Interview with Yevgeny Gontmakher, head of the government’s Department on Social Issues.

Yevgeny Gontmakher is head of the government Department on Social Issues. He spoke to The Russia Journal about the government's latest social policy reforms.

RJ: The government plans to introduce a tax deduction of up to 25,000 rubles for additional or private education and 25,000 rubles for health care. What will this do for the taxpayer?

YG: There's both good and bad in this measure. It will bring part of taxpayers' currently undisclosed income into the open. Taxpayers will be able to declare higher income without having to pay tax on it. But it's a tax break for the wealthy, or a layer of this hypothetical middle class of ours – senior managers, private sector doctors or lawyers. Most people have low incomes, though, and never or hardly ever use private education or health [care]. They won't be claiming this break.

RJ: Is there any data on the volume of health care and education to be covered by the tax break?

YG: It's complicated because not all health care services are official and paid for officially. But some estimates show that about a third of the population pays for health care more or less regularly. Unfortunately, we have a situation where sometimes hospital patients or their families, for example, have to pay for medicines because the hospitals don't have the resources.

RJ: Are there plans to raise the basic income-tax deduction?

YG: Yes, it will be raised to 300 rubles [a year], plus 200 rubles for each child. Now, it's 83 rubles.

RJ: Were there plans to raise the threshold higher still?

YG: There was a proposal to raise the tax-exempt threshold to the living minimum – around 1,000 rubles [a year]. But then we would have had a lot of people who would not pay any income tax at all.

RJ: The government proposals to introduce a flat income tax rate and a social services tax were unexpected. Will they be opposed?

YG: The Finance Ministry probably calculated that with a flat income tax – 13 percent – the budget could lose money. But a lot of people will legalize their incomes, and this will compensate for the loss. The Duma budget committee chairman, Alexander Zhukov, proposed two rates – say, 13 percent and 20 percent, and a regressive scale for social contributions.

RJ: How will the flat social tax help solve social services problems?

YG: [Prime Minister Mikhail] Kasyanov said "the decision's been taken, and I ask you not to discuss it further. If you have other points of view, keep them to yourselves." Maybe that's the right approach – the commander's taken his decision. But it's no secret that the social ministries were against the flat social services tax. We managed to save the pension fund, but the sick pay fund and unemployment fund have both been eliminated.

RJ: Trade unions have already sent out the alarm that there'll be problems with sick leave pay.

YG: I understand their concern – sick leave was one area left untouched since Soviet times, and it kept working smoothly. Now, with the new tax [to come into force from Jan. 1, 2001] the tax ministry will collect the money that will then go through the treasury. A new system will have to be designed. The treasury isn't ready yet.

RJ: What about the employment fund?

YG: Lately, 70 percent of the fund has been going on unemployment benefit payments. The benefits were too high. We cut them by half, but it's still a burden for this country. Also, it was easier to reorganize the employment fund – it's just an account at the Labor Ministry, not a separate structure.

RJ: So now what happens to unemployment benefits?

YG: They'll be paid by the federal budget through local employment offices that will remain in place.

RJ: What about the pension fund?

YG: The pension fund will remain independent. From next year, of 28 percentage points paid into the fund from the wages fund, 26 will go to the current pension system and 2 percent will go to individual accounts.

RJ: But if I'm always paying 2 percent into this account, it's like crediting the government, and this money shouldn't just build up, but grow. Who's going to take care of this?

YG: We need to think how to place this money at low risk. Perhaps the money could credit the budget or be placed in some special kind of security.

There probably should be some kind of diversified placement. The money will be managed by a company that will conclude a contract with the government.

RJ: There's an effort to lower the workers' tax burden, but what about the employers? They have to make even more payments.

YG: Employers' tax burden will also be lowered, overall by about 2, 3 percent. It's not much, but it's a start.

RJ: Do you really think these tax reforms will bring new money into the budget?

YG: There were attempts to change the tax structure to lessen the tax rate on wages under [Yegor] Gaidar, and they were later abolished because nothing happened.

Lowering the tax burden is a good idea, but real results will be achieved only under two conditions.

First, the tax burden would have to be reduced several times. Second, people here simply d

on't trust the state. We pay taxes, and look at the result – a miserable army, a police force we're afraid to turn to. When people see real change in their living standards, then they'll start paying their taxes. Transparency is important, taxpayers' money goes to Moscow, and they don't really know what's happening to it there.

When the taxpayer pays taxes to the local treasury and sees the visible impact of how it's used, then it'll become clear how the money is being spent.