The problem of hyper-inflation which had plagued Russia earlier in the transition period has been replaced" by the dramatic reduction in real wages and severe dilemma of arrears. By December 1995, real wages declined by 13 percent and real consumption declined by 5.3 percent. Real wage decline, and unexpectedly low levels of unemployment, can be attributed to evasion of excess wage tax and inside the gate employment" by which enterprise managers hoard labor by paying minimum wage and compensation workers in non-taxable manners such as payment in kind, low interest long-term loans that have questionable repayment terms. It should be noted that the Pension Fund is becoming more experienced in detecting methods of tax avoidance and recent action has been taken to close loopholes

Reduced inflation has given way to arrears as one of the primary causes of poverty in the Russian Federation and has primarily been the result of international pressure to reduce the budget deficit by ending emission based methods of covering the deficit" and tax avoidance and evasion. According to ITAR-TASS, pensioner were owed nearly 3 billion dollars in October 1996. Revealing the revenue gap, 22 regions were able to make pension payments while the remaining 69 needed transfers from the federal fund. Wage arrears for both private and public sector were estimated at 43 trillion rubles--9 billion of which was the state's responsibility.

An area of concern which was not addressed in 1992 and continues to be a problem today is a rapidly deteriorating income distribution between the regions of the Russian Federation. The disparities between the rich and poor regions could possibly be the worst amongst all the federations.

CONCLUSION AND SUGGESTION

One of the greatest obstacles to successful Russian market economic development is the absence of a modern and effective tax system and lack of reliable data. Foreign capital always seeks predictability, especially in terms of projecting tax liabilities. Lack of a stable tax regime is the number one reason why Russia's direct foreign investment dollar level is so low compared with other emerging markets. A frequent and common concern expressed by foreign companies is the fear (whether real or perceived) of an unstable, inequitable, unreliable, and unpredictable tax system in Russia. As a result, capital that could potentially be invested in Russia is instead invested in other countries that are perceived as enjoying more stable tax systems. For Russia, it is time to introduce tax breaks or other incentives by the end of the year for companies using international accounting methods as part of a new business reform plan. For example, companies which would follow these (international accounting) standards will have their profit tax lowered by, say, five percent... or maybe they will receive other privileges. Most Russian companies use domestic accounting practices developed to calculate tax levels. Western accountants say Russian accounting has limited use for business planning and investment. Below, we have stated some suggestion and concerns regarding public finance in transitional economies:

Before making any changes in the tax system the officials have to think very carefully to avoid unplanned changes. For instance, the law on the VAT has been changed 13 times since it was enacted. Proper tax reform would also solve another of Russia's problems--its chronic budget deficit. The country's inadequate system of tax revenue collection has been unable to keep pace with the rise in government expenditure, leading to a budget deficit of 6.3 per cent of GDP in the first half of this year. According to Mr. Stuart Brown, eastern Europe economist at Paribas Capital Markets, while fiscal policy has been lax in Russia, monetary policy has had to bear the burden of reducing inflation. The result has been high real interest rates. No wonder then that several leading companies are looking abroad for capital. Reducing the budget deficit, to reduce "crowding out" at home and allow fiscal policy to take some of the burden in controlling inflation, must therefore be a priority for the Russian government. The problem is that tax evasion and a culture of non-payment in Russian industry, will hamper efforts to improve revenue collection.

Regulate the movement of budget money by reorganize the Russian treasury and concentrate all budgetary financial flows within it.

A good approach to battling non-compliance would be the implementation of a unified computer information system to control revenues and expenditures of the federal budget and state extra-budgetary funds, which should contain taxpayers registration system and bring together information on tax and customs duties payments, banking transactions and cash disbursements, as well as data on tracing and utilization of the federal budget resources. But it is still difficult to implement. First, Russia does not have high qualified specialists in database and management information systems (MIS). Second, it will require buying expensive mainframe computers what is critical under collected (60 percent - percent) revenue. It is also important to decide what kind of tax information is going to be the first to be put in the database. The State Tax Service of the Russian Federation recently began this process by requiring all taxpayers to indicate a personal taxpayer identification number (PTIN) on payments and settlement documents for taxes and other levies beginning on August 1, 1995. The rule as of January 1, 1996, states that a PTIN should be included on all payment and settlement documents. Also Russia's State Taxation Service is redoubling its efforts to stop commercial banks from hiding income from tax authorities. The taxation service recently found that credit institutions failed to transfer 3 trillion rubles to the state on time, and that they have used legal means to hide their income. With the centralized computer tax information system, it would be easier to observe taxpayers and prevent tax evasion.

·         Reduce the cost of servicing the state debt.

·         Stop the emission of money.

·         Improve control over monopolies.

·         Reorganize the banking system. Set up a federal deposit of insurance bond.

·         Reform ministry of finance and economy.

·         Diversification of the tax base.

Some services should be financed by taxes levied on local beneficiaries. "Local taxes" are those over which local authorities have some control. Which taxes to assign? The question is not easy for Russia. In many market economies, the central government controls those taxes considered to be most redistributive, such as personal income taxes, and the cyclical corporate income tax, leaving more stable revenue sources levied on a consumption base or property to the local level. For example, some federal systems (the U.S., Switzerland, Canada) allow subnational corporate taxes, it would be better for the federal government to set the corporate income tax. For the transition economies, considerations of both administrative complexity and allocative efficiency suggest that subnationally levied corporate taxes should be avoided at the present time. Permitting the many small subnational governments in the transition economies to set corporate tax rates (or adjust the tax base) will allow substantial tax competition and differentiation in enterprise taxation, influencing enterprise location decisions in perhaps undesirable directions.

.The development of a more efficient and effective social safety net in perhaps the most immediate and difficult task to accomplish in the Russian Federation. Aside from cultural reasons outlined earlier, economic growth cannot occur without social stability which will not happen until Russia can design an effective system of coverage. Some possible ways to improve this critical area are: diversify the tax base for social programs, redesign the system of federal-sub-national relation which has made the latter bear an unjust amount of the burden--unfair because of regional differences and compounded by Soviet planning--, and make stronger attempts to reduce arrears which is a difficult task due to the temptation to return to emission-based methods of covering expenditure requirements.

APPENDIX