Col. Stanislav Lunev
Monday, April 15, 2002

While we've been busy with the war on terrorism, Russia has been dramatically increasing its military preparations. For the buildup of its military machine, Moscow has traditionally used financial and economic assistance from the West, which was recently restored after Moscow declared its largely symbolic support for the war against international terrorism.

Russia is also using its profits from the export of weapons, related technologies, natural resources and from some of the economic improvements that came after Moscow established the kind of flat-tax system dismissed by the U.S. and other Western nations.

Actually, Russia became the first among the larger nations to adopt the ideal free-market tax system and abandoned a so-called "progressive income tax" for a simple and fair 13 percent flat tax.

After it took effect in Jan 2001, Russian tax revenues skyrocketed even though the tax rate is now far below the 30 percent top rate of the old system.

Many American and Western experts predicted that tax revenues would fall after the establishment of a flat-tax system in Russia, where tax evasion has been a kind of national sport for about a decade. However, contrary to these predictions, Russia's inflation-adjusted tax revenues climbed by 28 percent last year, according to preliminary estimates.

As the Russian media reported, in addition to one low rate, Russia's flat tax is much more favorable to savings and investments. In this country, income is taxed once when Americans earn it and a second time when Americans invest it. Russia's flat tax does not double-tax corporate income or impose a capital gains tax on stocks, bonds and home sales. Also, with few exceptions, there is no double tax on bank deposit interest.

As a result of this system, which established one of the lowest tax rates in Europe, Russia's economy grew by more than 5 percent last year while most other nations were hit by recessions. In establishing a flat tax, Russia followed Hong Kong and Bermuda and such former Soviet republics as Latvia, Lithuania and Estonia, whose populations also enjoyed rapid growth in part because of their tax system.

Russia's experience disproves the opponents of a flat tax, who call themselves Democrats and liberals but in reality are super-conservatives who consider it impractical. Their belief that the flat tax is good for only small nations but would be unproductive for the large countries is also disproved by the experience of Russia, whose flat tax has been followed by growth in tax revenues and the economy.

However, if in democratic nations this growth helps their people, in Russia this growth merely advances the special interests of its elite, and the Russian people realize no actual benefits. The major part of the additional income realized from the flat tax has, as usual, disappeared into the personal bank accounts of Russia's elite.

Last week, according to Moscow's media, Russia's Finance Ministry officials uncovered the misuse and disappearance of government money in 2001 amounting to more than $3 billion – almost 10 percent of Russia's entire national budget.

Officials said the violations were found in the course of 49,500 audits and inspections, as a result of which 10,000 officials were implicated and 625 criminal cases were opened last year.

Also, part of the additional income received by Russia from establishment of its flat tax was used for the research and development of new weapons systems designed for a future war against the U.S. and NATO. In addition to the current programs developing new generations of strategic nuclear weapons, this year Russia has begun to modernize its fleet of Tupolev-160 bombers, capable of carrying nuclear-tipped cruise missiles.

As Russian military officials said recently, Moscow is shifting the emphasis of its aging nuclear air, sea and rocket trident to submarines, but the bomber upgrade could be a response to American-Russian arms cut talks. If the U.S. wants to store rather than destroy thousands of warheads to be included in a fresh round of cuts currently being worked on by officials, Moscow could follow suit by prolonging the working life of its bombers.

Russia's misuse of the additional benefits arising out of the flat tax, however, cannot deny the benefits of the system itself, which could provide democratic nations such as the U.S. with growth of tax revenues as well as financial and economic improvements in general.

Col. Stanislav Lunev is the highest-ranking Soviet military intelligence officer ever to defect from Russia. Read his gripping story, Through the Eyes of the Enemy.

Read more on this subject in related Hot Topics:
Russia

A product that might interest you:
Get NewsMax's exclusive interview with Col. Stanislav Lunev: CIA Files: Defector Reveals Russia's Secret Plans