Tributary taxation

The deciding feature of Putinist rule, tributary taxation is a funnel of wealth generation for the top tier of state bureaucracy. It’s a powerful tool for upholding political cohesion and fighting regionalism in Russia.

Tributary taxation consists of constant cash streams cascading upwards through the hierarchy of state employees, in parallel with regular taxation. The state that allows tributary taxation gives to its servants implicit permission to live off the “administrative rent” as a part of their remuneration.

Example:

Ivan who holds a small business gives the police operative Petr $100 a month is a brown envelope. Petr gives his police boss Alex $20 of these. Alex gives the regional internal ministry executive Maxim $10 of these. Maxim sends his boss in Moscow Oleg $5 of these. Oleg sends $3 of these to Mikhail Ivanovich, or someone else who can give him a helping hand if he suddenly gets some work-related problems.

It’s totally up to all these people if they want to pay, how often, to who, and how much. The point is to prove to the person higher up in the chain that they are better off keeping them in office, and not to opt for someone else at the next job appraisal. They can also send money simultaneously through some other chains of tributary taxation if their living depends on their support.

This scheme explains why the Western profit margins seem laughable to Russian entrepreneurs. The margin south of 5% simply cannot support the tributary taxation. As they say in Moscow, “No one gets off their behind here for less than 30%”.

Is it corruption?

Only partly. It’s not a straightforward bribe. It’s not contingent on any particular favor. Such favors often require additional payments. It’s more of a stakeholder dividend: Mi casa es tu casa.

Tributary taxation is a powerful tool for controlling bureaucracy from top to bottom. Ineffectual or disloyal officers lose access to this rent. It also forestalls local separatism and independent civil society, as the distribution of wealth and resources is pinned around the machine of state administration.

Why does it persist?

In Russia, this has a very particular origin. It’s the distinctive colonial character of the Russian economy.

Ever since the time of the Varangians, the main source of wealth for men in power was not taxation of their subjects’ incomes, but rather access to high-value, low-volume natural resources—as well as skimming off the North-South transit trade. Up to the 18th century, the Russian state lived off the trade in slaves, furs, honey, and some other colonial products. Just like now it thrives on exporting oil, gas, fish, timber.

In such an economy, the local population is only a pool of recruitment for troops that protect the perimeter and acquire new prospective territories. Locals provide as well the manpower for extracting colonial resources. As to the subsistence economy of the aborigines themselves, it’s too low-margin to be of interest to the rulers.

What is needed to get rid of the tributary taxation?

During Catherine the Great’s rule, Imperial Russia conquered vast fertile Cumanian prairies in Ukraine, southern Russia and along the Volga river. Large-scale commercial grain farming started there. During the XIX century, along with industrialization, it created a type of economy where more and more state income was generated by the subjects’ work, and not simply from sales of extracted natural resources.

This new pattern created the same political effect as in Europe and America. The middle class emerged. The mercantile estate began gaining influence. The requirement “no taxation without representation” started taking hold in Russia. Elements of local self-rule were introduced under Czar Alexander II, and Czar Nicholas II allowed the first Russian parliament in 1905.

Normally, such development leads to democratic rotation of elites and accountability of those in power. Tributary taxation dies off, as taxpayers claim political control over the bureaucracy. However, the middle class in Russia was destroyed after the revolution of 1917.

How did it survive the Communist rule?

Normally, tributary taxation needs private property. A surplus of wealth is needed to cascade a steady stream of cash through the private pockets of bureaucrats. Impoverished Soviet citizens could afford only one-on, one-off bribes, at best.

It took several decades for the standards of living to go up enough to recover some of it. The commodity-trading communities in Transcaucasia (fruits, drugs, and flowers) and Central Asia (cotton and drugs) pioneered it, and then it transplanted itself to many other segments of the state bureaucracy, primarily distribution of food and consumer products.

Why did it return?

The triumph of oligarchical Capitalism under Yeltsin, and especially Putin, led to a renaissance of tributary taxation. The spectacular rise of global commodity prices, combined with relative poverty of most Russians re-created the old pattern.

With a flat 13% income tax, Putin’s bureaucracy declared itself independent—and therefore unaccountable—before the mass of taxpayers. It depends on the volume and price of colonial commodities, primarily gas and oil, for its wealth and survival. Hence, the focus on defense, police and pipelines, railways and custom services as the pillars of the extraction economy.

The independence of state employees from taxpayers leads to a perpetuation of unaccountability of our rulers before the nation. As long as it stays so, the tributary taxation will persist as the preferred tool of state administration. It’s non-ideological, it’s simple, it’s cohesive, and it fits nicely into the existing system of oligarchical clans. This is the explanation of Putin’s relaxed view of the whole problem of corruption in the country: he sees it as a powerful tool of political control.

Will it disappear?

Not for some time.

It’s not about Putin. To get rid of it, Russia needs a strong, politically active middle class that can enforce accountability on our rulers, and by extension, on our bureaucracy. Right now, civil society exists only in tiny pockets in large cities, and at best can realistically count on support from 15–20% of the population. The country needs at least one more generation in peace and stability before our nation becomes strong enough to take control of its own state.

The graph below shows the share of small and middle-sized companies in Russia’s national economy. Left to right: China, USA, Germany, Russia. Blue means “share of employment”, red share of GDP”. The insignificance of SMEs in Russia comes from the dominance of large enterprises clustered around the extraction sector as well as state-centered enterprises in the infrastructure and military sector.

Share of small and middle-sized companies in Russia
Graph: Share of small and middle-sized companies.

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