Appendix I. A Model of Cash Compliance
This Appendix describes a simple game between the government and enterprises in which cash compliance is induced by the threat that the government will seize assets. In response to non-payment, the government chooses its optimal seizure policy balancing the revenue gained from seizing assets against the alternative of using unpaid tax liabilities as an imperfect substitute to cash for financing a chosen expenditure target. In this game, a decrease in non-revenue financing paradoxically increases the government’s willingness to tolerate lower cash compliance when formulating its seizure policy. It increases the likelihood, moreover, that enterprises will challenge government’s commitment to its policy of seizure, resulting in a further worsening of cash compliance.
First I consider the outcome assuming the government can pre-commit to a seizure policy. I then compare this to the case where the government cannot precommit, but rather adjusts its policy in response to enterprise behavior.
Citrin, Daniel A., and Ashok K. Lahiri, 1995, Policy Experiences and Issues in the Baltics, Russia, and Other Countries of the Former Soviet Union, IMF Occasional Paper No. 133 (Washington: International Monetary Fund).
Crotty, John, Katherine Baer, Richardson Thomas, and Richard Highfield, 1997, “Russian Federation: Addressing the Decline in Federal Cash Revenue Collections” (unpublished; Washington: Fiscal Affairs Department, International Monetary Fund).
Gaddy, Clifford G., and Barry W. Ickes, 1998, “Russia’s Virtual Economy,” Foreign Affairs, Vol. 77 (September-October), pp. 53–67.
Hendley, Kathrynn, Barry W. Ickes, and Randy Ryterman, 1998, “Remonetizing the Russian Economy,” in Russian Enterprise Reform: Policies to Further the Transition, ed. by Harry Broadman, Discussion Paper No. 400 (Washington: World Bank).
Ickes, Barry W., Peter Murrell, and Randy Ryterman, 1997, “End of the Tunnel? The Effects of Financial Stabilization in Russia,” Post-Soviet Affairs, Vol. 13 (April-June), pp. 105–33.
Interdepartmental Balancing Commission, 1997, “On the Causes of Low Tax Collection, General Causes of the Arrears Crisis, and Opportunities of Restoration of Solvency of the Russian Enterprise,” Report of the Interdepartmental Balancing Commission (Moscow, Russia: Interdepartmental Balancing Commission).
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)| false Interdepartmental Balancing Commission, 1997, “On the Causes of Low Tax Collection, General Causes of the Arrears Crisis, and Opportunities of Restoration of Solvency of the Russian Enterprise,” Report of the Interdepartmental Balancing Commission ( Moscow, Russia: Interdepartmental Balancing Commission).
Interdepartmental Balancing Commission, 1998, “On the Work of the Interdepartmental Balancing Commission in 1998” (Moscow, Russia: Interdepartmental Balancing Commission).
Brian Aitken is a Senior Economist at the International Monetary Fund. The author thanks John Anderson, Tom Richardson. Tapio Saavalainen, Ratna Sahay, and Jem mi n Zettelmeyer for comments on a previous draft, and participants of the December 1998 European II Department seminar.
Gaddy and lckes (1998). In their paper. Gaddy and Ickes do not model tax compliance directly, but argue that cash revenue collection can be increased only by redirecting enterprises’ cash proceeds away front other expenses such as wages.
Data on local government and extrabudgetary revenues are especially difficult to interpret. Local governments are widely believed to systematically underrepon their revenue, mainly because the distribution of federal transfers is in pan determined by local revenue shortfalls. In addition, an unknown share of revenues and expenditures reported by local governments and some extrabudgetary funds take place through non-cash transactions such as through mutual arrears clearing operations. While the share of these operations is believed to be large and growing, the absence of a lime series prevents cash and non-cash revenue developments from being analyzed separately. Aside from these concerns, however, there is no fundamental reason why the arguments in this paper cannot be extended to local and extrabudgetary revenues.
Total revenue is based on official Russian treasury figures excluding privatization proceeds and proceeds from sales of stocks of precious metals, and is composed of cash revenue and non-cash revenue (tax offsets). Tax offsets are recorded as revenue in the treasury figures when the offset transaction takes place, rather than when the tax liability was incurred. Data on changes in the stock of tax arrears come from the state tax service, and exclude fines and penalties. The total tax liability as assessed by the state tax service is estimated by adding total revenue to the change in the stock of tax arrears. An “adjusted tax liability.” shown in Table 1, is estimated by adjusting for differences in timing between when a taxable transaction actually took place and when a tax liability was later formally incurred as part of an offset operation.
The state tax service has the legal authority lo block. a tax delinquent’s bank accounts and force all current revenues into a single settlement account that is applied lo the paymenl of tax debts. Hendley, Ickes, and Rylerman (1998) discuss the increasing use of barter and other non-cash transactions as a way of evading seizure of revenues through the single settlement account system.
In December 1997. the Emergency Tax Commission look a path-breaking decision to seize assets of several major tax delinquents in the form of seizure of their entire “property complex.” This decision, by preserving an enterprise’s value-producing operation in tact, would have greatly increased the benefits to the government of seizure as well as increasing the costs to the enterprise managers and owners. For these reasons, the decision mobilized the direct opposition of powerful political lobby groups and was very soon reversed on legal grounds.