of the program. Two off-budget funds have been established: the Pension Fund, for all pension, maternity and child-rearing support payments, and the Social Security Fund, for temporary disability benefits, prenatal assistance, childbirth payments, and death benefits. Under the reform law, union republics are responsible for benefits to single mothers and the children in poor families, as well as the operation of homes for the elderly and the administration of local social security offices. The employer’s and employee’s pay-as-you-go contribution rates have been set initially at 26 percent and 1 percent of wages, respectively, beginning January 1, 1991. Thus, the restructuring of social security financing creates a closer linkage between benefits and contributions because of the elimination of the dependence on general revenue and the introduction of the employee’s contribution. However, the phase-in of higher pension benefits over the period to 1995 will inevitably require an increase in the employer’s contribution rate to 37 percent; the rate may have to be raised even higher when the effects of potentially higher unemployment than currently officially expected are taken into account.73

It is intended that unemployment compensation be financed through an additional 1 percent payroll tax on employers earmarked for the newly-established Employment Fund. However, the benefit provisions are likely to require a tax rate increase, or recourse to general government revenue. If, for instance, the current minimum wage of rub 70 per month were (hypothetically) paid to each unemployed worker for 26 weeks, benefits could be provided to about 10 million unemployed workers (or somewhat in excess of the official unemployment estimates for the first year of the transition, which range from 3 to 8 million) with a 1 percent payroll tax. As the average unemployment benefit is likely to exceed the minimum wage, however, the 1 percent tax rate could well be inadequate to cover the total cost of unemployment compensation.74

(3) Assessment and outlook

Social security reform should be viewed in the broader context of the overall reform of the economic system, with an eye on the longer run. In particular, the Soviet population is set to undergo a gradual ageing, as the old-age dependency rate increases over time during the first quarter of the next century. For instance, the percentage of the population age 65 and older could rise from 9.4 percent in 1990 to 16.9 percent in 2025, a rise broadly comparable to that anticipated in most OECD countries. The retirement policies put in place today therefore have implications for the budgetary pressures which future demographic conditions will create. Although the somewhat lower life expectancy in the USSR than in other developed countries can possibly justify correspondingly lower retirement ages, improved economic conditions that would follow the move to a free market would weaken this argument.

The greater risk, however, rests with the near and medium term. First, high rates of unemployment during the transition could noticeably reduce the contributory base for financing social security transfers. The induced higher payroll tax rates could in turn seriously harm the dynamism of the nascent private sector.75 Second, while compensation to contain the hardship on the poor population should be an essential part of any transition program, protection of the large majority of the population from the adverse effects of inflation is not feasible economically.


For further details on republican and national issues, see Appendix II-4.


For instance, the legal status of Leningrad and Moscow is comparable in many respects to that of a union republic.


The “lottery loans” (literally translated from Russian) appear to function as premium bonds.


Law on the Fundamentals of the Economic Relations of the USSR and the Union and Autonomous Republics, of April 10, 1990. Most principles affecting fiscal relations were further incorporated in the Decree on the Delimitation of Powers Between the USSR and the Subjects of the Federation, of April 26, 1990.


These areas include elaboration of forecasts—formally replacing the plan—of national social and economic developments; formulation and execution of union programs; implementation of general pricing policy; authority over the financial and credit system, including money in circulation; establishment of reserve, insurance, and other funds; determination of environmental protection and use of natural resources; management of transportation, communication, defense, space programs, energy and power systems, and union-owned property; coordination of the republics’ activities regarding investment and depreciation policies, science, technology, employment, migration, education, health care and culture; extension of grants and loans to foreign governments, and contracting credits from abroad; and determination of the minimum wage, pensions and other social security benefits.


Other relevant republic responsibilities include: possession and disposal of natural resources in their own interest and in the interest of the USSR; regulation of economic activity and social development on their territory; participation in the formulation and implementation of union decisions on economic development; regulation of investment activity, and in particular, construction, on their territory; control of prices on the basis of union pricing policy; participation in the control over money in circulation and direction of the activities of republic-based banks; and decisions regarding social development, employment, income regulation (including minimum wage), pensions, and other social security benefits. In each of these areas, the republics’ sphere of influence is narrowly circumscribed by the overriding USSR laws and regulations.


The emphasis on joint policymaking can be found also in the draft Union Treaty, elaborated by the central authorities in November 1990.


In turn, the members of the Federation Council are heads of the union republic governments, chaired by the President of the USSR. The executive powers of the Council have been substantially strengthened following the session of the USSR Supreme Soviet held on November 17, 1990.


The sharing of revenue and outlays between the republic and local jurisdictions depends in part on administrative considerations. International experience suggests that local (municipal, county, etc.) governments are in a relatively better position to collect taxes on real estate, as well as user fees, and have an advantage in investing in, and operating, local infrastructure projects, up to secondary school facilities, and in providing certain health care services and social assistance.


Reportedly, consumers and producers are already engaged in arbitrage of products subsidized at different rates (e.g., meat in certain Baltic republics).


International experience in federal tax structures reveals that in an open economic space it is necessary to introduce automatic border tax adjustments, coupled with administrative mechanisms, to offset existing differentials. For instance, in the European Community, a number of enforcement techniques have been considered (clearing houses, bonded warehouses) to affect the transfer of domestic indirect tax revenue collected on imports between trading partner countries. By contrast, in the United States, the lack of such a mechanism limits sales tax rate differentials across states. Analogously, in the area of company income taxation, to neutralize the effect of tax rate differentials on enterprises operating through affiliates, it is necessary to provide credits for taxes paid under other jurisdictions. Alternatively, as practiced in the United States, a multistate corporation’s state tax base is determined by somewhat arbitrary apportionment rules (based on assets, sales, and/or work force). In Germany, the Länder choose to tax corporations at the location of the head office, automatically limiting tax rate differentials.


By contrast, the Shatalin reform plan envisaged upward transfers from the republics to finance union budget expenditures. Under this approach, transfers would be based on each republic’s GDP or per capita GDP, and the republics could exercise considerable control over the union budget by determining the overall magnitude and timing of the transfers.


The Shatalin reform program essentially ruled out central bank financing of republic or local budget deficits.


By the same token, any drawdown of local government deposits with the banks should be consistent with any overall limits on net domestic bank credit to the consolidated budget and extrabudgetary funds.


New borrowing should be serviced by the debtor government, as against the present outstanding government liabilities or future debt contracted by the union, which are to be financed at the union level.


During the course of the New Economic Policy more than 60 kinds of taxes were introduced, including the personal income tax (1922). Most of these taxes disappeared in 1930, being replaced by the present turnover tax and system of payments of enterprise profits.


See Chapters III.4 and IV.3 for details.


Although the tax base consists of wage income, the tax is deemed to be an enterprise liability in the sense that individuals or households are, in practice, unaware of the tax.


The system (a form of financial autonomy) was adopted in 1987 by firms belonging to five ministries. In 1988 it was extended to an additional 20 ministries, and in 1989 to all enterprises.


The magnitude of the centralized fund operations in the period 1985-89 is shown in Appendix II-1, Table J.4.


Other authorized allocations included the enterprise’s allocations to the fund for the development of production and science and technology; a reserve for interest payments on bank loans; deductions to the social consumption fund, to provide meals, medical care, and other benefits to workers; the material incentive fund, from which various premia and bonuses were paid; and allocations to the centralized production development fund.


Transfers to the budget are estimated to have declined from 50-60 percent of profits before the law was adopted to 35-42 percent, while payments to centralized funds were reduced from 30-40 percent of profits to less than 10 percent.


Decree of the USSR Council of Ministers of January 13, 1987, Section IV. See also Regulation of the USSR Ministry of Finance No. 124, of May 4, 1987.


Decree of the CPSU and the USSR Council of Ministers No. 1074, of September 17, 1987. The USSR Ministry of Finance set the corresponding regulation through Executive Order No. 226, of November 30, 1987.


Decree of the Presidium of the USSR Supreme Soviet of January 13, 1987.


Law on Taxes on Enterprises, Associations, and Organizations, of June 14, 1990. The law applied as of July 1, 1990 to joint ventures with a foreign equity participation exceeding 30 percent.


In late 1990, the elimination of centralized funds and most branch ministries by 1991 was envisaged. However, the draft state budget for 1991 included a tax on depreciation allowances and a one-time levy on the revaluation of inventories earmarked for newly created stabilization funds.


In principle, upon full repatriation of profits abroad, the Soviet tax burden would total 40.5 percent of profits.


For example, the deduction of repayment of loans used to finance centralized state investment, depreciation on the basis of the criteria set out in a firm’s statute, a tax credit on the rental paid to state enterprises on goods made available in the process of restructuring, a tax credit on the interest on long-term bank debt of joint ventures, and a tax credit on the expenses made by joint ventures on account of scientific research and experimental design work.


The system of advance payments is described in Appendix III. 1-1.


For details, see Appendix III. 1-1. For a discussion of this tax scheme in the light of incomes policy considerations, see Chapter IV.6.


Income from abroad is taxed, but a foreign income tax credit is provided within the limits of Soviet law.


Starting in 1991, this tax will not be levied on married women; in the following year married men will be exempted, and in 1993 the tax (by then levied only on unmarried men) will be eliminated.


In this income interval, the average tax rate ranges from 0.3 percent to 9.8 percent.


From January 1, 1991 the tax credit can be claimed by employees having three or more economic dependents. Earlier it was necessary to have at least four dependents to qualify.


Here, as in all graduated rate schedules of the Soviet tax system, the tax (T) is computed using the formula T = t(Y-L) + C, where t is the marginal rate corresponding to the bracket, Y is taxable income, L is the lower limit of the income bracket, and C is a constant, capturing cumulative taxation in previous brackets. The adoption of a subtractive method—represented by the formula T = t Y-C’ where C’ is also a constant—would simplify computation.


The determination of ad valorem rates has been made by using the formula

t=1 − CP(1+a)(1b)

where C is planned cost, grossed up by a, a planned industry-specific markup or gross profit ranging from 0.15 to 0.23 but typically 0.20; and P is the retail price, discounted by b, a trade margin or retail markup on the order of 0.10. The rate thus determined is used for some period of time, usually for five years, before it is revised.


The regulations and rates were laid down by Decree No. 815 of the USSR Council of Ministers of August 13, 1990, and Letter No. 03-02-02 of the USSR Ministry of Finance, of August 22, 1990. Joint ventures were allowed to pay the tax retroactively without penalty or interest.


See Chapters III.4 and IV.3 for details.


At which the USSR already has the status of observer.


For details on the new commercial exchange rate, see Chapter III.4.


See USSR Council of Ministers decree No. 815 of August 13, 1990, applicable to joint ventures with at least 30 percent foreign participation retroactively since July 1, 1990. The new import tax structure, effective November 1, 1990, applies to all economic entities.


However, the fixed payments were sometimes based on the value of the output or as a percentage of the wholesale price or of the profit of the enterprise.


For more details, see Appendix III. 1-2.


In order to make such a system operational, lower-level governments would need to be provided with qualified manpower for preparing and implementing their budgets without the involvement of ministries of higher-level government.


Although authorizations may be carried over from quarter to quarter, at the end of the year they are canceled.


To the extent that credits are expenditure authorizations, it would be more appropriate to view credit administrators as budget administrators.


In addition to these tasks, the Audit Department has the duty to conduct an audit where wrongdoing is suspected. The Economic Police, in charge of investigating economic crimes, is not allowed to present a case to the courts until the audit report is completed.


By comparison, U.S. budget defense outlays totaled 5.9 percent of GDP in 1989 and are estimated at 5.4 percent of GDP for 1990. For industrial countries as a whole, the figure was 4.4 percent in 1987, the last year for which comparable figures are available.


Prior to 1989, data on defense expenditure recorded in the state budget were incomplete and reflected only an amount equivalent to wages, salaries, and operational expenses. In May 1989, President Gorbachev announced a planned 1989 global defense expenditure figure of rub 77.3 billion, and stated that this followed two years in which defense outlays had been frozen. Reportedly, defense expenditure grew at around 1 or 2 percent a year in the 1960s and 1970s. In the mid-1980s, growth is said to have accelerated to around 3 percent per annum. It is likely that capacity had been building up since the early part of the decade, with the objective of modernizing the existing stock of military assets. The Twelfth Five-Year Plan, starting in 1986, placed a strong priority on defense spending, which was to grow by 40 percent over the period of the plan, compared with a targeted 22 percent growth in national income. Around 1987, however, it appears that the build-up was reappraised.


In Japan, for example, military pensions are considered outside the defense budget. In the United States, internal security is classified as a civilian expenditure, while military R & D is defined as including spin-offs to civilian industry.


Attempts have been made to value weapons by using Soviet prices and Western production functions, but these have been recognized as questionable. Besides obvious differences in efficient techniques (not least because, given prices, relative scarcities in the USSR and the West are so different), account must be taken of possible economies of scale. It has been suggested that the USSR produces relatively few undifferentiated weapons, in long production runs. It is hence likely that per unit production costs in the USSR would turn out to be much lower than would be estimated by a Western manufacturer accustomed to producing a more specialized armament in lower quantities and with a shorter economic life.


In contrast, national income accounts do include imputations for unpriced services (including imputations for land use which might be considered analogous to rent imputations made on owner-occupied houses), but at domestic prices. Only a full economic accounting would attempt to apply shadow prices to correct all domestic price distortions. Nonetheless, in an economy where all prices are administered and there may not be equilibrium in the market for any single good, the question of which prices are “out of line” is a matter of degree and of judgment. From a narrow methodological point of view, it seems inconsistent to accept the Soviet social valuation of consumer goods in the construction of the national income accounts, but to reject the social valuation of military inputs and output.


Nevertheless, it remains a cause for concern that national income estimates of defense-related production are larger than financial data on defense expenditure.


Identifiable direct subsidies to loss-making enterprises (in all sectors) were at most rub 1.8 billion in 1989 and rub 16.8 billion in 1990 (i.e., the “subsidies” line in “state budget expenditure on the economy”). Losses could conceivably also have been covered under the rubric of “operational expenditures” (also part of expenditure on the economy). These amounted to rub 8 billion in 1989 and rub 11.8 billion in 1990 (Table III.1.8).


This assumes that, as President Gorbachev stated, defense expenditure in 1988 was the same as in 1989.


To make this assessment, it would be necessary to know the relevant price deflator and the extent to which the above growth rate includes conversion expenditures.


While this target does not presume that the size of the defense complex remains as large as at present, the conversion program does not plan to dismantle the defense complex; indeed, it is possible that civilian industries could be incorporated in it.


These figures are obtained using an exchange rate of rub 1.2 per DM, following the introduction of the commercial exchange rate in November 1990.


The plan does not include the cost of increasing procurement prices in May 1990, effective for the 1990 grain harvest. While supplementary costs of rub 9 billion for the state budget as a whole, and a possible further rub 5 billion for the RSFSR, have been projected, the seasonality involved makes these preliminary calculations subject to a wide margin of error.


The underlying data (in rubles) are as follows, with the subsidy being larger than the difference shown between producer and retail prices to the extent of the markups excluded from the producer price:

Producer PriceRetail PriceDifference
Meat (kg)
Butter (kg)
Milk (liter)0.650.240.41


Most of the economic subsidy to housing actually stems from the treatment of land as essentially free and probably also from the low costing of buildings and maintenance services. Two other possibly significant sources of housing subsidy are preferential credits for reconstruction and the provision of housing services by enterprises, neither of which appears in the budget.


For instance, the subsidy on grain could rise from its 1988 level of rub 64.8 per ton to rub 176 per ton.


Also see Chapter IV.6.


Other sources of assistance consist of goods and services (such as day care) provided through social consumption funds at the enterprise, and consumer subsidies.


Transfers from the budgets of union republics and receipts from the sale of sanitaria tickets to temporarily disabled workers have provided the remainder of revenue.


Until now, retirees have been free to choose between having the pension computed on the basis of earnings during the past 12 months prior to retirement and the 5 best consecutive years in the past 10.


An allowance of rub 12 per child per month that has until now been paid to low income unmarried mothers from the union budget will hereafter be paid by each separate union republic out of its own revenues.


The guidelines thus seem to bring forward the full indexation of pensions provided for in the pension reform.


For a more detailed discussion, see Chapter IV.6.


There currently exists some means testing insofar as allowances for raising children in poor families are provided, as described above.


The original proposal was for the employer’s contribution rate to be set at 37 percent of wages, resulting in a surplus equivalent to 11 percentage points in the initial year. Instead, as part of the 1991 draft budget, a separate 11 percent payroll tax has been temporarily earmarked for the newly-created stabilization funds.


Moreover, these estimates do not take into account the costs of the employment service and of retraining programs (see Chapter IV.6).


Simulations presented in Appendix III. 1-3 bring out clearly the potential impact of high unemployment rates on required pay-as-you-go contribution rates.

Appendix III I-1 Summary of the Tax System1



(Act of June 14, 1990, Ch.I)

(Effective January 1, 1991. Effective July 1, 1990, however, in relation to joint ventures with more than 30 percent foreign capital, and work centers for young people and youth centers of Konsomol.)

a. Nature of tax

A tax on the net income of enterprises, meaning private or public enterprises, associations, and organizations which are legal persons and have an independent balance sheet, including joint ventures, nongovernment foreign organizations, and non-budget government agencies deriving income from economic and other commercial activity. (Profit of foreign firms: see item 2 below.)

Deductible costs and expenses include labor, purchased goods, inputs, and services, social security and medical insurance payments, compulsory insurance, interest on short-term debt, depreciation and equipment repair, and expenditure related to natural resources and mining. Joint ventures may choose their own depreciation criteria.

Wage expenditure is adjusted upwards/downwards to conform to the standard set by the USSR Supreme Soviet. This rule does not apply to foreign investment (joint enterprises with foreign capital participation higher than 30 percent, international nongovernment organizations, and international associations engaging in economic activity).

Commercial and cooperative banks and joint ventures may deduct provisions to a special reserve, up to the point it reaches 25 percent of equity capital. On the liquidation of the joint venture, the tax applies to the unused portion of the reserve.

Main nondeductible items: sanctions pursuant to Soviet legislation and the following payments to labor: material help, participation in the annual results (except in agriculture), leave payments over and above the amounts mandated by law (including maternity, pension raises, and separation grants), and dividends paid to the working collective or its members.

Profit and other income from abroad are included in the tax base, but a credit is given for the tax paid to a foreign government.

A progressive surtax applies on profits exceeding the sectoral profitability levels defined by the USSR Supreme Soviet.

b. Exemptions and deductions

Exempt entities: Gosbank and apprentice enterprises and cooperatives. Special regime applies to state enterprises in the areas of transportation, civil aviation, and communications.

Entities exempt from the excess profit tax: banking and insurance organizations; and agricultural enterprises.

Exempt income: income from shares, bonds, and other securities, and income from shares in joint enterprises.

Tax incentives:

  • (1) Exemption:
  • (a) For two years, new enterprises (except those in the mining and extraction industry) set up in the Far East and Far North economic regions. In the second year of operations the exemption is 50 percent of the tax.
  • (b) For two years, new enterprises producing consumer goods (other than wine, vodka, tobacco and its products, perfume, and cosmetics) from local raw materials and waste, subject to input value content.
  • (c) For two years (three in the Far East region) from the time they become profitable, joint ventures engaged in material production (except mining and fishing) with at least 30 percent foreign capital. Joint ventures set up before January 1, 1991, are eligible regardless their sector of activity.
  • (d) Enterprises which develop their own material and technical base in rural areas, urban-type settlements, and regional centers.
  • (e) For two years, cooperatives for production and processing of agricultural products, construction and repair of buildings, and the production of building materials. Cooperatives engaged in other activities (except those in trade and purchasing, public catering, agency and entertainment, which have no tax incentives) will pay 25 percent of the tax in the first year and 50 percent in the second year. Restructuring restriction: the exemption does not benefit cooperatives formed by the liquidation of enterprises, or their division; or cooperatives attached to enterprises, associations, and organizations working on equipment leased from the enterprises.
  • (f) For two years, small enterprises operating in specified sectors. Other small enterprises pay 25 percent of the tax in the first year and 50 percent in the second year. The restructuring restriction (see (e) above) applies.
  • (g) Collective farm markets, if their profit is used for specified purposes.
  • (h) Specified merit public organizations.
  • (i) Cooperatives of veterans of war and labor, if 70 percent or more of the workers are persons of pensionable age.
  • (j) Fishing enterprises, in relation to the profit from the sale of fish caught by the enterprise itself.
  • (2) Deductions:
  • (a) 30 percent of current expenditure on scientific research, experimental design, and absorption of new technologies.
  • (b) Repayment of credit used to finance centralized state capital investment, not covered by profit allocations to capital accumulation.
  • (c) 30 percent of expenditure connected with protection of nature.
  • (d) Approved expenditure on maintenance of facilities for housing, health, education, culture, and sports.
  • (e) Contributions to merit institutions, up to 1 percent of profit.
  • (f) Grants for construction of rural houses, up to 1 percent of profit.
  • (g) 30 percent of the profit of an enterprise operating in specified sectors, when more than half the personnel is old aged or disabled; or 20 percent of the profit, if they are between 30 and 50 percent of personnel.
  • (h) Losses incurred by joint ventures with at least 30 percent foreign capital, in the previous 5 years, provided the special reserve is insufficient.
  • (i) Expenditure on the construction, reconstruction, and renovation of basic resources, mastering new technologies, and training.
  • (j) The amount of profits used by joint ventures to develop production (expenditure on basic means of the formation of a reserve).
  • (k) Interest on the long-term bank debts of joint ventures, except overdue or deferred credits.
  • (l) Joint-venture expenditures on scientific research, experimental design and nature-conservation measures.

Additional relief may be provided by the USSR Council of Ministers, and the republics and local governments, within the limits of the respective tax shares.

c. Rates

Normal rate 45 percent. Applies to profits within the profitability limits set by the USSR Supreme Soviet. (Tax sharing: the 45 percent rate is split between the union budget (22 percent) and the republic and local budgets (23 percent). The limit of 23 percent encompasses also payments to local budgets for labor and natural resources, such that the enterprise’s liability regarding those three levies is limited to 45 percent.)

Excess profits are taxed at the following rates:

  • (1) 80 percent on profits up to 10 percentage points above the limit;
  • (2) 90 percent on the remainder. (Tax sharing: the proceeds of the excess profit tax accrues half to the union budget and half to the republic and local budgets.)

Tax credits against the profit tax:

  • (1) Tax paid abroad, up to the level of domestic taxation on the same income.
  • (2) Rental paid to lessors by leasing enterprises.
  • (3) Amount of profit used by joint ventures for the development of production (expenditure on capital goods or reserve formation).
  • (4) Interest on long-term bank debt of joint ventures, except overdue or deferred debts.
  • (5) Expenses of joint ventures with scientific research and experimental design work and on measures to safeguard nature.

Special rates:

  • (1) 55 percent on banking and insurance organizations (half of the proceeds accrues to the union budget).
  • (2) 30 percent on joint ventures with at least 30 percent foreign capital.
  • (3) 10 percent on joint ventures set up in the Far East economic region with at least 30 percent foreign capital.
  • (4) 35 percent on consumer societies, unions and associations (proceeds accrue to local budgets).
  • (5) 35 percent on public and religious organizations and their enterprises (proceeds accrue to local budgets).

Differentiated rates up to 45 percent (as set by the Supreme Soviets of the republics) on non-agricultural production cooperatives and their unions and associations (proceeds accrue to the budget of the region or town of their place of registration).

Differentiated rates (as set by the Supreme Soviets of the republics) on: commercial purchasing, public catering, and agency and entertainment cooperatives (sharing of tax proceeds defined by the laws of the republics); agricultural enterprises, including state and collective farms; enterprises offering repairing services; and municipal services.

Differentiated rates up to 45 percent (as set by the local Councils of People’s Deputies) on enterprises forming part of the local economy and relating to municipal property (proceeds accruing to local budgets).

Advance payments are due on the 15th and the 28th of each month, on the basis of the tax paid in the previous year. Small taxpayers may make a single payment each month, on the 20th. Every quarter the taxpayer estimates the cumulative actual tax liability. Cooperatives, public enterprises, and agricultural enterprises (including collective and state farms) determine the tax quarterly, taking account of the amounts calculated for the preceding quarters within the year. Joint ventures make quarterly advance payments on the 15th of March, June, September, and December; a final return is presented by March 15 of the following year.


(Act of June 14, 1990, Ch.II)

(Effective January 1, 1991)

a. Nature of tax

A tax on the profit of companies, associations, and any other type of foreign organization which carries out, through a permanent representation, economic activity in the territory of the USSR or its continental shelf or economic zone. (For the income of foreign participants in joint ventures, see item 3 below. For the passive income of foreign organizations, see item 4 below.) The profit is determined according to rules set by the USSR Council of Ministers. Whenever a direct determination is not feasible, the profit is estimated as 15 percent of the gross income or the expenses incurred. The profit is determined annually; a return is filed by April 15, and audited, at cost, by a Soviet auditing organization.

b. Exemptions and deductions

Tax incentives

Foreign firms are entitled to the same tax reliefs granted to joint ventures (see item 1 above) regarding philanthropic grants and expenditure to safeguard nature.

The tax on foreign firms may be forfeited or reduced on the basis of reciprocity, if the foreign tax authority confirms that a more favorable treatment is granted to Soviet firms with respect to the same or similar taxes.

c. Rates

The tax rate is 30 percent.

(Tax sharing: Half of the proceeds accrues to the union budget and half to the republican and local budgets.)


(Act of June 14, 1990, Ch.VII, Sec. 31)

(Effective January 1, 1991)

a. Nature of tax

A withholding tax:

  • (1) on the income received by enterprises, associations, and organizations (except foreign entities unconnected with activity in the USSR) from shares, bonds, and other securities, and the income received from joint enterprises by their Soviet participants; and
  • (2) on the transfer abroad of income of foreign participants in joint ventures.

The tax applies to income received in the territory of the USSR and its continental shelf and economic zone.

b. Exemptions and deductions

Exemption: interest from state bonds and other state securities.

Tax treaties may exempt, partially or totally, the income of foreign participants in joint ventures.

c. Rates

15 percent. In the case of transfer abroad, the tax is paid in the currency of transfer.

(Tax sharing: half of the proceeds accrues to the union budget and half to the republican and local budgets.)


(Act of June 14, 1990, Ch.VII, Sec. 32)

(Effective January 1, 1991)

a. Nature of tax

A withholding tax on dividends, interest, copyright and license royalties, freight, rental payments, and other income from Soviet sources of foreign legal persons not connected with the USSR through a permanent representation.

b. Exemptions and deductions

Tax treaties may grant partial or total tax exemption.

c. Rates

Six percent on freight paid by foreign legal persons in connection with international transport; 20 percent in the remaining cases.

The tax is paid in the currency of transfer.

(Tax sharing: Half of the proceeds accrues to the union budget, and half to the republic in whose territory the enterprise or organization paying the tax is located.)


(Act of April 23, 1990)

(Effective July 1, 1990)

a. Nature of tax

A set of schedular taxes on income (items 5.1 through 5.7 below), representing the major component of the “taxes on the population” which also include the tax on adults without children (item 5.8 below), the agricultural and land taxes, and the taxes on owners of buildings and motor vehicles (see items VI. 1-4 below).

For purposes of taxation, a permanent resident is a person who stays in the USSR for more than 183 days in a calendar year. Soviet citizens are taxed on worldwide income, and foreign residents on the income derived from Soviet sources. Foreign citizens and persons without citizenship (“foreign physical persons”) with permanent residence in the USSR are taxed on the same basis as Soviet citizens.

Income received in foreign currency is converted at the official exchange rate.

b. Exemptions and deductions

Exempt persons: Heroes of the USSR, awardees of the Order of Glory, invalids of war and equivalent, participants in the Civil War, World War II, and other participants of military operations (even at headquarters), personnel of the organs of internal affairs who became invalid while carrying out official duties, invalids from childhood, people with blindness of the first and second group, Mother-Heroines, and citizens working in Leningrad from September 8, 1941 to January 27, 1944.

The executive committee of local Councils of People’s Deputies at the oblast, municipal and regional level may grant partial or total exemption to individual taxpayers.

Exempt income: Social security benefits, state and voluntary pensions, alimony, scholarships, work retribution of students of vocational-technical schools, reward for donation of blood and breast milk, remuneration of workers of medical institutions for collecting blood, work income of members of cartels prospecting gold, compensation for injury and other health damage, compensation for loss of breadwinner, wages and other foreign currency income of Soviet citizens from work abroad for Soviet enterprises, institutions, and organizations, proceeds from the sale of property (except production for sale), income of private subsidiary farms, inheritance and gifts (except royalties received by successors), gains on state bonds, lottery winnings, interest and premia on deposits in state banks and on Treasury obligations, voluntary and compulsory insurance indemnization, rewards for rationalization suggestions, gifts up to rub 200 per year received from enterprises, institutions, and organizations, prizes received in international, all-union, and republican competitions, material assistance linked to natural disasters and other cases indicated by the USSR Council of Ministers, other material assistance up to rub 500 per year, reinvested dividends, income from work on collective farms, per diem and other allowances received by military personnel on active duty.

c. Rates

Tax reductions: The tax is reduced:

  • (1) by 50 percent, on all income received by invalids not exempt, and by parents and wives of military personnel who perished in or as a consequence of service;
  • (2) by 30 percent, on all income received by single mothers, widows, and widowers having two or more children under 16 and not receiving a pension for loss of a breadwinner;
  • (3) by 30 percent, on all income received by one of the parents who is raising and caring for an invalid from childhood.

Tax credit: The income tax paid abroad on taxable income is given credit, up to the amount of the Soviet tax liability.


(Act of April 23, 1990, Ch.II)

a. Nature of tax

A withholding tax on wages, salaries, and any other labor compensation, including dividends on the stocks of labor collectives, participation in profits (even by ex-employees), military allowances, and lawyers’ compensation. The monthly payment is final, as there is no annual adjustment.

The taxable income of foreign physical persons includes bonuses paid in connection with residing in the USSR and compensation for expenditure such as children’s school education, food, and leave trips for the family. It does not include, however, payments to social security and pension funds, or compensation for housing rent and maintenance of an automobile for official purposes.

b. Exemptions and deductions

Exemptions (in addition to those mentioned above):

  • (1) earnings of members of collective farms;
  • (2) income of work at the basic work place, not exceeding rub 100 per month;
  • (3) severance pay paid upon dismissal;
  • (4) legal compensation payments, except unused leave;
  • (5) payments in place of free housing and communal services.

The tax liability of foreign physical persons may be reduced or eliminated, on the basis of reciprocity, if the country of citizenship grants a more favorable tax treatment to Soviet citizens.

c. Rates



(In rubles)
Tax (rubles + percentage on

amount of income

within the bracket)
100-1300.00 + 29
130-1508.70 + 30
150-70014.70 + 13
700-90086.20 + 15
900-1,100116.20 + 20
1,100-1,300156.20 + 30
1,300-1,500216.20 + 40
1,500-3,000296.20 + 50
over 3,0001,046.20 + 60

Additional, together with bonuses over and above the base earnings for work in the far north and other areas with severe climatic conditions: tax rate 13 percent.

Tax reduction: The tax is reduced:

  • (1) by 50 percent, on wages, salaries, and allowances of military personnel who served in the contingent sent to the Republic of Afghanistan;
  • (2) effective January 1, 1991 by 30 percent, on the reward for working in the basic work place by a worker with three or more dependents.


(Act of April 23, 1990, Ch.III)

a. Nature of tax

A withholding tax on the earnings from work on a nonrecurrent basis for enterprises, institutions, and organizations, including material assistance (bonuses, pensions, etc.) paid by those entities to people not working there. The monthly payment is final, as there is no annual adjustment.

b. Rates



(In rubles)
Tax (rubles + percentage on

amount of income

within the bracket)
15-200.22 + 5.5
20-300.50 + 6
30-401.10 + 7
40-501.80 + 8
50-702.60 + 10
70-1004.60 + 12
100-7008.20 + 13
700 & oversame as item 5.1 above


(Act of April 23, 1990, Ch.IV)

a. Nature of tax

A withholding tax on royalties and other compensation for the creation, publishing, performance, or other use of works of science, literature, and art, and also compensation for authors’ inventions, discoveries, and industrial models. Legal successors and heirs are also liable. The tax is also levied on payments for translation, editing, and revising works of science, literature, and art, and on the sales of works of painting, sculpture, drawing, and other kinds of art and articles of decorative or applied art.

The tax is paid during the year, and with each payment the annual tax liability is recalculated.

b. Exemptions and deductions

Exemption: income not exceeding the exemption threshold for self-employed workers.

c. Rates

(1) Nonrecurrent payments:


(In rubles)
Tax (rubles + percentage on

amount of income

within the bracket)
up to 1800.00 + 1.5
180-2402.70 + 5.5
240-3606.00 + 6
360-48013.20 + 7
480-60021.60 + 8
600-84032.20 + 10
840-1,20055.20 + 12
1,200-8,40098.40 + 13
8,400-10,8001,034.40 + 15
10,800-13,2001,394.40 + 20
13,200-15,6001,874.40 + 30
15,600-18,0002,594.40 + 40
18,000-36,0003,554.40 + 50
over 36,00012,554.40 + 60
(2) Recurrent Payments to Heirs of Authors:


Tax (rub + percentage

on amount of income

within the bracket)
up to 5000 + 60
500-1,000300 + 65
1,000-3,000625 + 70
3,000-6,0002,025 + 75
6,000-10,0004,275 + 80
10,000-15,0007,475 + 85
over 15,00011,725 + 90

Tax Reductions:

  • (1) by 50 percent, for heirs under 18, women over 55, and men over 60 years;
  • (2) effective January 1, 1991 by 30 percent, for authors having three or more dependents and no basic work place.


(Act of April 23, 1990, Ch.V)

a. Nature of tax

A tax on the net income of all types of individual business activity, including labor farms and private companies owned by foreign citizens and persons without citizenship (“foreign physical persons”). The base of the tax is the difference between gross income and documented expenditure associated with deriving the income. Expenditure includes material costs, amortization deductions, lease payments, wage payments to contract labor, payments to state social security, mandatory property insurance, interest payments for short-term bank credits (except on overdue and deferred loans), and repair of fixed production assets.

Advance payments are due quarterly, and an annual adjustment is made by March 15 on the basis of the return presented by January 15.

b. Exemptions and deductions

Exemptions: Income from individual labor activity, including from worker or peasant household businesses, not exceeding the exemption threshold for self-employed workers; men aged 60 or more, and women aged 55 or more, in relation to income from farming activity exempted from the agricultural tax.

Tax holiday: For two years since formation, the farm income of members of peasant household businesses.

c. Rates

Up to 3,000 (if average monthly income exceeds that of item 5.1 above for basic work place);

  • (1) If there is no basic work place: according to item 5.1 above;
  • (2) If there is a basic work place: according to item 5.2 above (adjusted for number of months)


(In rubles)
Tax (rubles + percentage

on amount of income

within the bracket)
3,000-4,000332.40 + 20
4,000-5,000532.40 + 30
5,000-6,000832.40 + 50
over 6,0001,332.40 + 60

Tax reduction: Effective January 1, 1991; the tax is reduced by 30 percent if the taxpayer has three of more dependents and does not have a basic work place.


(Act of April 23, 1990, Ch.VI)

a. Nature of tax

A tax on the net income derived from running a peasant farm, i.e., a farm engaged in raising, producing, or processing agricultural products. Net income is determined as in item 5.4 above. Joint partners are taxed separately following the income sharing they agree on.

Monthly advance payments are calculated as 10 percent of gross income, and the final tax liability is determined on the basis of a return presented by March 1. The peasant farm is also liable to a withholding tax on wages paid to contract labor.

b. Rates

  • (1) if there is no basic work place: same rates as item 5.1 above;
  • (2) if there is a basic work place: same rates as item 5.2 above. In either case, adjusted for number of months.


(Act of April 23, 1990, Ch.VII)

a. Nature of tax

A tax on the net income not taxed under items 5.1 through 5.6 above. Net income is the difference between income received—in monetary form and in kind—and expenditures incurred in deriving the income. Expenditures include those mentioned in item 5.4 above and other expenditure specific to the type of activity.

Advance payments are due quarterly, and an annual adjustment is made by March 15 on the basis of the return presented by January 15 and other information gathered by the tax agencies. Enterprises, institutions, and organizations paying income to individuals must withhold tax in each payment, and adjust the tax liability in each subsequent payment.

b. Exemptions and deductions

Exemption: income not exceeding rub 300 per year.

c. Rates

Annual Taxable


(In rubles)
(rubles + percentage

on amount of income

within the bracket)
300-3600.00 + 10
360-4806.00 + 14
480-60022.80 + 19
600-84045.60 + 23.5
840-1,200102.00 + 29
1,200-1,800206.40 + 33.5
1,800-2,400407.40 + 40
2,400-3,000647.40 + 46.5
3,000-5,000926.40 + 52.5
over 5,0001,976.00 + 60


(Act of April 23, 1990, Ch.IX)

a. Nature of tax

A withholding tax on the non-labor income of nonresidents, derived from Soviet sources.

b. Exemptions and deductions

Tax treaties may grant partial or total exemption.

The tax may be waived or reduced, on account of reciprocity, if the country of residence grants a more favorable tax treatment to Soviet citizens.

c. Rates

20 percent.


a. Nature of tax

A tax on the wage income of men from 20 to 50 years of age, and married women from 20 to 45 years of age, without children. (This tax is to be phased out from 1991 to 1993.)

b. Exemptions and deductions

Main exemptions: persons with monthly earnings of rub 100 or less, invalids of groups I and II, persons suffering from certain types of psychological ailments, and parents whose children have died, been killed, or are missing in action.

A one-year tax holiday applies following marriage. Maximum rate of tax: 6 percent of wages.

c. Rates

Maximum rate of tax: 6 percent.


Effective January 1, 1991

a. Nature of tax

Compulsory contributions by enterprises and workers to the state social security system. Workers’ contribution is withheld by the employers.

The contribution may vary according to a number of factors, such as the danger or difficulty of the work.

Neither the USSR Pension Fund nor the newly-created Social Security Fund are consolidated in the state budget.

b. Rates


  • (1) employers: 37 percent of total payroll; (only 26 percentage points will constitute a social security contribution in 1991)
  • (2) employees: 1 percent of paycheck.



(Act of June 14, 1990, Ch.III)

(Effective January 1, 1991, as a rule, but on July 1, 1990, for joint ventures.)

a. Nature of tax

A tax on the production of consumer goods by enterprises, associations, and organizations, including cooperatives and joint ventures. When both wholesale and retail prices are fixed, the tax is determined as the difference between the retail price, net of a trade discount allowance, and the wholesale price. In the absence of fixed wholesale prices, rates are established as percentages of the retail prices, taking into account average production expenditure for the area in question and a markup on the order of 20-25 percent on cost.

b. Exemptions and deductions

Exempt entities:

  • (1) For two years, new enterprises producing goods (other than vodka, wine and vodka products, beer, tobacco and its products, plastic goods, perfume and cosmetics) from local raw materials and waste.
  • (2) For two years (extendable by the union and autonomous republics within the limits of their tax share), folk-art enterprises in respect of the sale of the artistic goods they produce.
  • (3) Enterprises and societies for the blind, including production-training, if more than 50 percent of personnel has a limited capacity to work.
  • (4) Consumer cooperative enterprises for the sale of goods (except beer, spirits, and wines made from grapes and other fruits and berries) situated in mountainous and remote regions, up to 50 percent of the tax; and those situated in towns and cities under regional authority, urban-type settlements and rural areas, 25 percent of the tax.
  • (5) Agricultural enterprises, by the sale of products (other than plastic goods, dressed fur, fur and jewelry articles, and wine and vodka made with the use of spirits) made by them from local raw materials.
  • (6) Listed merit organizations, in respect of goods and products produced in accordance with the objects of their activity.
  • (7) Enterprises and economic organizations of creative unions, within the limits of the turnover tax amounts used by those unions for the activities under their rules.
  • (8) Cooperatives of war and labor veterans, with at least 70 percent of the workers being of pensionable age, producing goods from local raw materials and waste.
  • (9) Apprentice enterprises and cooperatives, in respect of the goods made by them.

The USSR Council of Ministers may establish additional relief from the turnover tax for individual payers.

Exempt goods (sample): meat, milk, newspapers, children’s wear, eggs, medicine, coal, timber products, fruit and vegetables.

c. Rates

Rates are set by the USSR Council of Ministers.

Rates for joint ventures (in percent):

Cotton & wool cloth, plastic products20
Leather footwear for adults, other

textiles, artificial leather, gold

jewelry (without precious stones)
Wallpaper, refrigerators, computers,

watches, VCRs, wine, cosmetics
Silk fabrics, beer40
Carpets, artificial furs, cassettes,

automobiles & parts, clothing made

of synthetic fibers, silver jewelry
Jewelry with precious stones, fortified

wines, champagne, cognacs
Liquor and vodka products90
Other goods on which turnover tax is

paid by Soviet enterprises

Tax retention:

  • (1) Enterprises producing consumer goods may retain up to 30 percent of the tax obtained from an increase in production by comparison with the preceding period, as defined by the USSR Council of Ministers.
  • (2) Enterprises may use up to 50 percent of the tax obtained from the sale of the additional goods to make for the insufficiency of the accumulation fund in paying a bank credit granted to increase production or improve quality and range of consumer goods produced.

Tax sharing: The tax proceeds accrue to the union budget, but the USSR Supreme Soviet Supreme and the Supreme Soviets of the union republics may assign shares to the union and autonomous republics.


(Act of June 14, 1990, Ch.VII, Sct.33)

(Effective July 1, 1990)

a. Nature of tax

A tax on the income of casinos, video salons (exhibition of videos), operation of gaming machines with money prizes, and from large-scale concerts and theatrical entertainments held in open spaces, stadiums, sport halls and other premises with seating for more than 2,000 persons.

Material expenses connected with obtaining the income is deductible in determination of taxable income.

b. Rates

70 percent.

Tax sharing: Half of the proceeds accrues to the union budget, half to republic and local budgets.



a. Nature of tax

A tariff based on the 1984 version of the CMEA nomenclature. The tariff is based on three digits (although the nomenclature has seven digits). There are only about 300 entries. The base of the tariff is the transaction value, which consists of the (valuta) ruble equivalent of the foreign currency price, converted at the official exchange rate. Payment may be made in rubles.

b. Exemptions and deductions

Exempt: raw materials and most capital goods. Goods imported from developing countries are generally exempt, in the framework of the GSP.

c. Rates

The tariff rates vary from zero to 70 percent, the unweighted average being 3.5 percent. For each entry there are two rates, the maximum—or basic—rate and a minimum rate applied to countries with MFN agreements with the USSR.


(Act of June 14, 1990, Ch.IV; Decree 815 of the USSR Council of Ministers, 1990)

(Effective July 1, 1990)

a. Nature of tax

A tax on enterprises, associations, and organizations subject to the profit tax (see item 1 above) which carry out foreign trade transactions. It is intended to capture the difference between international prices, converted into (valuta) rubles at the official rate, and internal prices for certain tradeable goods.

The rates are to be expressed:

  • (1) for private parties transactions, at percentage rates of the foreign trade value of goods indicated in the customs declaration;
  • (2) for government transactions, as the difference between the foreign trade and internal price, after deduction of overheads.

b. Exemptions or deductions


  • (1) Equipment, material, and other property imported for integralization of authorized capital (foreign direct investment).
  • (2) Temporary importation;
  • (3) Imports for sale for foreign currency.

Draw-back: The tax paid on imports is refundable with re-exportation within a year.

The USSR Ministry of Finance may change rates for individual commodities to adjust to new business conditions in the external and domestic markets.

c. Rates

Sample of rates:


From Other

Personal computers600600
Vegetable fibers130130
Coffee beans300480
Raw sugar230230
Alcoholic beverages200610
Jeans for adults1,470
Perfumes, cosmetics210
Domestic appliances460460
Audio & video cassettes5002,090
Television sets870870
Unlisted consumer goods160160

The tax proceeds belong entirely to the union budget.



(Act of June 14, 1990, Ch.V)

(Effective January 1, 1991)

a. Nature of taxes

A tax on the expenditure on labor over and above rub 100 per month per worker of collective farms, including fishing farms. The tax base includes additional pay, all kinds of bonuses and allowances, and payment in kind (goods valued at cost).

Payment dates and procedures to be set by the laws of the union and autonomous republics.

b. Rate

8 percent.

The tax proceeds belong entirely to the local budgets.


(Act of June 14, 1990, Ch.VI)

(Effective January 1, 1991)

a. Nature of tax

A tax on the excess of “funds used for consumption” (C) over the “nontaxable portion of funds used for consumption” (A), by enterprises, associations, organizations, foreign legal persons, international nongovernment organizations, international associations engaging in economic activity, and joint ventures with more than 30 percent of foreign capital. (C) includes all personnel expenditure (including labor pay, premia in cash or kind, material help, labor and social privileges, and other individual payments, but excluding royalties and rewards for discoveries) and dividend and interest income paid on shares of the working collective and individual investments by members of the collective. The non-state-financed income of the enterprises (V) is the total expenditure on pay for labor in the cost of the products sold plus the remaining profits, after adjustments are made to ensure comparability with that of the previous year. (A) equals the previous year’s C times the ratio of the current year’s V to the previous year’s V, multiplied by k, where k (=0.98) is an adjustment coefficient allowing for V to increase relative to C. The USSR Council of Ministers may change k to take into account the specific features of production in individual sectors. An adjustment in the previous year’s V may also be made to allow for the occurrence of surplus expenditure with payment of the corresponding tax. On the other hand, any margin of A over C may be included in the reserve fund and used by the enterprise for consumption in the subsequent periods without tax payment.

b. Deductions and exemptions


  • (1) The increase in C in new enterprises, during the standard period of assimilation of designed technical and economic indices and the first year of operation.
  • (2) The increase in C in connection with the implementation of centralized measures for raising the standard of living, including the introduction of new conditions for labor and the eradication of the consequences of emergency situations.
  • (3) Payment for the work of disabled and handicapped persons, when they exceed 50 percent of the enterprise’s personnel.
  • (4) Survival benefits for death, and financial compensation, above the statutory limits, to the victims of work accidents and professional diseases.

The USSR Council of Ministers may set additional tax reliefs.

c. Rates

Tax rates for 1991-92:

Percentage by which the

nontaxable portion

of the funds is exceeded

per each ruble

of the excess
Up to 1 percent1.00
Over 1 percent, up to 21.25
Over 2 percent, up to 31.50
Over 3 percent2.00

Tax sharing: Half of the tax proceeds accrues to the union budget, and half to the republic and the local budgets.



a. Nature of tax

A tax on private holders of rural land, collected by the union budget and distributed to the local budgets where the tax was collected. These taxes are to be transferred, in 1991, to the republic level of government. This tax substitutes for other taxes, as the agricultural produce is not subject to any tax. Also, workers on collective farms are not liable to individual income tax; to the extent they also tend a small piece of land on their own, they pay this tax.

b. Exemptions and deductions

In the calculation of the tax, the area of the plot of land allotted to the farm is reduced by the area corresponding to buildings, gullies, and public roads.

Main exemptions include invalids, persons of advanced age, families of military servicemen, and agricultural specialists.

c. Rates

Annual rates per 1100 hectares vary from rub 0.20 to rub 2.20 from region to region, according to geographical and other factors. On average, the rate is rub 0.81 per 1100 hectares per year.


a. Nature of tax

A tax on private holders of non-built-up urban plots, collected by local authorities for the benefit of local budgets.

b. Exemptions and deductions

Exemptions are numerous.

c. Rates

Annual rates per square meter range from 0.4 to 1.8 kopecks, and are distributed in six categories according to location.


a. Nature of tax

A local tax on the value of privately-owned urban buildings, including residential homes or part of them, outbuildings, garages, and dachas. Besides the tax, the owner has also to pay for compulsory state insurance for the building.

b. Exemptions and deductions

Exemptions are numerous.

c. Rate

1 percent.


a. Nature of tax

A tax paid by individuals and enterprises who own transport vehicles and other self-propelled machines and mechanisms, such as automobiles, motorcycles, motor boats, yachts, and motor-sledges. It is collected by the union budget in connection with the technical inspection or registration, and the proceeds are earmarked for projects of road conservation.

b. Rates

Rate per horsepower of the engine:

Light automobilesrub 0.50
Motorcyclesrub 0.30
Cargo vehiclesrub 1.00
Cutters and yachtsrub 0.10-0.25



a. Nature of tax

A duty levied on delivery of various official documents and acts, including emigration permits, notarial services, and recognition of inheritance rights.


Status as of July 1, 1990 unless otherwise indicated.

The fiscal year runs from January 1 to December 31.

Commercial contracts cannot stipulate the assumption of foreign firms’ tax burden by the Soviet counterpart.

Tax treaties, which have preference in application over internal tax laws, have been concluded with Austria, Bulgaria, Canada, Cyprus, the Czech and Slovak Federal Republic, Denmark, Finland, France, Germany (both the GDR and the FRG), Hungary, Italy, Japan, Malaysia, Netherlands, Norway, Poland, Romania, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Appendix III.1-2 Profile of Tax Administration as of December 1, 1990
1. Organization
1.1 At national levelThe State Tax Service (STS) is composed of the Main State Tax Inspectorate (MSTI—a department of the USSR Ministry of Finance set up in July 1990) and 5475 state tax directorates at all levels of government (union republics, autonomous republics, krays, oblasts, rayons, and cities). The STS is responsible for collection of all tax and nontax state revenue (except customs duties).
1.2 At central levelThe MSTD is organized in six technical sections, each one administering a different tax or group of taxes, and two supporting sections (organizational-inspection and tax information and accounting). This structure is largely replicated at all levels of government.
2. Human Resources
2.1 StaffThe STS has a staff of 40,000 and is in the process of absorbing another 25,000; ultimately it will have 100,000 employees. Ninety one persons work for the MSTI. Eighty percent of the statutory strength consists of field officers, 13 percent of administrative and technical personnel, and 7 percent of heads and deputies of tax inspectorates.
2.2 Recruiting and trainingCourses in finance and taxation are taught in a number of college programs, and specialization in taxation requires part-time work in a tax inspectorate beginning in the junior year, and one year of internship following graduation. Those who have performed satisfactorily are hired. Staff are recruited mostly from graduates of vocational schools, which rank above schools (middle level) and institutes (higher education). Training centers are located in Moscow, Leningrad, Kiev, and other major cities. Knowledge of law and accounting is rare; typically the tax officer is an economist by formal training.
2.3 PayThe nationwide average STS salary is rub 416 (after the 1990 increase from rub 190). Salaries vary according to the importance of the tax inspectorate. In a typical district tax inspectorate, the salaries are as follows: director, rub 460; director of department, rub 430; chief, rub 400; senior officer, rub 350; and tax officer, rub 320. In Moscow only, the salary is 30 percent higher. Seniority allowances (available only at the STS) range from 60 percent to employees with one year in the job to 150 percent to those with more than 15 years. An extra amount equal to a one month’s salary is paid at the time of the annual leave.
3. Filing and paymentProfit tax: advance payments are due twice a month (once a month for small taxpayers, quarterly for joint ventures). The tax liability is reassessed quarterly. An annual return is filed by March 15. Tax on excess wage increases: is assessed and paid quarterly. Wage income tax: the withholding at source is final; no annual adjustment. Enterprises pay tax at the same time they pay wages (once a month). Self-employed: advance payments are due every quarter. The annual return is filed by January 15, with any tax supplement due immediately and any excess refunded by March 15. The taxpayer has the option of buying a patent (license to operate), which is valid for one year; the corresponding annual charge is related to the taxpayer’s presumed income. Tax on owners of buildings: paid in two installments, by June 15 and August 15. Tax on owners of vehicles: paid at the time of annual inspection. Tax payments are made exclusively through the banking system, usually by transfer from the taxpayer’s account to the budget.
4. Number of returnsEnterprises: there are about 46,000 state enterprises and 1,200 chartered joint ventures. Self-employed: about one million, of which 350,000 present a return and pay tax, 350,000 are taxed under the system of patent, and 300,000 are tax exempt.
5. Collection
5.1 AmountIn 1989, rub 384.9 billion, or 41 percent of GDP, was collected.
5.2 ArrearsFigures not available. Late payment: an interest of 0.05 percent per day is applied (starting January 1, 1991, 0.2 percent per day). Hardship: to meet temporary financial hardship, payment may be deferred or made in installments (depending on tax officer’s visit to taxpayer’s place of business and examination of the bank account).
5.3 Delinquent accountsFailure to file return (according to the law enacted on June 3, 1990): the chairman or chief accountant may be fined rub 100-200, and rub 200-300 for reincidence within one year. Recalcitrants may be reported to the procurator’s office. (Until recently, when the taxpayer failed to file a return or pay the tax, the tax office would write him a reprimand letter, or, at most, would request the local council (soviet of people’s deputies) to discuss the matter with the delinquent taxpayer. The council is, in principle, empowered to confiscate bank account balances.) Failure to pay (according to the new law): the tax office is empowered to impound and arrest funds from, and close, bank accounts of a delinquent taxpayer. At the office’s request, the procurator’s office may bring the taxpayer to trial. If a guilty verdict is reached, the court may determine the sale of the taxpayer’s assets and close his/her business.
6. Audit
6.1 InternalReturns are checked for arithmetic errors. Manual controls permit identification of taxpayers who fail to file a return. Joint ventures must have their financial statements audited (at cost, by a state auditing organization) before filing a return. The chief accountant of a state enterprise is independent from management
6.2 ExternalTax officers in the taxpayer’s premises check for tax payment. Once a year, each enterprise is checked regarding the withholding of the tax on wage income. In the past, emphasis has been placed on auditing 100 percent of enterprises. When a problem is found, the tax auditor fills out an inspection form (akt) demanding compliance within a specified period, usually three months. When this time expires, the officer follows up.
6.3 AdministrativeThe tax inspectorate staff check to see that tax offices are working properly, and organize training seminars.
7. Appeals systemAn appeal may be filed within one year of tax payment, as follows: first level—the local tax office (which is required to resolve within one month); second level—the tax inspectorate immediately above (within one month of the first-level decision); judicial level—the tax inspectorate decision may be challenged through the courts. The filing of an appeal does not imply suspension of payment of the tax.
8. RegistrationPrior registration with the tax inspectorate is required to open any business. There are no taxpayer identification numbers.
9. Material resources
9.1 BuildingsThere is a great scarcity of office space, furniture, and other equipment. Only a few tax inspectorates are properly equipped. In some cases, one desk is shared by two officers.
9.2 ComputersThe work done is done manually. A few microcomputers are available. In 1990, the STS was authorized to buy 1,000 microcomputers. The main computer center of the Ministry of Finance is expected to distribute the new equipment and to prepare tax programs.
10. AssociationThe USSR is not a member of any international tax administration association.
1. OrganizationAlthough the State Customs Administration is four years old, it is still being organized. It has 104 customs houses operating in four regions. The customs authority reports directly to the Council of Ministers (at least until the customs administration is set up).
2. CapacityThe customs administration is responsible for the collection of customs duties and the import/export tax. Presently, the foreign trade organizations still process their own imports and pay duties directly to the budget.
3. PersonnelThe current staff of 9,000 will be increased gradually to 20,000-25,000.
4. NomenclatureUntil recently, the 1984 version of the CMEA nomenclature (seven digits) was used. A new classification has been prepared following the Brussels Nomenclature.
5. TariffThe former tariff covered 300 entries based on three digits of the nomenclature. Annual collection has been about rub 200 million. A new tariff has been drafted to cover up to 10,000 items with rates typically below 10 percent, although rates up to 100 percent are levied on a few goods. Semifinished goods bear the lower rates, and consumption goods the highest. Developing countries benefit from preference in the framework of the GSP.
6. AssociationThe USSR has the status of observer at the GATT. The authorities’ aim is to join the Customs Cooperation Council (CCC) and to become a full member of the GATT.
Appendix III. 1-3 Social Security Reform and Budgetary Prospects


Reform of the social security system is an important ingredient of the transition to a market-oriented economy. While the outlook for long-run growth will improve with increased reliance on market forces, the removal of the myriad of implicit and explicit tax-transfer schemes—which have pervasively distorted incentives in the Soviet economy—will impose substantial hardship on many groups of the population during the transition. To minimize this hardship and to assure political support for economic restructuring, it is necessary to design policies that cushion the less well-off from excessive burdens; any attempt at protecting all groups from the adverse consequences of reforms would be self-defeating. For instance, sizeable increases in inter-generational transfers, such as provided by the recent pension reform, at a time when the supply-side of the economy requires revitalization, could slow the transition to a market economy and make the social security reform wasteful and inadequate to assist those in need.

A major task for the authorities is to achieve an appropriate balance between improving social welfare, on the one hand, and transforming the economy so as to provide for providing sustained growth, on the other. This can be accomplished by reducing the policy-induced allocative distortions, including disincentives to work and to save, and by restoring soundness to the public finances. In sum, social security reform should be aimed at enhancing cost effectiveness, that is, maximizing benefits to those in need at the least budgetary and allocative cost.

This appendix examines some of the medium-and long-term budgetary implications of recently adopted or proposed social security and social assistance measures from a fiscal policy perspective.1 Of particular interest are the implications for government outlays and/or revenues of alternative economic reform scenarios and benefit indexation. Despite the inevitable need to resort to a highly stylized methodology, the simulations serve to underscore the potential budgetary risks inherent in certain generalized schemes of social protection.


a. The pre-reform system

(1) Structure and finances

The social security system to date has been an employment-related benefit program which—along with job guarantees and an undifferentiated wage structure—was designed to promote simultaneously labor force participation and full employment. Although the scope of social security has evolved over the past seven decades, there has been little movement until very recently toward assigning to social insurance the “provider of last resort” role it serves in market-oriented economies, under the so-called Beveridge principle.2

Social security in the USSR is a pay-as-you-go scheme which provides old-age, disability, and survivors’ pensions to workers, self-employed and state farm workers; sick pay and workman’s compensation; maternity and childbirth payments; and a variety of family allowances. Until now, there has been no perceived need for unemployment insurance compensation since unemployment has not been officially recognized in the USSR for close to 60 years. Pensions have accounted for well over two-thirds of social security expenditure in recent years, with sick pay allowances making up for an additional 10-11 percent (Table III. 1.10). In 1990 a considerable effort was made to increase the scope of family allowances.

The financing of social security since its inception has borne relatively little resemblance to that found in most market economies. In effect, basing their financing on the benefit principle—which helps assure that beneficiaries are cognizant of the cost of their social entitlements—a majority of countries relies on earmarked payroll taxes, usually assessed against both employers and workers. By contrast, social security in the USSR has been financed mainly, and in roughly equal proportions, by contributions from enterprises and general revenue of the union budget (Table III. 1.10). The financing share of the union republics remained small and has declined in recent years.

This structure of financing has been deficient at least in two respects. First, it is based on a weak linkage between benefits and contributions because of reliance on general budget revenue and payroll tax contributions entirely from enterprises, without any contributions from workers. Second, the payroll tax has varied (between 4-14 percent) across sectors and enterprises, depending in part on the degree of hardship associated with the location and nature of the employment. The average payroll tax rate for the system as a whole was expected to increase from 9.1 percent in 1989 to 12.1 percent in 1990. Variation in tax rates further reduces the link between benefits and contributions and makes the insurance premia and rates of return variable across economic activities.

(2) Types of benefits

The existing public pension system was established in 1956 for workers, state farm workers and self-employed, and extended via a separate program in 1964 to collective farm workers. The system has provided earnings-related old-age, disability and survivors’ pensions to approximately 44 million social security pensioners (out of a total of about 60 million) averaging approximately rub 89 per month in 1989, or about 40 percent of the average wage. Full old-age pensions are payable to men age 60 or older with 25 percent of work experience, and to women age 55 or older with 20 years of employment, with a lower age threshold for special circumstances or occupations. These statutory retirement ages are low in comparison with those in many industrial countries (Table 1), where the tendency has been toward raising the legal age, motivated by the rise in life expectancy and by concerns over the longer-term impact of aging populations on contribution rates.3 Receipt of an old-age pension does not preclude continued work activity, although there have been limitations on the amount of wages that can be earned without a reduction in pension benefit. In 1989, approximately 9.5 million recipients were classified as working pensioners.

Table 1.USSR: Statutory Retirement Age in OECD Countries, 1989
Standard Retirement AgeEarly Retirement Age
Iceland 16767
New Zealand6060
Turkey 2656033
United Kingdom656033
United States656562-6462-64
Source: OECD Social Policy Data Bank.

Age 60 for seamen and fishermen having worked 25 years.

Age 50 for prematurely aged men; miners covered for 1,800 days.

Based on contribution.

Source: OECD Social Policy Data Bank.

Age 60 for seamen and fishermen having worked 25 years.

Age 50 for prematurely aged men; miners covered for 1,800 days.

Based on contribution.

The pension benefit has been based on a 50 percent replacement rate of average gross income either during the last 12 months prior to retirement, or during any five-year period from the last ten years. A higher replacement rate has been applied to average incomes under rub 100 per month, rising to 100 percent at rub 70 per month. With an unindexed maximum set at rub 120 per month (rub 160 for miners), increasing nominal wages have led to a growing number of workers experiencing a fall in their effective replacement rate.

Disability pensions have been paid both for job-related loss of capacity to work and for invalidity induced by general illness, although the latter is subject to tenure requirements. Benefits have ranged from rub 30-120 monthly depending on the degree of disability and whether or not the disability is work related. The number of disabled pensioners has shown a remarkable stability since the middle of the 1970s, remaining essentially unchanged at 6.4 million. Survivors’ pensions have traditionally been paid to female (age 55 or older or invalid) and male (age 60 and older or invalid) survivors of workers or retirees or to their dependent children, grandchildren, or parents, at slightly lower rates of replacement than in the case of old-age and disability pensions.

Sick pay (for temporary disability) has been available to all Soviet citizens insofar as medical care is concerned, with cash payments provided to students, employed persons, and state farm workers; a special system exists for collective farm workers. Membership in a trade union has been a prerequisite for receipt of full cash benefits. An additional related expenditure consists of the cost of visits to sanitaria and rest homes. By 1990, cash benefits and expenditure on sanitarium visits were estimated at rub 9.6 billion and rub 2.5 billion, respectively, totaling about 13 percent of total social security outlays. There is no minimum qualifying period for receiving sick pay, which is available for a period of four months; thereafter, the beneficiary is considered to be permanently disabled and is entitled to a full or partial disability pension. An increasing proportion of the worker’s income is replaced as the number of years of experience increases, from a 50 percent replacement rate for workers with less than a three-year work history to 100 percent for those with more than eight years of employment. Workers temporarily disabled by a work-related injury are also indemnified at a 100 percent replacement rate regardless of tenure. In all cases, if a worker has more than three dependent children, earnings are replaced at a 100 rate regardless of experience. For the average worker, these provisions resulted in a daily benefit of approximately rub 8 and rub 9, replacing 80 percent of the average wage in 1989 and 77 percent in 1990, respectively. Despite the generous sick pay provisions, the average number of sick days per worker in 1989 was 9.4, low by international standards.

Maternity benefits are available to all residents at a 100 percent replacement rate for a period of eight weeks before and eight weeks after confinement, although the average duration of paid maternity leave is much lower. Following maternity leave, a payment of rub 35-50 per month has also been made to the mother until the child reaches one year of age. Additional assistance is provided to low-income parents. In 1989 and 1990, the average duration of paid maternity leave was 58 and 53 days, respectively, with a 68 percent average replacement rate. Family benefits consist mainly of allowances to assist families to raise children. Grants were provided to families at the birth of each child: rub 50 for the first child, rub 100 for the second and third births, rising to rub 250 for the eleventh and subsequent births. In addition, an allowance of rub 4 per month was paid for a fourth child, rising to rub 15 for the eleventh and each additional child. Unmarried mothers, however, received rub 20 per month per child. Low-income assistance has been rather limited in the USSR; the only notable direct means-tested benefit has been an allowance of rub 12 per month until the child reaches age 8 for families with per capita monthly income under rub 50.

b. Recent and prospective reforms

(1) Pensions

The pension reform law enacted in May 1990 is broadly aimed at increasing the share of national income allocated to pensioners. It also aims to make the social security pension program substantially more universal than heretofore by bringing military pensions4 into the scheme, folding in the pensions of collective farm workers, and providing a basic pension to retirees without any work history. The legislation introduces indexation to preserve the real and relative (to current wages) levels of pensions. Finally, the reform alters radically the structure of financing all social security benefits (Table 2).

Table 2.USSR: Summary of Pension Programs Before and After Reform
Pre-Reform SchemePost-Reform Scheme
CoverageEmployed persons, disabled in public duties, and state farmworkers.

Special provisions for certain subgroups.

Special system for collective farmworkers, established in 1964.

Voluntary supplemental system for all workers.
All persons, including those without a work history.

Voluntary supplemental system retained.
Source of fundsInsured person: none.

Employer: From 4-14.4 percent of payroll, variable across industries.

Government: General revenues for excess of expenditure over employer contribution.
Insured person: 1 percent of wage.

Employer: 26 percent of wage fund of enterprise. Government makes same contribution on behalf of its employees. Rate to vary by industry according to degree of difficulty of work and other conditions.

Possibility of use of funds from the state budget.
Qualifying conditionsOld-age pension: Age 60 (men) or 55 (women) and 25 (men) or 20 (women) years of work, with reduced work requirements for select groups (e.g., in far north regions). Lower age and shorter work history for certain groups.

Invalidity pension: Incapacity for any work (total invalidity) or usual (partial invalidity) injury. Tenure requirements of 2-20 years for men, 1-15 years for women, and 1-5 years (women) and 1-14 years (men) for dangerous work, according to age; reduced pension if fewer years.

Survivor’s pension: Insured has 20 (men) or 1-5 (women) years of work or 1-15 (women) years for dangerous work, according to age at death; reduced pension for shorter work history.
Old-age pension: Generally unchanged from earlier law.

Invalidity pension: Generally unchanged; provision for invalidity due to general illness as well, subject to minimum required years of work variable by age; up to 23 years–1 year of work; from age 23 to 26–2 years of work; from age 26 to 31–3 years of work; from age 31 to 34—5 years of work; from age 34 to 41–7 years of work; from age 41 to 46–9 years of work; from age 45 to 51–11 years of work; 51–56 years and older–14 years of work; 61 years and older–15 years of work.

Survivor’s pension: Nonworking members of the family of a deceased breadwinner, children, spouses and parents (whether or not they are dependent on the breadwinner), and the grandparents of the deceased when there are no others to provide support.
Cash benefitsOld-age pension:Old-age pension:
50 percent of average gross earnings in last 12 months (or best 5 consecutive years in last 10 years) if earnings above rub 100 per month; 55 percent if earnings rub 80-100 per month; 65 percent if earnings rub 60-80 per month; 75 percent if earnings rub 50-60 per month; 85 percent if earnings rub 35-50 per month; 100 percent if earnings under rub 35 per month. Higher rates for dangerous work. Supplemental of 20 percent of pensions for 10 years’ work beyond qualifying 25 year period with uninterrupted employment in the same enterprise. For same longer work period but with only 15 years of service in the same enterprise, half the increment is received.

Supplement of 10 percent of pension for one dependent; 15 percent for two or more. Supplement of rub 10 per month for each year pension is delayed after reaching age of entitlement (up to a maximum of rub 40). Minimum pension equal to rub 70 rubles, maximum equal to rub 120 (higher for select groups such as miners). No indexation, but adjustment of 10 year-old pension every two years. Reduced pension proportionate to number of years of work, with minimum equal to 25 percent of full pension. Pension also reduced when concurrent earnings exceed rub 150 per month.
55 percent replacement rate of average monthly earnings calculated from any consecutive five-year period in last 15 years of work before applying for pension, regardless of interruptions in work. If work history is shorter than 5 years, actual number of years is used. A decreasing share of average earnings in excess of four times the (indexed) minimum wage is included in pension determination; 100 percent of average earnings up to 4 times minimum wage; 85 percent of fifth multiple of minimum wage; 70 percent of sixth multiple of minimum wage; 55 percent of 7th multiple of minimum wage; 40 percent of 8th multiple of minimum wage; 25 percent of ninth multiple of minimum wage; and 15 percent of 10th multiple of minimum wage. Earnings in excess of 10 times the minimum wage are not included in base.

Replacement rate is increased by 1 percent for each year of additional work beyond qualifying period, up to a maximum of 75 percent. Minimum pension is equal to the (indexed) minimum wage.

Pensions are fully indexed for changes in wages and the cost of living, and are not subject to individual income tax.

Minimum pension equal to (indexed) minimum wage. No limit on concurrent earnings from employment of pension.

Introduction to a new social pension, payable to non-working citizens when they do not have a right to a labor pension. These are payable to totally disabled persons, to men age 65 or older and women age 60 or older, to disabled children under age 16 and to surviving children of an insured worker. Social pensions for disabled range from 50-100 percent of the minimum wage depending on the severity of invalidity or whether the beneficiary is a survivor of the injured worker.
Disability pension:Disability pension:
90 percent of old-age pension if totally disabled. 100 percent of old-age pension if minimum number of years for old-age pension is attained. Pension range: rub 7-120 per month. For partial invalidity, pension equal to 45 percent of earnings up to rub 40 per month, plus 10 percent of higher earnings. Minimum pension rub 26 per month; maximum rub 60.

Supplement for dependents, additional years of continuous employment if constant nursing assistance needed, and for injury performing dangerous work.

Survivor’s pension:

One survivor, 45 percent of earnings up to rub 40 a month (full orphans, 65 percent) plus 10 percent of higher earnings. Pension range: rub 26-60 per month.

Two survivors; 90 percent of old-age pension; minimum rub 50 per month; maximum rub 120 per month.

Three survivors or more: 100 percent of old-age pension, in range of rub 75-120 per month.

Pension increased 10-15 percent for 10 or 15 year period of continuous work.
For total disability, 55 percent replacement of earnings, equal to at least the (indexed) minimum wage or, if tenure requirement for old-age pension reached, old-age pension is assigned. For partial disability, 30 percent replacement of earnings, equal to at least half of the (indexed) minimum wage.

Survivor’s pension:

Pensions are assigned to each survivor in the amount of 30 percent of the earnings of the deceased breadwinner, but no less than the social pension for the corresponding category of disabled (see below). For a child who has lost both parents, the pension is to be no less than twice the amount of the social pension.
Source: Ministry of Finance.
Source: Ministry of Finance.

All pension benefits—old-age, disability, survivors’ and students’ stipends—are scheduled to increase over the next several years by virtue of an explicit increase in the replacement rate. The monthly benefit, equal at least to the minimum wage, is to be based on a 55 percent replacement rate applied to the average of gross earnings in any five-year period during the last 15 years of work, up to a maximum of ten times the minimum wage. This ceiling, combined with the fact that a declining proportion of a pensioner’s average earnings above four times the minimum wage are included in the earnings base, results in a progressive benefit formula; the effective replacement rate declines steadily from 55 percent to 38 percent as average earnings increase (Table 3). Another novel feature is that a pensioner’s replacement rate can be increased by 1 percentage point for each year of work beyond the qualifying period, regardless of age, up to a maximum replacement rate of 75 percent. For example, for the male worker who begins work at age 20, the pension can be potentially based on a statutory rate of 70 percent (55 percent for the first 25 years, plus 15 percent for the years from age 45 to 60), and the effective replacement rate raised accordingly. Although the retirement age and qualifying periods of pensions are left unchanged, the net effect of the new pension law on the retirement decision cannot be ascertained ex ante. On the one hand, higher benefits provide an inducement to retire, but on the other, the removal of the ceiling on post-retirement earnings provides an incentive to remain in the labor force.

Table 3.USSR: Hypothetical Pension Replacement Rates 1
Average Earnings

(In multiples of

minimum wage)
Monthly Pension

(In rubles)
Pension as a Ratio

to Earnings

Assumes a minimum wage of rub 70 per month.

Assumes a minimum wage of rub 70 per month.

Perhaps the most significant provision introduced by the pension reform is the full indexation of benefits effective January 1992—brought forward to 1991 under a proposal in the presidential guidelines—aimed at both preserving the purchasing power of retirees and assuring greater stability of the overall replacement rate. In effect, the legislation calls for annual automatic adjustment of pension benefits for changes in the cost of living (without specifying the measure of these changes); the reform also establishes a minimum increase of 2 percent per year in pensions. Additionally, the reform provides for adjustments of the earnings base insofar as the minimum pension is equal to the minimum wage. Moreover, the reform introduces a minimum subsistence pension (or social pension) for women and men age 60 and 65, respectively, who have never been employed; persons disabled from childhood; disabled children under age 16; and children in the event of the wage earner’s death. The benefit is generally 50 percent of the minimum wage, but can range from 30-100 percent of the minimum wage, with the higher amounts being paid to disabled pensioners. This represents a departure from the exclusively employment-related basis of pensions, making the government more of an insurer of last-resort than heretofore.

(2) Other benefits and allowances

Until now, relatively little change has been made to compensation for temporary disability, although a number of proposals are under consideration by the authorities. One notable change is the extension of full sick pay to all workers regardless of trade union membership. During 1990, a number of measures was adopted to improve the size and scope of family allowances.5 First, a one-time allowance equal to three times the minimum wage replaces the birth grants noted earlier, representing a significant increase in the average grant. Second, the previously available allowance for raising children to age one is to be extended to age one and a half, and is raised to 100 percent of the minimum wage for working mothers and 50 percent for nonworking mothers. Third, a means-tested monthly allowance (with family incomes less than twice the minimum wage) equal to 50 percent of the minimum age is to be paid to qualifying households for each child from age 1½ to age 6,6 and for each child of single mothers until the child reaches 16 years of age. Fourth, allowances equal to the minimum wage are to be paid for each child of military personnel serving fixed tours of duty, as well as to foster children under age 16.

Under the only income support program targeted directly to the poor, responsibility for which was to be shifted to the union republics beginning January 1991, the eligibility for the rub 12 cash payment per child has been expanded from those under age 8 to those under age 12. The presidential guidelines call for policies which would protect the less well-off from the price increases that are likely to result from a removal of consumer subsidies. Considerable uncertainty remains, however, with respect to both the way in which compensation would be determined as well as to whom it would apply.7

A draft law has been approved on a first reading in the USSR Supreme Soviet for the introduction of an unemployment compensation scheme. Compensation would be provided for up to 26 weeks, and up to 39 weeks for pre-retirement workers.8 During this time, the beneficiary will be required to search for a job commensurate with his or her experience and skill level. The program will provide tax exempt benefits equal to 50 percent of the last wage (excluding bonus payments) of the unemployed worker, or of the minimum wage, whichever is greater. In addition to unemployment compensation, the program would provide public works jobs as well, at not less than one half of the wage earned in the previous employment or at the minimum wage, whichever is greater.9

(3) Financing

Beginning in January 1991, social security operations were to be moved off budget. The transfer from general budget revenue was to be eliminated, and the system is hereafter to be financed fully from payroll taxes. The contribution rate of employers was to be set at 26 percent of the enterprise’s wage bill. Significantly, the reform introduces a 1 percent tax on the wages of employees, a measure that can be expected to increase the linkage between benefits and contributions and to identify the beneficiary for administrative purposes. It is anticipated that the combined contribution rate will have to be adjusted over time—to the originally proposed 38 percent.10 The contributions are earmarked for two funds: almost four fifths to the Pension Fund, out of which are to be paid all pensions, maternity and child-rearing support payments, with the remainder earmarked for the Social Security Fund, to finance temporary disability benefits, pre-natal and childbirth payments, and death benefits.

The unemployment compensation scheme is expected to be financed from a 1 percent payroll tax earmarked to the Employment Fund (the “State Fund for Occupational Orientation and Assistance to the Unemployed”). Three fourths of these tax receipts are to be retained by the union republic from which the funds originate, and the remaining one fourth are to be centralized at the union level. Other sources of revenue are to consist of allocations from the state budget, income earned from employment services, and voluntary contributions by enterprises and individuals. The Employment Fund would provide financing for labor creation programs (e.g., job training, employment in public works projects), in addition to unemployment compensation benefits.


Medium-term scenarios are presented below for the major components of social security, and long-run scenarios for old-age pensions. Neither set of simulations should be interpreted as projections, but should instead be seen as illustrative of the sensitivity of social security finances to variations, in key assumptions. For a given initial set of program parameters (e.g., the replacement rate and the degree of indexation), the most significant factors in the medium term are the rate of inflation, wage growth, labor force participation, unemployment, and the size of the beneficiary population. While these factors also influence the long-term outlook, demographic forces tend to play a dominant role in such a horizon.

a. Outlook for 1991 and beyond

A useful starting point in assessing the potential medium-term outlook for social security spending is the preliminary projection of outlays for 1991 by the Ministry of Finance (Table 4). This projection incorporates expected policy-related changes to beneficiary populations and benefit levels, as well as the new allowances scheduled for introduction this year. Significantly, the only important macroeconomic variable explicitly taken into account is a presumed nominal growth in aggregate wages of 12.3 percent, with no allowance for indexation, explicit compensation for price increases or unemployment compensation.

Table 4.USSR: Social Security Expenditure, 1990-91(In billions of rubles)


1. Benefits for single mothers
and poor families2.12.2
For single mothers0.80.8
For children in poor families1.31.4
2. Grants to institutions and other social security measures1.52.0
3. Pensions, including those to collective farmers65.688.0
4. Benefits for raising children to age one and a half5.65.6
5. Benefits for raising children from age 1.5 to 60.810.0
6. Sick pay, maternity, childbirth, burials and outlays for sanitaria16.322.0
7. Benefits to single mothers and one time benefits for birth of a child0.3
Source: Ministry of Finance.
Source: Ministry of Finance.

Overall, outlays are to rise substantially (42 percent), due mostly to increases in pensions, which account for the largest share of spending. Thus, even though pension benefit increases are phased-in over several years, there is nevertheless a sizable initial jump in benefits (34 percent). The other major item accounting for the large increase is the allowance for raising children from age 1½ to age 6, introduced in December 1990.

A projection of the (non-actuarial) balance of the Social Security and Pension Funds11 for the period 1991-95 (Table 5) has been prepared by the Ministry of Finance simulating the effect of the 27 percent total contribution rate and the phase-in of changes in benefits. The simulation is based on an assumed average growth of wages between 4 and 5 percent per year—implicitly without retail price increases—for 1992-95 and a projection by Goskomtrud of underlying beneficiary populations. The projection suggests that financial balance cannot be maintained over the medium term if benefit levels, eligibility, and/or contribution rates are not adjusted. Payroll tax contributions appear to be insufficient to fully cover expenditure already in 1991; thus, the authorities may need to raise the combined contribution rate sooner and perhaps higher than the rate (38 percent) originally anticipated. Of particular concern is the possibility of an explosion of transfer payments as unemployment compensation and low-income support payments are introduced and if, as proposed in the presidential reform guidelines, indexation of pensions is brought forward from 1992 to 1991. When some of these considerations are taken into account, a vivid picture emerges of serious continuing pressure on the budget.

Table 5.USSR: Projection of Social Security Operations, 1991-95(In billions of rubles)
Social security contributions 1120126133139147
Social Security Fund2224262830
Pension Fund103119129140148
Source: Ministry of Finance.

Assuming payroll-based rates of 26 percent on employers and 1 percent on employees.

Source: Ministry of Finance.

Assuming payroll-based rates of 26 percent on employers and 1 percent on employees.

b. Medium-term scenarios

The official projection raises concern in view of the fact that the transition process is likely to entail temporary increases in unemployment and price rises which would feed through to both the revenue and expenditure sides of the social security accounts. First, unemployment, even if only frictional, would erode the contribution base, either generating a large deficit or necessitating a higher tax rate. Second, significant price increases, due to a reduction or removal of consumer subsidies, combined with indexation of pension and other benefits, would put significant upward pressure on outlays.12

Alternative scenarios through 1995 have been prepared using as a point of departure the official spending projection for 1991 (Table 4). A crude methodology has been adopted to generate a baseline scenario which closely approximates the official medium-term projection (Table 5) and which can accommodate various assumptions for the rates of inflation, unemployment and the degree of indexation (of wages and benefits), among others. The methodology, utilized to simulate the possible trajectory of aggregate spending in each category, can be summarized as follows:

Expenditure on benefits for single mothers and children in poor families (category 1 in Table 4) in 1991, SMPC91, is estimated by multiplying the projected level by an assumed rate of inflation and an assumed degree of indexation (δ) for 1991. For subsequent years, SMPCt is obtained by adjusting the previous year’s value by the change in the size of the population age 0 to 15 (POPt,0-15) (implicitly assuming that the beneficiary population remains a constant proportion of this age group), and the assumed rate of inflation πt in year t:13

For grants to institutions and other social security measures (category 2), Gt, a similar approach is employed, except that the value in each subsequent year is adjusted by the change in the size of the total population (POPt), so that:

Expenditure on pensions (category 3), Pt14, is estimated by multiplying the number of pensioners in each period by the average pension in the same year, taking into account adjustments in the rate of inflation and the effects of any previous year’s indexation.15

Expenditure on allowances for raising children up to age one and a half (categories 4 and 5) FA1t, and allowances for raising children from 1½ to age 6, FA2t, are simulated identically as SMPCt, except for an adjustment for yearly change in the population under age 1½ (POP0-1.5) and between age 1½ and age 6 (POP1.5-6) respectively:

Expenditure on each type of social security benefit (category 6) is simulated somewhat differently. Sick pay, SPt, is estimated in each period by the product of a constant replacement rate of 80 percent,16 the average wage (wt), the average number of sick days per worker (9.3) in 1989-90 and the number of employed workers (Et):

Similarly, maternity benefits, MBt, are estimated by multiplying the average wage by the average 70 percent replacement and by the total number of days of maternity leave (DLt), adjusted for the change in the female population of child-bearing age, roughly ages 15 to 45 (FPOP15-45):

Outlays on sanitarium visits, St, are obtained by multiplying the average expenditure per worker in 1990 (S90) by the number of workers in each subsequent year, adjusted by the rate of inflation and degree of indexation:

Population projections at five-year intervals to 2025, along with dependency rates (Table 6), have been used to simulate the number of employed workers in each year, by applying age-and sex-specific labor force participation rates (LFPR)17 to the projected number of persons in the same age groups.18 The resulting number is then multiplied by the assumed overall rate of unemployment (Ut) to obtain an estimate of the number of employed workers in each year:

Table 6.USSR: Population Projection, 1990-2025(In millions of inhabitants)

75 & over11.510.812.617.219.823.222.323.0
Memorandum items:
Total fertility rate2.1862.1062.0972.0912.0842.0782.0722.065
Total dependency rate 153.755.053.553.952.152.355.358.7
Old-age dependency rate 214.517.018.521.220.520.623.326.8
Source: IBRD.

The total dependency rate is defined as the sum of the population aged 0-14 and 65 and over as a percentage of the population aged 15-64.

The old-age dependency rate is defined as the population aged 65 and older as a percentage of the population aged 15-64.

Source: IBRD.

The total dependency rate is defined as the sum of the population aged 0-14 and 65 and over as a percentage of the population aged 15-64.

The old-age dependency rate is defined as the population aged 65 and older as a percentage of the population aged 15-64.

where j = age group 16-29, 30-49, 50-54, 55-59, or 60 and over, and k = male, female.

The baseline medium-term scenario (Table 7) is simply the approximation of the official projection (Table 5) augmented to include those outlays which are financed by the union republics. This highly stylized scenario thus assumes no inflation (and, therefore, no indexation of benefits nor any low-income compensation beyond that provided by existing benefits), nor any additional unemployment.

Table 7.USSR: Medium-Term Baseline Scenario for Social Security Operations, 1991-95(In billions of rubles, unless otherwise noted)
Pension Fund103109114120126
Social Security Fund1718191921
Other 12122232324
Required pay-as-you-go rate (percent of payroll)2430303131
Memorandum items (percent):
Inflation rate
Unemployment rate
Wage growth114444
Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.

Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.

In order to highlight the sensitivity of social security spending to alternative assumptions about inflation and unemployment, four different scenarios have been simulated, consistent with a “radical” and alternatively a “gradual” overall economic reform program,19 and, for each of these, indexation or nonindexation of benefits beginning in 1991 is assumed—in all cases, pension benefits are fully indexed from 1992, as called for in the reform legislation.20 In the radical reform, there is an immediate shock to the economic system, with inflation and unemployment rates reaching fairly high levels, especially in comparison with recent experience in the USSR. The counterpart to the increased burden of the transition is the more rapid adjustment to improved economic performance beyond the medium term. In the gradual reform, the initial policies have a lesser, although not insignificant, effect on prices and employment, but there is a slower improvement in economic performance.

The results obtained from these two alternative scenarios (Tables 8 and 9 and Chart 1) highlight the advantages of nonindexation from a financing perspective; the required tax rates21 not only remain lower than otherwise, but begin to decline as early as 1992 under the radical reform. Immediate across-the-board benefit indexation significantly increases the initial and future required pay-as-you-go tax rates. Although the estimated required tax rate under radical reform is higher than under the gradual program until 1994, reflecting the much larger initial price adjustment in the former case, it is important to underscore the fact that the radical reform results in a more rapid restoration of higher real economic growth than under a gradual approach. This is reflected in lower rates of both unemployment and inflation by 1995. These simulations serve to highlight some of the pressure on the tax base of a large part of social spending. Left out of the analysis are the additional compensatory payments that are likely to be required, namely, for unemployment insurance and low-income protection.

Table 8.USSR: Medium-Term Radical Reform Scenarios for Social Security Operations, 1990-95(In billions of rubles, unless otherwise noted)
Without benefit indexation
Pension Fund117136164196241
Social Security Fund1922273239
Other 12327313643
Required pay-as-you-go rate (percent of payroll)2527272624
With benefit indexation
Pension Fund117136164196241
Social Security Fund1922273239
Other 12527323743
Required pay-as-you-go rate (percent of payroll)3842414037
Memorandum items (percent):
Inflation rate621811108
Unemployment rate911998
Wage growth3818171920
Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.

Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.

Table 9.USSR: Medium-Term Gradual Reform Scenarios for Social Security Operations, 1991-95(In billions of rubles, unless otherwise noted)
Without benefit indexation
Pension Fund122145169201242
Social Security Fund2024283339
Other 12428323844
Required pay-as-you-go rate (percent of payroll)2427282929
With benefit indexation
Pension Fund122145169201202
Social Security Fund2024283339
Other 13529333845
Required pay-as-you-go rate (percent of payroll)3236394039
Memorandum items (percent):
Inflation rate4022101714
Unemployment rate4791010
Wage growth3920191919
Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.

Source: Estimates.

Sick pay, maternity leave, rest home stays, burials.


(percent of payroll)

Source: Estimates.

1. Without benefit indexation.

2. With benefit indexation.

c. Long-term scenarios

Given the latency of the growth of some benefits, pensions in particular, it is relevant to look to the distant future to determine the long-term financial sustainability of the social security system. As in many industrial countries, the Soviet population is projected to experience a significant change in its age structure over the next 25-40 years as a result of declining fertility in recent decades (Table 6 and Chart 2).22 The trends reflect not only the fact that the projected decline in the youth dependency rate is not expected to offset the rise in the elderly ratios, but that the earlier legal age of retirement in the USSR makes the ageing process more marked.


(percent of labor-force-age population)

Source: International Bank for Reconstruction and Development.

1. The denominator is defined as the female population aged 16 to 54 and the male population aged 16 to 59. For the old age dependency ratio, the numerator is defined as the female population aged 55 and over and the male population aged 60 and over. For the youth dependency ratio, the numerator is defined as population aged 0 to 15.

2. The denominator is defined as the female population aged 16 to 59 and the male population aged 16 to 64. For the old age dependency ratio, the numerator is defined as the female population aged 60 and over and the male population aged 65 and over. For the youth dependency ratio, the numerator is defined as population aged 0 to 15.

The importance of these demographic prospects for social security lies in the fact that in a pay-as-you-go (PAYG) system of financing pensions, the current period pensions of the retired population in each year are paid by the employed workers in the same period. Thus, as the number of retired persons per worker increases, a higher share of each worker’s income must be transferred to retirees if the relative gross incomes of both retirees and workers are to remain fixed (as is often achieved either systematically via the pension formula, or on an ad hoc basis). The required PAYG contribution rates for public pensions in the USSR in each year to 2025 have been derived from the basic accounting identity that applies to a PAYG scheme, namely, that in each period t, total pension outlays must be financed by total contributions.23 Defining the replacement rate, (βt, as the ratio of the average pension in each period to the average gross wage, and the dependency ratio, Dt, as the ratio of the number of retired persons to the number of workers, the PAYG tax rate in each period is given by τt = βtDt. The higher Dt, the higher must be τt; similarly, a rising or falling βt will raise or lower it.

A fundamental determinant of the PAYG tax rate is, thus, the average replacement rate. There is, of course, no necessity for the replacement rate to remain fixed, except insofar as it is ensured by the benefit formula.24 However, authorities in most countries in recent years have typically endeavored to minimize major changes in the relative incomes of elderly and workers. Moreover, in the case of the USSR, the recent pension reform aims explicitly at increasing the pension replacement rate. For illustrative purposes, two alternative assumptions are made about the future path of the average replacement rate. In both cases, between 1991 and 1995, the replacement rate each year is determined by the baseline simulation reported above, which relies on official projections of the average pension. For the period beyond 1995, the replacement rate is assumed alternatively to remain constant from 1996 onward or to grow at a rate of a half of 0.5 percent per year to 2025.25 In the latter case, the average replacement rate rises to 60 percent—the actual rate as of 1960. Projections of the dependency rate have been made by separately simulating the number of beneficiaries of old-age pensions and the size of the contributory base (i.e., the number of contributing workers). The number of beneficiaries in each period to 2025 is estimated by assuming that the number of recipients of old-age pensions, B55/60,26 grows in the first instance at the same rate as the size of the population of legal retirement age—women age 55 and older and men age 60 and older. On the assumption that the age and sex-specific labor force participation rates remain constant through time, and that the number of contributors, C55/60, remains a constant proportion of the labor force, the denominator of the dependency rate is obtained from projections of the population in each age group. The ratio of B55/60 to C55/60 provides an estimate of the dependency rate D55/60 in each period.

In view of the projected population ageing, it is conceivable that the relatively low Soviet retirement ages will have to be reconsidered at some time in the future. Thus, it is useful to assess the extent to which increasing the legal pensionable age might reduce the future tax burden on workers. To quantify this, an alternative dependency ratio has been simulated assuming that the statutory retirement age for women and men is increased every two years by one-year increments over a ten-year period, beginning in the year 1995, so that by 2005 the legal ages for men and women would be 65 and 60, respectively. The ratio of the resulting number of pensioners to the contributor base yields the alternative dependency rate, D60/65.

Four simulations of the required PAYG tax rate have been made. The first is based on the dependency rate D55/60 and assumes, as noted, that the average replacement rate of old-age pensions rises to about 60 percent by 2025. The second simulation assumes the same pattern for the growth of the average replacement rate, but is based on a gradual increase of the retirement age (to be completed by 2005) and concomitantly of the dependency rate D60/65. The third and fourth simulations are alternatively based on current and raised retirement ages, but in both cases the average replacement rate remains constant at 52 percent from 1996 onward.

In the case of retirement at ages 55 and 60 and a rising replacement rate, the estimated PAYG contribution rates rise quite considerably, reflecting the force of both demographic change and the replacement rate (Table 10 and Chart 3). The separate influence of population ageing in the USSR can be gauged from the constant replacement rate simulations. The very strong influence of the low retirement age on the per worker cost of future pensions is also evident; raising the pensionable age by five-year intervals reduces the increase in contribution rates by 6 percentage points. However, these simulations do not take into account unemployment, which can have an adverse effect on the contribution base.

Table 10.USSR: Pay-As-You-Go Tax Rates for Old-Age Pensions Under Alternative Long-Term Scenarios, 1990-2025 1(In percent of payroll)
YearRising Replacement RateConstant Replacement Rate


55 & 60


60 & 65


55 & 60


60 & 65
Source: Estimates.

Each column refers to the average of ages shown for women and men, respectively.

Source: Estimates.

Each column refers to the average of ages shown for women and men, respectively.


(percent of payroll)

Source: Estimates.

1. Retirement age is set at 55 for females and 60 for males.

2. Retirement age is assumed to be 60 for females and 65 for males.

Illustrative quantification of the potential implications of demographic conditions on payroll tax rates underscores their importance in the formulation of social security policy. At the same time, other factors should have opposite favorable effects. In particular, if labor productivity is significantly enhanced, the future burden per worker in the first instance will be lightened. However, if productivity gains, desirable in their own right, are passed through to pensions in order to maintain the relative incomes of workers and retirees, this will have little effect on the required tax rate. Thus, the large increase in the elderly dependency ratio that is projected over the next two to three decades in the USSR requires that eventually the authorities reassess the relative shares of national income of workers and retirees.

Although not captured by the present analysis, it is necessary to consider demographic differences among union republics; these differences partly explain current difficulties in establishing a centralized pension fund for the USSR (see Chapter IV.6). Moreover, besides variations in the present age structure (Table 11), differences in total fertility rates suggest that demographic diversity among the republics is likely to persist well into the next century.

Table 11.USSR: Selected Demographic Indicators, by Union Republic, 1990






USSR average27.317.12.34
Source: Ministry of Finance.
Source: Ministry of Finance.

For further discussion, see Chapter IV.6.


Of course, effective retirement ages differ somewhat from statutory ones. As elsewhere, incentives to postpone retirement are present in the Soviet retirement system. For instance, the initial pension can be increased by 10 rubles per month for each additional year of work beyond the qualifying age. Conversely, penalties for early retirement have also been present, the pension being reduced proportionately if taken before reaching the legal age.


That is, for soldiers, as distinct from officers who are already covered by the scheme.


Decree of the USSR Supreme Soviet “On Urgent Measures to Improve the Status of Women, Protect Motherhood and Childhood, and Strengthen the Family,”and Decree No. 759 “On additional Measures for Social Protection of Families with Children in Connection with the Transition to a Regulated Market Economy” [no date].


The beneficiary population for this allowance is the same as for the allowance which previously was paid to mothers for raising children to age one.


See Chapter IV.6 for a discussion of alternative approaches.


It is not clear to what extent the proposed program would require prior employment for eligibility.


For a more elaborate discussion of this program, see Chapter IV.6.


The original rate was scaled back largely because it would have generated a surplus during the first two years of implementation. Instead, the 11 percentage point difference between the original and present rate is to be levied to finance the newly-created extrabudgetary stabilization funds.


A consolidated (union and union republic) balance for the two funds is not available because of a lack of revenue data for the union republics, which are excluded from the projection.


Although only pensions are to be explicitly adjusted for changes in the cost of living, all benefits tied to wages (e.g., sick pay and maternity leave benefits) will also change. At the same time, as wages grow so do receipts of social security contributions. In a broader budgetary context, however, it should be noted that the pressure on social security transfers would be compensated at least in part by the fall in state budget outlays on consumer subsidies.


Presumably, an interim effect of the transition to a market economy will be an increase in the size of the population below the poverty line. Thus, the assumption made here is unlikely to hold in reality, but insufficient information is available on which to project the number of poor population.


Based on data provided by the Ministry of Finance, the projected number (in millions) of pensioners (old-age, disabled, student, etc.) in each year to 1995 is: 60.8 for 1991; 61.9 for 1992; 63.0 for 1993; 64.1 for 1994; and 66.3 for 1995.


The estimates of average pension in each year to 1995 provided by the Ministry of Finance, as noted, do not take into account any possible future inflation, although they do incorporate the minimum 2 percent annual increase called for in the reform. In simulating aggregate pension spending, it has been necessary to adjust the average pension in subsequent years for inflation above 2 percent and for any indexation of benefits in previous years. In other words, if pensions are indexed fully only in 1991, but not in subsequent years, one would nevertheless expect the average pension in those subsequent years to be higher than otherwise.


The observed replacement rate of 77 percent in recent years is arbitrarily increased to 80 percent to take account of the extension of full cash benefits to nontrade union workers.


Labor force participation rates obtained from Oxenstierna (1990).


For simplicity, the labor force participation rates are assumed to remain constant over the simulation period.


Normally, indexation of benefits occurs with a lag of several months. The assumption made here, for simplicity, is that benefit adjustments are contemporaneous with inflation.


The required rate (to be distinguished from the statutory combined contribution rate, which remains 27 percent in each year for all scenarios) is equal to expenditures on all programs divided by the wage bill.


A decline in fertility rates today reduces the future size of the working age population relative to the number of elderly. This is often referred to as “ageing from the bottom,” as opposed to “ageing from the top”, which results from increases in the average duration of life (and unchanged fertility rates).


As a general rule, the more the initial pension depends on current period wages, and the greater the degree of post-retirement indexation of existing pensions, the more stable will be the average replacement rate.


It is not possible to project the level which the replacement rate might reach, as this depends on the income distribution of future retirees and the relative trends in wages over time, among other things.


Given projections through 1995, made available by the Ministry of Finance.

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