Self-Employed Russians Hiding Away From Taxes in Their Garages

Self-Employed Russians Hiding Away From Taxes in Their Garages


Driven by the desire to get more taxes from people, the government extended the regulations for registration of self-employed persons to 19 more regions in addition to the four regions where they had been introduced previously in the test mode. However, residents are not in a hurry to pay taxes and make contributions to state funds, as the country has a ramified “garage” economy.

The term came to Russia from the West where it refers to entrepreneurs who just started to run their own businesses and used garages of their parents as a stepping-stone. As a rule, these startups are associated with the intellectual property or high technologies’ development. For example, visual effects for George Lucas' first Star Wars film were created in a garage through the efforts of the team of four people. Mark Zuckerberg also worked on his Facebook in a garage.

However, in Russia, the situation is different. In particular, Igor Palashov, a consultant on corporate information, says that in this country the “garage” economy is more the case of business operations in the so-called “shadow economy" zone with problems common for Russia as a whole. "In general, Russia's “garage” economy is mentally in the same chains as all other economic activity. You should admit that historically the task of keeping us under control as a public system has always been a higher priority than the task of development. Under the source of wealth we mean the tools of redistribution rather than the production of goods. We are trying to meet constant changes and first of all, are striving to keep up with the world leaders. As soon as we come forward, we seem to be lost. We subconsciously reject innovations and recognize them only after someone has trial-tested and proved them. The great paradox is that having powerful talents and courage, we tend to borrow but not to create something. This deplorable national habit has had severe consequences for all generations of Russian innovators. Certainly, it ensured the peculiarities of the garage-based economy -- private initiative is often self-censored.”

Palashov has been studying the “garage” economy for several years: "So far, this is mainly a "hobby" for me, which refers to the psychotherapy of city residents constantly living under stress, or a sector of "natural economy," associated with the high level of poverty and the necessity to keep alive. To be fair, it should be noted that in recent years the situation is changing, and in general, there are positive developments: the “garage” economy tends towards production. Today, this sector is beginning to demonstrate its potential to establish market-oriented companies.”

According to Olga Golodets, who served as a Deputy Prime Minister of Russia in the previous cabinet, about 38 million individuals work in the garage-based sector in Russia.

As wrote, taxes and contributions to the funds are not paid by about 40% of economically active Russians. These figures were provided by Simon Kordonsky, professor at the Supreme School of Economics and scientific director of the Khamovniki Social Research Support Foundation. Particularly, people prefer not to register official legal entities, not to get employed and to pay for goods and services in cash. The Treasury thus has a shortfall of about 3 trillion rubles annually, which is almost 3% of GDP. Almost 1 trillion rubles of them accounts for personal income tax.

In fact, in an attempt to somehow control these amounts of “shadow” money, the authorities have introduced the status of a "self-employed individual" with a fast-track registration procedure and a simplified system of taxation providing for much smaller tax deductions than both personal income tax and uniform tax on imputed income systems or other systems of simplified taxation of entrepreneurs.

Experts are confident that the garage-based economy will continue developing. In particular, this year the authorities expect the number of unemployed to increase by 60%, first of all, due to the redundancies of preretirement age workers. They have the required knowledge, skills and energy, and, therefore, are able to join to the "garage workers."

"The growth of the garage economy is also provoking an increasing interest in local lore, crafts and domestic tourism,” Palashov said. “This influence is indirect and it shows up through the activities of the authorities in stimulating regional economies and certain cities in what concerns support for small businesses with the help of various programs. However, even in related sectors, this activity affects the garage economy through the cohesion of technological processes: the production of matryoshka dolls is associated with woodworking, while traditional embroidery is connected with clothing production. There are significant opportunities for cooperation and partnerships.

Certainly, the technological possibilities mastered by the younger generation will also fuel growth in the above-mentioned sector. Even the impossibility to receive financial support from the state for small businesses, to borrow or get machines and equipment on the terms of lease does not influence this sector greatly. The "garage companies" do well enough with what they have on their own or find financial resources by other means.