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High taxes push Russians into informal sector - experts

September 08, 2014, 16:37 UTC+3 Zamyatina Tamara
© EPA/ANDY RAIN

MOSCOW, September 08. /ITAR-TASS/. According to research by the Russian Academy of National Economy and Public Administration, more and more Russians tend to believe that engaging in shadow economy activities is rather a blessing than evil. According to experts, people increasingly prefer the informal sector of the economy to avoid high taxes and job cuts.

According to the academy, up to 40% of the economically active population is currently employed in the informal sector. The Rosstat Federal State Statistics Service cites the figure at about 20%, or 14.1 million people working in the informal sector last year. This year, the informal sector has an additional 0.5 million people, with the figure hitting a 10-year high, Rosstat said.

“People engaged in the informal sector of the economy are farmers, non-corporate entrepreneurs, private tutors and others. When we look at the employment pattern, we can see the number of self-employed as well as hired workers growing in this sector. It is the informal sector that has been giving the employment gain over the past 10 years,” the head of Rosstat, Alexander Surinov, told the Novaya Gazeta newspaper.

“The shadow sector is big, incorporating non-resident housemaids, baby-sitters, cleaners. Many people are glad to get their pay in cash. In different countries of the European Union, this sector varies from 3% to 7% percent. But one can hardly find a country where this figure would approach 20 to 30%,” economist Sergei Aleksashenko says.

“Places of work are getting fewer year by year. And what should a person left without a job do? Go to a labor registry office for unemployment benefit which is 4,900 rubles (some $136) at most, while many people get a meager 850 rubles. But people must eat and feed their families. If they have a car, they do cabbing. If they know something about technology, they fix TV sets and telephones,” Vladimir Gimpelson, director of the Labor Research Center at the Higher School of Economics told the Trud newspaper.

“People often fail to understand that life ‘in the shadow’ does not bring big money. Earnings there are on the average 20% less than in the legal sector. And no sick leave, no vacation pay or labor protection. Besides, one cannot sell ‘shady’ business, or leave it to inheritors. If something happens to a person, things will immediately go to pieces,” said Gimpelson.

The effect from an expansion of the "grey zone" of the economy is obvious - lower tax base, lack of legal protection for such workers and simply work at full stretch.

Polls at enterprises by Markit (a provider of financial information services) and the Gaidar Institute for Economic Policy show that they forecast staff reductions, though they are losing momentum. The flow of the workforce from formal into unregulated sectors of the economy is continuing.

"Decline in demand for labor is a reflection of the business climate, which is not favorable to growth in investment, including job creation,” Gimpelson says.

“The main reason behind swelling informal sector is growing tax on business, including a unified social tax. As a result, many entrepreneurs leave the legal market, taking along their workers, who receive salaries under the table,” the head of the Higher School of Economics and former Economics Minister, Yevgeny Yasin, told ITAR-TASS. “A new wave of taxation has not been felt as of yet, but people prepare ‘an alternative aerodrome’ in advance, and the tendency towards a growing illegal sector of the economy may stay in place,” the expert forecasts.

“The factors that used to prop up the Russian economy since 2003, like oil prices, are not working now. Coupled with the withdrawal of a sizable part of the population ‘into the shadow’, this may well result in a decline in economic growth to 1-1.5% a year, and possibly zero growth,” Yasin said.

“In order to improve the situation, we must see major changes in economic policy, a higher degree of trust of the business community and citizens in the state. For this, a considerable part of mechanisms of the government management of the economy must be lifted,” he said.

“The decision on changes in tax policy, including the expediency of introducing sales taxes, will come before the end of September 2014,” Prime Minister Dmitry Medvedev said in an interview with the Vedomosti newspaper on Monday. The prime minister said coming government decisions on tax policy will not affect income taxes of individuals.

 

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