4.

Official Responses

Legal Restrictions, Bureaucratic Interference, Taxation

There was a tense, uncertain, and highly ambiguous relationship between those who had promoted cooperatives and prospered within the institution, and those who perceived private enterprise as a colossal error and a corruption of socialism. The clash between these two opposing convictions was not without effect; the number of cooperatives increased in spite of the efforts of powerful sections of the state bureaucracy.

How can the seeming contradiction between the presence of a growing movement of private enterprise and the continuing contempt of a large segment of the public and the rigidities of officialdom be explained? In some ways, this apparent inconsistency was a perfect mirror image of the general course of economic policy under Gorbachev. First, as in the 1930s, the new economic reform was very much a revolution carried out from above rather than from below. The preponderance of the evidence shows that reform and privatization are what a coterie of the leadership wanted, and protection from the vagaries of the market was what the overwhelming majority of the population wanted. Take, for example, the Ryzhkov government’s announcement late in the spring of 1990 that bread prices were to triple as of July 1990, and that other prices would rise the following January. Predictably, panic buying took place right after the announcement of the impending price increases. On June 14, 1990, responding to the mass anxiety, the Supreme Soviet voted overwhelmingly not to raise bread prices.¹ Second, the functionaries in the economy knew what they stood to lose if economic reform, including privatization, were to succeed. But there was great uncertainty among the general population about the payoffs from privatization. The combination of incompatible goals and expectations was what drove three years of efforts to place a restrictive yoke around the shoulders of the cooperative movement; it was a market oriented institution constrained by opposing forces.

In discussing official reactions, it is crucial to understand that the term “official” did not imply during the period of perestroika what it had before the program began. Although the Soviet bureaucracy was never monolithic and of one mind, by the late 1980s it had experienced considerable fragmentation. As a result, there was no single official policy toward cooperatives. In general, central authorities (those responsible for setting all-union regulations) were more ambivalent about cooperatives than were local (city, regional, and republican) officials. Central authorities were more responsive to political pressures and this resulted in a series of regulations that swung from strong support for cooperatives to strong control over their activities. Often, announced intentions to move in a particular direction were abandoned before the changes could be made official. Much of the seeming ambivalence at the center about cooperatives was due to the actions of opposed political forces.

At the local level, however, officials were generally either in favor of or opposed to the cooperative movement. In part this reflected the fact that single individuals, especially party leaders, still had considerable power, whereas at the center power was more dispersed among competing factions. So there was more consistency in policies and actions at the local level, and in areas where officials were hostile to cooperatives fierce conflicts often raged. Local authorities were especially active in protecting state enterprises from competition with cooperatives. Where the latter were able to provide services to the public more quickly or cheaply than were the state organization, officials would put barriers in the cooperatives’ way or close them down altogether.

Reformers had a more difficult task than did conservatives in the bureaucratic battle that took place. Conservatives only had to appease public hostility toward cooperatives in order to gain favor, but reformers had to show themselves sensitive to the public mood without giving into it so much that the program of economic reform and the move to more market influences would be put in jeopardy. This added to the difficulties of those at the center in maintaining an unambiguous position vis-à-vis cooperatives.

There was during the period 1986-1990 considerable tension between the center and local areas, with local officials either ignoring central rulings or passing their own regulations in contradiction to all-union regulations. Moreover, as the center gave more and more jurisdiction over cooperatives to local authorities, its ability to resist local challenges was weakened. It was not until after the March 1990 elections, which put liberal reformers in power in many areas, that this pattern was broken. Indeed, local areas became even more market-oriented and pro-cooperative than the center. Prior to this, though, even in areas where officials had strong anti-cooperative views, local procurators and judges would frequently act to protect the legal rights of cooperatives. In sum, the situation in 1986-1990 was extremely complex, making any simple dichotomy into official and unofficial views untenable. Official reactions were as varied and contradictory as those of the general public.

This chapter examines the three main ways in which authorities at different levels tried to restrict the growth of private enterprise: legal restrictions, bureaucratic interference, and taxation. The official assault on the new cooperatives was a mixture of heavy-handed restrictive legislation, both direct and subtle bureaucratic interference, and punitive tax policies. We begin with an analysis of the restrictive legislation that began to emerge soon after the Law on Cooperatives went into effect. From there we assess the ways in which the bureaucracy exercised its prerogatives to impede and sometimes smother the cooperative movement. Finally, we move to an examination of tax policies aimed directly or indirectly at the cooperatives.

LEGAL RESTRICTIONS

The May 1988 Law on Cooperatives was far from the final legislative word on what cooperatives were supposed to be and what they were supposed to do. After the initial passage of the legislation, there were a number of key amendments to the original law. At any given moment, in fact, it would have been difficult to articulate with certainty what the state’s ambitions for cooperatives were, because the rules changed so often. The nature of the changes was such that the range of freedom available to cooperatives became narrower and the intrusions of the state into their day-to-day affairs became greater.

After several months of grumbling about real and alleged anti-social cooperative behavior, a hint that the axe was about to fall came in November 1988, barely five months after the enabling legislation. Medical cooperatives were targeted by the Ministry of Public Health, which issued an order prohibiting them from leasing medical equipment. Six medical cooperatives in Moscow stopped operating virtually at once.²

But the first major change in the law was the December 29, 1988, resolution of the USSR Council of Ministers, “On Regulating Certain Types of Cooperatives in the USSR.”³ The resolution had two main articles and two appendixes. The first article established that cooperatives did not have the right to engage in certain activities. At a minimum, the list of forbidden activities indicated what the state considered important for it to continue to monopolize. A number of these prohibited activities involved issues of national security and public health, such as bans against making weaponry, munitions, and narcotics, and the proscription of these activities was quite defensible. But many of the prohibited activities demonstrated that the Soviet state was unwilling (or unable) to allow individuals and the market to make decisions. Thus, a substantial number of medical activities by cooperatives were disallowed, including the treatment of cancer patients, patients with infectious diseases, drug addicts, people with mental problems, and pregnant women. Nor could cooperatives manufacture wine and vodka, no doubt because the government did not want to lose the huge revenues that the state collected from this industry. Cooperatives were also forbidden to engage in publishing or to organize schools.⁴ Part of the legislation outlined certain activities in which cooperatives did have a right to engage, but only on the basis of contracts concluded with state organizations, such as the buying and processing of secondary resources and by-products, providing certain kinds of medical assistance (not otherwise banned elsewhere in the law), and manufacturing perfumes and cosmetics.

The state’s explanation for the restrictive legislation followed soon thereafter. In an interview with Izvestiia, I. Prostiakov, vice-chairman of the USSR Council of Ministers’ Bureau for Social Development, said the justification for the resolution was that cooperatives were increasing at a rapid rate and that activities in which they were involved “were bound to be at variance with the interests of society. ...” The mentality of Soviet officialdom can be seen in Prostiakov’s comment that a resolution was inevitable because one of the articles of the Law on Cooperatives stated that activities not prohibited were permitted and therefore the government had to do something about defining what this meant.⁵ In part, the 1988 restrictions were merely a restatement of the 1986 legislation on individual enterprise.⁶ The new restrictions were, however, broader than those which had been specified earlier.

MEDICAL AND TRADING COOPERATIVES: CASE STUDIES IN RESTRICTION

A key target of the restrictive legislation was the medical cooperatives. Along with education, the health care system has long been claimed as an area of success by Soviet leaders. The free provision of these services was seen as part of the foundation of the society, health care and education being basic rights of all citizens. The Law on Cooperatives specifically forbade the setting up of private general schools, but allowed private medical services to be provided in tandem with state facilities. This proved a controversial issue, though, and the cooperative health care sector soon ran into trouble.

At first, the new medical cooperatives did well, although central officials were cautious about the whole idea. The 1986 law allowing individual eco-nomic enterprise placed restrictions on what physicians could do outside of the state sector, and in March 1987 the USSR Ministry of Public Health set out the qualifications that providers had to have, the sanitary conditions that had to be met, and the medical procedures that were and were not allowed.⁷But there was still concern about the question of prices, and about the possi-bility that personnel would flee the state hospitals and clinics to set themselves up in private practice. Private providers were expected to take the fee structure of cost-accounting state facilities as a benchmark, which if followed would make it less attractive for them to leave the state sector.⁸

The conditions under which most physicians and nurses worked were themselves a disincentive to remain in the state sector. The shortage of equipment and medicines, the poor sanitary conditions, the low pay, the heavy load of paperwork, and the constant interference of administrators, all made the lives of patients and providers trying at best. Although medical personnel had been given salary increases of about 35 percent in 1986, pay was still low given the qualifications and responsibilities of these people; for example, under the new pay scale, the maximum base pay for a surgeon in rural areas was still only 230 rubles a month.⁹ Moreover, no matter how hard a physician worked, or how skilled he or she became, the salary remained the same; although in principle good work was supposed to be rewarded, funds for additional salaries were not made available.¹⁰ The only way to increase income was to accept or request bribes, and this made physicians vulnerable to pressures or prosecution. It was this corruption and its attendant risks that led many doctors to form cooperative clinics.¹¹

Medical people were quick to set themselves up in private practices, as was seen in Moscow where 600 of the 2,000 applicants for registration when the law came into effect in May 1987 were medical personnel.¹² By September, 2,500 people were officially registered in Moscow’s private medical sector.¹³Although the medical cooperatives did not grow as quickly as other types of cooperatives, there were nevertheless 2,800 such cooperatives employing 48,0 people by mid-1989, and physicians working in them were earning four to five times more than they had in state hospitals.¹⁴ These were not just doctors’ clinics, though, for they offered a wide range of health-related services, including homeopathic medicine, private sanatoriums, and the care of invalids.¹⁵ They even created their own “trade association,” the Moscow Association of Medical Cooperatives.¹⁶

Although there was considerable support for these cooperatives, they were not immune to the harassment that other types of cooperatives faced. At a meeting of the Council of Ministers in 1989, complaints were made that private clinics were charging fees well above the state tariffs, even though these cooperatives paid subsidized prices for the resources they acquired from the state sector. Ethical questions were also raised about the practice of directors of state clinics working in cooperative clinics.¹⁷ This was seen as a conflict of interest because the person setting the terms for use of state equipment was also a member of the cooperative doing the leasing. Moreover, as many as nine out of ten people working in medical cooperatives still retained their jobs in the state sector.¹⁸ Also, as in the case of other types of cooperatives, medical people were taking most of the cooperatives’ income (70 percent) in the form of wages. A more serious criticism, though, was that private clinics were not legally liable for wrong diagnoses or treatments, and were not required to inform the authorities about cases of infectious dis-ease.¹⁹ Cooperatives on the fringe of the private medical system also created bad publicity for private medicine through such activities as selling scarce pharmaceutical materials and even blood to foreign companies for hard currency.²⁰

A serious assault on medical cooperatives began in November 1988 with the issuance of an order by the USSR Ministry of Health prohibiting the leasing by cooperatives of expensive equipment. Objections by the medical profession (which earlier at a Congress of Physicians had voted in favor of some regulation of private clinics), and by those attending an emergency congress of medical cooperatives called in response to the order, did not prevent even wider restrictions on private medical practice being announced at the end of December.²¹ The new restrictions forbade a large number of treatments and services in the private sector, and allowed cooperatives to function only under the close guidance of state clinics.²² The new prohibitions apparently covered at least 40 percent of the cases then being treated in cooperative clinics.²³ In Moscow alone, half a dozen or so medical cooperatives immediately went out of business.²⁴

The crackdown was justified in part on the grounds that the government had to ensure that medical treatment was provided in a professional manner and that the quality of care was of a high standard. That this was a misplaced concern can be seen from the fact that physicians in the medical cooperatives were in fact better qualified than those working wholly in the state sector, and that one of the reasons patients went to the private clinics was to gain access to specialists they would otherwise be unable to see. Moreover, most patients were so satisfied with the care provided by their medical cooperative that they intended to keep using it.²⁵

The use of state equipment by medical cooperatives was also not a straightforward question of patients in the state clinics being denied access to needed diagnostic procedures. A lot of the equipment in the state clinics was not being fully used, and giving access to it through a cooperative actually added to the amount of health care being provided to patients. According to one report, expensive medical equipment in the state sector was being used at only 40-50 percent of its capacity.²⁶ Even where equipment was fully used (and it was not easy to define what was meant by this) there could be benefits to leasing the equipment to the cooperatives.²⁷ For example, the waiting time for a CAT-scan was often a year or more in the state clinics. As a result, many patients were willing to pay 500-1,000 rubles “under the counter” to avoid a wait. Estimates of total illegal payments such as these put them at between two and six billion dollars a year.²⁸ Allowing a cooperative to use the equipment, even though it charged a significant fee, meant that the procedure could be obtained more quickly and more cheaply, making it available to a wider range of people. Also, the ability to pay bribes was only part of what was needed—without access to the proper people, bribes could not be offered. The cooperative clinics removed this barrier, making access to care easier. Nor was it a question of the state being denied a return on its expenditures, for the state clinics received a considerable fee for the use of their equipment, since the clinic providing the equipment often received the lion’s share of the cooperative’s fee. For example, the Lik cooperative charged 107 rubles for a CAT-scan, of which the state clinic received 42 rubles, plus 42 rubles for wear and tear, while the physician was paid 6 rubles and the cooperative received 8 rubles.²⁹

Prices in the medical cooperatives were really not so high as compared to some of the other sectors of the cooperative movement. Reported prices of medical cooperatives were quite reasonable given the needs of patients that were going unmet by the state sector. Typical were the fees charged by the Tselitel’ private clinic, where patients paid 56 rubles for an X-ray and 106 rubles for an ultrasonic internal examination.³⁰ Indeed, the pediatric cooperative Filatovets apparently looked into the background of its clients and found that most of them were in fact people of modest means who used the private clinic because they could not afford the bribes at the state facilities.³¹

The newspaper Izvestiia was a strong champion of the cause of private medical care during the period when medical cooperatives were under at-tack. It published many articles attacking the medical authorities for their hostility to cooperatives and gave a great deal of publicity to the shortcomings of the state system of health care. In September 1987, the paper sent correspondents to Baku to investigate people’s views on the state clinics, and published detailed complaints about the unavailability of blood for transfusions (unless a relative could be persuaded to be a donor), overcrowding, and unsanitary conditions. Izvestiia’s correspondents told horror stories of negligence and venality, including the attitude among personnel that without payment the patient should not expect attention (including women in childbirth; a birth could set the parents back 500 rubles in “gifts”).³²

The severe restrictions imposed on cooperatives in Uzbekistan in 1989 included medical cooperatives. One commentator was moved to note that without privately provided health care the population would continue to suffer the dangers and indignities that the state system provided: “How many more dirty hypodermic needles, wrong diagnoses, rude shouts and dirty bed sheets await us in our outpatient clinics and hospitals? How many more children and mothers will yet die? How much more suffering—all free of charge—awaits us given the lack of necessary medicines? If medical coopera-tives have one measure less of each of the above, the ban on providing medical care is arbitrary and harmful.”³³

As in other areas of the Soviet system, in the medical field cooperatives were able to supply a much-needed service at a price that was not unreasonable, given the situation. But this did not prevent them from coming under attack by those who had a stake in the old system, in this case the Ministry of Health. Interestingly enough, it was Minister Chazov who was one of the cooperative’s strongest opponents, even though he was also a severe critic of the official medical system and personally informed the state of its enormous shortcomings. His campaign against medical cooperatives was buttressed by the hostility of much of the public, even though there was also considerable public support for private health care. At the same time, although they suffered considerable damage, medical cooperatives managed to survive.

Another major target of the opponents of the cooperative movement was the trading cooperatives. As shown earlier, a major source of popular hostility toward cooperatives was the middlemen, all of whom seemed to be tarred with the brush of speculation. As a result, a great deal of political pressure was brought to bear on Soviet legislators to rein in these offensive cooperatives. For example, the All-Union Central Council of Trade Unions, the highly conservative state-sponsored union, through its elected representa-tives demanded the closing of the trading cooperatives.³⁴

In the months that followed the December 1988 restrictions, republics continued to issue their own lists of banned activities. The Ukrainian Council of Ministers responded to public pressure by forbidding cooperatives to act as middlemen in selling tickets of all types (transportation, movies, theater, etc.) as of June 1, 1989,³⁵ despite the fact that such cooperatives accounted for only 1 percent of total cooperative earnings.³⁶ An edict issued by the Presidium of the Uzbek SSR Supreme Soviet went into effect on October 1, 1989, which banned a very long list of activities. Part of the list was simply a repetition of the nationally forbidden activities, such as manufacture of weapons and narcotics. But it also banned such potential businesses as the printing of forms, menus, and labels, giving paid lectures, producing and selling pastry products, all brokerage activities, carrying out any transaction involving foreign currency, including the organization of foreign tourism, running a pawn shop, producing and restoring icons, writing computer programs, running a consulting business involving implementation of economic reform, and operating a public catering establishment unless the cooperative had its own resources to raise its own feed, cattle, and poultry.³⁷

In one of the republic’s papers, a commentary on this new legislation dripped with sarcasm and frustration. The author pointed out that “the share of cooperatives in the republic’s economy is less than 1.5 percent” and that a decree such as this “is just like using cannon to shoot sparrows.” Referring to the prohibition on brokerage services, he said, “Wait a while, comrades. Do you think that once we have closed down purchasing and resale and brokerage cooperatives, life would become prosperous once again? That the store shelves would come crushing down under the weight of tasty and diverse items? That shortages would disappear together with speculators?”³⁸

Some restrictions were imposed because in the competition for scarce resources, the state could not meet its own needs if it allowed cooperatives equal access. The primary example was food. While 132 billion rubles worth of food went to retail trade outlets in 1989, there was still an estimated 40 billion ruble shortage of food during the year.³⁹ Given the general shortage of food in state stores, especially away from the major cities, this was an extremely sensitive issue almost from the beginning of the cooperative movement. Various efforts to restrict access of cooperatives to state food began as early as November 1988, when several provinces imposed restrictions on the amounts of certain foods that cooperatives could buy. In Krasnodar, cooperatives were legally entitled to buy flour and some animal fats, all groats and hulled grains (except buckwheat), tomato paste, apple juice, jam, salt, and cornstarch. No other food items from state stores were available to them.⁴⁰The local soviet executive committee, which introduced the restriction, found that in the first half of 1988 cooperatives bought 1 million rubles worth of food in state retail stores and 70 percent of it was used as “raw materials,” a euphemism for cooperatives simply reselling food to the public.⁴¹ Along similar lines, the Ukrainian Republic Council of Ministers in mid- 1989 modified the list of allowable cooperative activity. In particular, it brought a halt to the breeding of fur-bearing animals such as foxes and mink. The reason was that cooperatives were buying up meat, fish, and dairy products from state stores to feed to their animals. It required more than 100 kilograms of meat to yield one fox pelt and there was a state subsidy of 301 rubles on 100 kilograms of meat, which in essence meant that the state was subsidizing cooperative fur-breeding.⁴²

The state escalated its intrusion into the affairs of cooperatives. It made a major assault on both the principle and practice of private enterprise in October 1989 when the Supreme Soviet passed legislation to give local authorities much more power over cooperatives and introduced the possibility of regulating prices charged by cooperatives. The legislation amended Article 19 of the Law on Cooperatives in stating: “For the purposes of stabilizing prices on the consumer market the Council of National Deputies can establish maximum prices for basic consumer goods (services) produced and sold by cooperatives. ...” Cooperatives that imported goods were constrained by this legislation from selling them at prices higher than those established by the state for comparable items. This was to be enforced by local authorities.⁴³The October revisions included a restriction imposed on state retail outlets forbidding them from selling food to cooperatives, and a corollary restriction forbidding cooperatives from buying food in either the retail or wholesale network and reselling it, a clear indication that the limited efforts to handle the problem of food leaving state stores and falling into the hands of cooperatives were clearly not working.⁴⁴

The attack against middleman activity was also stepped up through the October legislation. As of January 1, 1990, it was made illegal to engage in trading and middleman activity “connected with buying up industrial and food goods in the retail and wholesale network of state trade for purposes of resale.” State retail stores and consumer cooperatives were similarly enjoined from selling the goods to cooperatives. The local soviet executive committee was responsible for making sure that cooperatives previously engaging in these activities either stopped or found a different livelihood as a cooperative.⁴⁵ These amendments were suggested by the official trade un-ions,⁴⁶ once enthusiastic supporters of the party line and now suddenly the champions of “the people’s interests” against the allegedly rapacious cooperatives, the creation of the party.

Even in Moscow, seemingly a bastion of liberal thinking, the long arm of the authorities reached into the movement. Temporary regulations were imposed that suspended the old rules for creating new cooperatives and called for a review of all cooperative activity as of January 1, 1990.⁴⁷ Leonid Abalkin, Gorbachev’s close associate, in a speech before the Supreme Soviet in October 1989, defended the new authority of local functionaries and provided two broad reasons why it was essential to increase the rights of local bodies in decisions about cooperatives. First, he said it was necessary to take local peculiarities and traditions into account.⁴⁸ Second, it was necessary to “strengthen state control of the growth of money incomes.”⁴⁹ Ironically, the central government was making local soviets the gatekeepers of the law and the protectors of the undefined “interests of society.”

There can be no doubt that this legislation was a real triumph for party conservatives, national and local. Opponents of cooperatives could benefit if the administration of cooperative affairs were shifted to the local level. Those places that already supported cooperatives would continue to do so, but in those areas where the authorities held anti-cooperative sentiments they could go after cooperatives, no longer constrained by the influence of a more liberal national authority. This view was held by Vladimir Tikhonov, president of the Union of USSR Amalgamated Cooperatives. He conjectured that “everything depends on the local authorities who . . . will become stratified. In Uzbekistan, Byelorussia and the Kuban, where the attitude towards coop-eratives is hostile, they will surrender, though the local budget will be deprived of their taxes. But cooperatives will become stronger in the Baltics, the Komi Autonomous Republic, Armenia and Georgia.”⁵⁰

Local control was further extended on April 6, 1990, by amendments to the Law on Cooperatives proposed by the USSR Council of Ministers to the Supreme Soviet. Not only were local soviets now responsible for registering new cooperatives, but they were also given the right to decide priorities in production. In order to be able to force their own preferences on the market, the local soviets could issue licenses granting cooperatives the right to produce those goods and services the local soviets deemed appropriate. The April amendments also regulated the financial activity of cooperatives. While cooperatives previously could have several bank accounts, now they were entitled to only one account, and that had to be in the place where the cooperative was registered. In addition, bank officers now determined the upper limit of cash which cooperatives could hold to cover current expendi-tures. The emendations also provided protection for cooperative workers, while giving authorities the right to meddle in ways that seemed inconsistent with efficiency. Cooperatives were obliged to make every full-time employee a full-fledged member of the business with rights equal to those of all other members. Prior to this revision of the law, a cooperative could have very few members but could employ a couple of hundred “hired hands” (naemniki).Now the only cooperative workers who did not have to be granted membership in the cooperatives were those who worked part-time. The amendment was only partly born of concern; it was hoped that it would help slow the outflow of workers from state enterprises.⁵¹ This was an unrealistic goal in view of the considerably higher earnings that were available in cooperatives.

BUREAUCRATIC INTERFERENCE

One of the by-products of Soviet central planning was the creation of a large bureaucracy to administer the daily affairs of Soviet economic, political, and social life. A major reason that economic reform was so necessary in the Soviet Union was that economic progress had for a long time been handicapped by the bureaucracy. The inefficiency of the large numbers of faceless apparatchiks who became part of the fabric of a failing economic system justified the creation of new forms of economic organization, including the cooperatives. But cooperatives were never intended or allowed to function completely independently of the existing institutions of Soviet society, including the bureaucracy. And at every step of the way, cooperatives’ dealings with the infamous Soviet bureaucracy were usually to their detriment.

The obstacles that the bureaucracy set in the path of the cooperative movement were no accident. They reflected deeply held views that showed disdain for private enterprise in general, and for cooperatives in particular. This was illustrated by the results of a study conducted in late 1988 by the Moscow-based Center for the Study of Public Opinion of 800 individuals who were members of cooperatives, staff members of law enforcement agencies, or members of local executive committees. Of the personnel of local soviet executive committees, 74 percent had doubts about cooperatives or were even “convinced that the undertaking is futile.” Because of the power local government had over cooperatives, this became a self-fulfilling prophecy. Forty-one percent of the local soviet executive committee members and 68 percent of the people working for law enforcement organs wanted “even tougher supervision over the cooperatives’ activity.” In view of this attitude, it is understandable that one-third of the cooperative members said that “distrust and excessive tutelage on the part of local authorities are the chief obstacles to the development of cooperatives,” and that 37 percent said that they could not count on any support from local authorities.⁵²

REGISTERING COOPERATIVES

From the very beginning, local bureaucrats made starting a cooperative a time-consuming process, although they showed no such slowness in closing down cooperatives. It took more than two months for the Moskvoretsky regional executive committee to give a building to the cooperative Liublinobut it took only an hour for the Petrograd regional executive committee in Leningrad to close the cooperative Pomoshchnik which provided tourist services.⁵³ Local officials would not register all cooperatives. Local organs used their power to deny permits without any basis; the fundamental problem was that no stable criteria were developed to help decide who should be allowed to form a cooperative.⁵⁴ In one survey, about 35 percent of cooperative members polled spoke of having “major difficulties in the organizing stage.”⁵⁵

Part of the problem was that many different government organizations issued licenses. In Moscow, licenses were issued at the beginning by district executive committees, administrative-technical bureaus, and many others. In a few cases, store directors simply dispensed handwritten certificates allowing vendors to operate in their store.⁵⁶ Recognition that this system led to inconsistencies as well as to “abuses by unconscientious officials” led to the implementation of a single licensing procedure in the city on No-vember 1, 1989. Under this new system, a committee in each Moscow district had the sole right to issue a license. The new system was both good and bad. On the plus side, consumers had some protection because they now had a single identifiable place to go to complain about cooperative offenses, and cooperatives knew exactly who was responsible for maintaining the quality of the place of business. ⁵⁷ On the other hand, the power to grant licenses was concentrated in a single bureaucratic agency, providing even greater opportunities to extract bribes from those who needed the allimportant license to operate.

Local officials posed difficulties with regard to the establishment of cooperatives whose business did not have an analogue in the state economy.⁵⁸There was also reluctance on the part of some officials to register a cooperative whose fees would be paid by state organizations rather than private parties. When some people wanted to start a cooperative to repair schools, kindergartens, and hospitals, the Department of Comprehensive Economic and Social Development of the Voroshilov Borough Soviet Executive Com-mittee supported the idea, but the relevant financial agencies voted against it because they felt that local state agencies would have to pay the bills rather than private individuals.⁵⁹ There was also official inflexibility when cooperatives registered for one economic activity, but then decided that they would like to move into another business. A cooperative which was supposed to be in the business of repairing electric and radio equipment wanted to expand into watchmaking as well, but the Moscow City Executive Committee disbanded it. A second cooperative which went into another business had its labor contract canceled.⁶⁰ These cases demonstrate that cooperatives were not given free rein as entrepreneurs, and remained highly accountable to the state.

ARBITRARY CLOSING OF COOPERATIVES

The bureaucracy most particularly flexed its muscles in deciding which cooperatives would remain in operation and which were to be closed. In an explicit way, it was not the market that became the final arbiter of a cooperative’s right to operate, but rather the bureaucracy; it had the power of life and death over entrepreneurship in the Soviet Union.

In 1989, 1,500 public catering cooperatives were shut down, about 20 percent of all the cooperatives in this sector. Four types of reasons were given for these actions. First, some were producing “unsuitable” food such as cotton candy, rather than basic meals. Second, four out of five cooperatives were buying food from state stores. Third, conditions were often unsanitary and food was adulterated. Finally, some of these places were becoming gathering places for “shady” characters.⁶¹ This was yet another instance of the highly moralistic and judgmental quality of Soviet attitudes toward private enterprise. The market was virtually an alien concept.

At times local decisions to shut down a cooperative were extremely counterproductive, as in the case of the Stroitel’-2 cooperative in Odessa. This cooperative installed natural gas service in villages, settlements, and private homes. It had a 250,000 ruble contract with the Krivoi Rog Gas and Municipal Construction Trust. The cooperative was so efficient that it appeared that it was going to accomplish in one year what it had taken the comparable state organization nine years to do in another village in the area. Customers paid the cooperative 300 rubles more than they had to pay the state to have gas service installed, but it was conceded that this was because of the higher prices that the cooperative had to pay for its materials. The high quality of the cooperative’s work was also recognized. Yet local authorities decided to close the cooperative, based on the belief of the Ukrainian republic’s State Committee for Supervision of Industrial Safety and Mining Safety that only specialized subdivisions of the state should be allowed to install gas service. The director of the now-defunct cooperative said with a sense of understandable anguish, “One gets the impression that not all skies are sunny on the cooperative horizon: Authorization today, prohibition tomorrow; an opening today, a shutdown tomorrow.”⁶²

Another case where the bureaucracy’s imperious behavior ruined an efficient cooperative involved the cooperative Komfort in Riga, which opened a facility that sold used cars, with daily sales averaging thirty-two cars. The cooperative had a reputation for politeness and attentiveness and charged only 5 percent commission for its services, instead of the 7 percent charged by the state. But when the authorities sanctioned the opening of the used car operation, they forgot to convey this decision to the state car inspection office, and the latter refused to register cars bought at the cooperative, in spite of Komfort's willingness to give 50 percent of its profits to the local soviet.⁶³ In similar fashion, an unprofitable state yeast factory was converted into a cooperative producing for the state. In this new incarnation it made money, but the Ministry of Finance told the cooperative that its workers could not share in the profits. While the procurator objected to the ministry’s proscription, the local executive committee and the local financial de-partment failed to support him.⁶⁴

A number of the new cooperatives were placed under the aegis of the central council which administered the long-standing consumer coopera-tives. The new cooperatives felt burdened by the local control exercised over them, in particular the capricious way in which cooperatives were closed. In 1989, the elimination of cooperatives within the consumer cooperative system amounted to a decline of 1,100 cooperatives which employed 7,000 people.⁶⁵ Often the unspoken cause for shutting down cooperatives was that they were awash in money in violation of some vague notion of social justice. For example, a cooperative for procuring and processing agricultural products in Rostov oblast was told by the local soviet that if in the fourth quarter of 1989 its earnings from foreign exports exceeded its domestic income during that period, it would be closed down. In the Kuban, authorities closed down 127 trading cooperatives without any investigation into their actual activities. At the time that these cooperatives were terminated they had shipped goods worth two million rubles to other regions and had imported six million rubles worth into the Kuban.⁶⁶

Making large profits automatically made cooperatives candidates for eradication. In Yevpatoria, in the Crimea, in a much-celebrated case, two cooperatives were closed down by the city soviet executive committee. Both were making huge profits, which the authorities said were earned illegally. In fact, with the exception of what was described as a minor technical misunderstanding, the profits they earned were perfectly legal. Both of the cooperatives were much more efficient than the state factories in which they were operating. In regard to the closings, an Izvestiia correspondent wrote:

I know that cooperative members in many cities are waiting to see how the Yevpatoria story ends. What lesson will they draw? The lesson is clear. It’s dangerous to work at full strength. To work honestly is dangerous, too. If Progress,which did not conceal its income, all of which, down to the last kopek, went through the bank, had not revealed all of its money, no one would have paid any attention.⁶⁷

There were any number of reasons for shutting down cooperatives, including bureaucratic lethargy. A cooperative leased a failing restaurant from the state. The restaurant’s plumbing stopped working and an inspection revealed that the underground piping needed to be fixed, which contractually was the government’s obligation. But the state did not care to deal with the problem and proceeded to close down the cooperative instead.⁶⁸

In the Krasnodar krai local authorities issued resolutions to close cooperatives on more than one occasion. In early 1990, a resolution was issued which closed 677 cooperatives.⁶⁹ This followed on the heels of the closing in 1989 of 322 cooperatives, including all the trading cooperatives.⁷⁰ The situation in Krasnodar deserves spelling out, because it demonstrates the degree of malevolence toward cooperatives on the part of the old guard in many provincial party hierarchies. The first party secretary of the Krasnodar krai was quoted in late 1989 as saying, “Cooperatives are a social evil, a malignant tumor. Let us combat this evil in a united front. . . . We must react from the essence of things and not from the law’’⁷¹ (italics added). Such a definition of socialist legality wreaked havoc with cooperatives ail over the country. The Krasnodar party secretary who regarded cooperatives as presumptively guilty even suggested that judges who could not see their way clear to overlooking the law should be recalled. He ordered an investigation of every single cooperative in the krai. The law stated that if a cooperative was in violation of acceptable behavior, the local executive committee was supposed to give it a warning. Penalties were applied only if the cooperative continued violating the law. These legal constraints were ignored in Krasnodar and the result of the witch hunt was the shutting down of the 322 cooperatives mentioned above.⁷²

The power of the party at the local level bordered on omnipotence. Take the case of the cooperative Merkurii in Alma-Ata. In order to sell its goods, the cooperative leased space from the store Komissiontorg. A week after it opened a resolution was passed prohibiting cooperatives from purchasing goods from foreigners for sale in the Soviet Union. The law was not retroactive, but Merkurii was closed by the raion executive committee after nine days on the grounds that it had violated the new law. The chairman of the executive committee, who subsequently became second secretary of the Alma-Ata city party committee, made it quite clear that he did not like the head of the cooperative. He thought the cooperative chairman was not “civilized,” but rather was a currency speculator. The city court ruled that the local executive committee had acted illegally in closing the cooperative without giving it proper notice that it had “violated” the rules, and the lower court’s decision was upheld by the republican Supreme Court. But the party secretary refused to abide by the court’s decision, firmly asserting his own views: “In the first place, the Law on Cooperatives is not perfect. In the second place, Soviet power was bom before the court system was created.”⁷³ Such local despotism was a perpetual sword hanging over the heads of cooperatives.

Even a virtuous act of a cooperative could be turned against it by an arbitrary authority. The cooperative Sputnik, which was a multibranch science and technical cooperative, made a great deal of money. It decided to use 300,000 rubles of its money to give New Year’s presents to children’s homes and homes for senior citizens and was initially thanked for its act of charity. Then local bureaucrats began asking how Sputnik was able to make such large donations. There were many investigations; finally the cooperative was disbanded on a technicality and all its donations were ordered returned to the state. The basis for its demise was that it was publishing pamphlets about technological and industrial topics said to fall under the heading of “forbidden subjects,” even though it was unclear what forbidden subjects it was writing about.⁷⁴

One consequence of the multiple investigations was the realization that too many government agencies were supervising cooperatives, and that sometimes they gave conflicting directives. Multiple accountability created a situation in which cooperatives were often forced to juggle many bureaucrats and keep them all moving in the air at the same time. There was no doubt that by late 1989 the tendency to close legitimate cooperatives had gotten out of hand. Therefore, to prevent erroneous closings of cooperatives and to avert their bankruptcy, in early 1990 cooperatives that had their licenses revoked were given the right to continue operating during the three months required to appeal this decision in court.⁷⁵

In a number of places, state bodies restricted the right of cooperatives to buy materials and equipment for cash as a way of preventing speculators from accumulating large sums of money and then laundering the money by buying inputs for their cooperative. For example, the Belorussian Ministry of Trade and the republic office of Gosbank issued orders permitting coopera-tives to buy only fifty rubles worth of goods at a time.⁷⁶

There were a large number of cooperatives which wanted to engage in foreign trade, and there is little doubt that their operations could have helped to diminish the shortage of goods at home. But there was a highly inefficient set of procedures for cooperatives wanting to engage in foreign trade, with fifty-six different organizations issuing the licenses necessary to export goods produced or purchased by cooperatives.⁷⁷

By one count, there have been about 200 resolutions modifying the Law on Cooperatives.⁷⁸ In addition, there were apparently about 800 pieces of local and departmental legislation concerning cooperatives that contradicted the law.⁷⁹ The USSR Union of Amalgamated Cooperatives, admittedly a selfserving source, estimated in early 1990 that various state restrictions decreased the value of cooperative output of goods and services by 12-15 billion rubles.⁸⁰

Every time new restrictions were imposed on cooperatives, concerns were expressed about the viability of the movement as a whole, and fears were raised about the economic consequences for the wider society. After the December 1988 restrictions, the cooperative bank in Naberezhnye Chelny experienced a sharp drop in the demand for loans even though the number of new cooperatives doubled, showing that cooperatives were reluctant to invest in the growth of their businesses given an uncertain future.⁸¹ At the time of the Uzbekistan restrictions in late 1989, specialists spoke of the demise of 40 percent of the republic’s cooperatives and unemployment of 72,0 people. Uzbekistan was already suffering from a high level of unemployment and this helped fuel ethnic disturbances in the republic.⁸² Following the restrictions in Moscow in the winter of 1989, experts predicted the closing of one-third of the cooperatives and the loss of 1 billion rubles in cooperative production.⁸³ At an emergency meeting of the USSR Union of Amalgamated Cooperatives held in Moscow in February 1990, experts were quoted as predicting that the result of both local and central moves to restrict cooperative activities would be the loss of at least 10 billion rubles in cooperative production.⁸⁴ Losses not only would come from the decline in tax revenue and in the increase in unemployment, but there would also be direct costs to the city soviet.

If at the time of its closing a co-op has no money in the bank to pay off its employees, workers losing their jobs when the co-op is liquidated have, accord-ing to the KZOT [Cooperative Labor Law], the right for severance pay. That money will also have to be paid by those who closed down the co-op, i.e., the rayon ispolkom. In short, for the city as a whole the total loss may reach into tens of millions of rubles.⁸⁵

But there was more at stake than the simple counting of resolutions and short-term losses in output. The larger issue was how the legislative salami tactics that slowly whittled away at the freedom of small-scale Soviet entrepreneurs were at odds with the overall goal of economic reform. Just as the Ryzhkov government’s proposal for a so-called regulated market economy reflected an ambivalent view of reform for the economy as a whole, the policies enacted after May 1988 showed the ambivalence in the government’s intentions toward cooperatives.

It is worth quoting the sobering words of Pavel Bunich, a member of the USSR Academy of Sciences, on the subject of excessive restriction.

When cooperatives are closed without any justification, the investments made in them are lost to some degree or other. Losses appear from the unique expropriation and nationalization and a general uncertainty arises about tomorrow that paralyzes any interest in future savings, technical progress and the permanently operating forces of gradual economic development. This is fraught not only with the curtailment of the cooperative reform today but also with the loss of confidence in it by potential participants in the movement.⁸⁶

TAX POLICIES

Initially, the tax rates applied to cooperatives were extremely generous, especially compared to state enterprises which routinely paid about half of their profits in taxes. Cooperatives had to pay taxes equal to 3 percent of their income in the first year of their operation, during the second year 3 to 5 percent, and in subsequent years only 10 percent.⁸⁷ The low rates were set to provide an economic incentive to expand for those in the cooperative movement, and also to allow others to see the financial rewards from entry into private enterprise. These tax rates served the state’s goal of developing private enterprise. But very early on there was opposition from several quarters to such favorable tax treatment for cooperatives, especially from those who believed that equity considerations were being ignored. The criticism was endorsed by the two key official newspapers. A late 1987 article in Pravdastated: “Preferential taxation for cooperatives during the period of their formation does not always ensure observance of the principle of social justice, and in some cases this facilitates the concentration of large sums of money in the hands of certain persons. . . ,”⁸⁸ A year later Izvestiia said: “In setting an equal tax rate (three percent) for everyone, it was apparently never imagined that a cooperative enterprise . . . could earn 500,000 rubles in profit in its first few months. . . .”⁸⁹ Furthermore, cooperatives did not actually pay all they were supposed to pay. In the first year after the Law on Cooperatives went into operation, tax receipts from cooperatives totaled about 40 million rubles, or only about 1 percent of total cooperative income.⁹⁰

Thereafter, the dominant pattern of state policy became one of increasing the tax burden of cooperatives. The argument supporting the case for higher taxes was that since cooperatives made extraordinary profits, they should pay taxes which were consonant with their high earnings. In other words, the basis for Soviet taxation policy on cooperatives put heavy emphasis on equity considerations rather than the creation of economic incentives. Tax policy was in flux from 1988 to early 1989, although in February 1988 the Council of Ministers had issued a resolution formally affirming the initial low rates,⁹¹but when the issue was settled the tax burden on cooperatives had increased substantially. By 1989 tax revenues had quadrupled in relative terms so that cooperative taxes amounted to 1.5 billion rubles,⁹² or 3.75 percent of their estimated total earnings of 40 billion rubles.

The first attempt to retreat from the generous tax rates came on March 14, 1988, when the Supreme Soviet passed a tax decree put together by the Ministry of Finance, the Ministry of Justice, and Gosplan that took a meat axe approach to the problem.⁹³ The decree established tax rates for cooperatives that were both highly progressive and quite steep, the top marginal rate going as high as 90 percent of monthly income.⁹⁴ These were now to be assessed on profits, rather than income. Defending the proposed new tax, then-Minister of Finance Boris Gostev said: “[The progressive tax] amounts to confiscation of certain super-profits. We have categories of people who receive too high an income. And in a socialist society high differentiation cannot be allowed.”⁹⁵ Debate over the new law was immediate and widespread—according to Prime Minister Ryzhkov there were over 200,000 quite varied reactions to the new rates. ⁹⁶ The degree of unhappiness was apparently sufficient for the Presidium of the Council of Ministers to meet on July 13 to discuss the March proposal. At the meeting several economists spoke out against the idea of taxing the cooperative’s income rather than its profits.⁹⁷ On July 29, some four months after its passage, the Supreme Soviet repealed the March decree.⁹⁸ But this was only a temporary retreat. At this juncture it was not a question of whether taxes would rise, but by how much.

The government’s next action on taxes came on February 23, 1989, when the Supreme Soviet passed a new law on taxation of cooperatives. This time the policy would stick. Cooperatives would no longer be the beneficiaries of low tax rates, and more important, they had to pay the new tax rate averaging 25 percent based on their income rather than on their profits. Thus, the February law created a substantial inequality in tax treatment between cooperatives and state enterprises. While state enterprises paid half of their profitsto the state budget, cooperatives were to pay 25 percent of their incomes. But if profits rather than income were calculated, then cooperatives actually were paying an estimated tax rate of 75-80 percent.⁹⁹ Taxes were based on a definition of adjusted gross income which allowed deductions for acquiring basic resources ( osnovnye sredstva) such as the costs of materials and rental charges for fixed assets, expenses to train personnel, monies that went to environmental protection, and other budgetary payments, but these were the only allowable deductions. The tax rates themselves were to be set by the individual republics because the tax revenues collected from cooperatives went into local budgets rather than the central budget.¹⁰⁰

There were three justifications for this onerous policy. The first argument was that since cooperative wages were not governed by state norms, if taxes were levied on profits, the cooperatives would simply shift revenues to wages and away from profits.¹⁰¹ Indeed, in defending the new tax law, the first deputy minister of finance contended that the majority of cooperatives had used 75-85 percent of their income for wages.¹⁰² The second argument was that cooperatives, especially the smaller ones, had a difficult time calculating the exact amount of profits. On the other hand, the state also demonstrated its priorities in cooperative development by being lenient toward some cooperatives. Those processing agricultural commodities and engaging in con-struction were exempted from taxes during the first two years of their operation.¹⁰³ Other cooperatives could have their tax rates lowered for an unspecified period of time. ¹⁰⁴ Moreover, local bodies were given the right to decrease taxes by as much as 50 percent if a cooperative made charitable contributions.¹⁰⁵

While the February law spelled out the broad intentions of the government, the June 6 law filled in the details. The tax rates were defined with great specificity by republic and by type of cooperative activity. The variations in tax rates among the republics implicitly reflected the dissimilar attitudes of various republics toward cooperatives. The Baltic republics were from the very beginning strong supporters of cooperatives. So it is not surprising that Latvia and Lithuania were two of only three republics to use tax incentives as an inducement for cooperatives to put money into investment. Latvian tax rates, which averaged between 10 and 15 percent, were also extremely low relative to those of other republics.¹⁰⁶ In Lithuania, there were three tax brackets: the production of goods, public catering, and the processing of secondary raw materials were taxed at 5 to 10 percent; transportation at 25 to 35 percent; and all the rest at 15 to 25 percent. Lithuania was one of the few republics granting deductions for goods designated for export, and it was the only republic where financial resources going to scientific work were exempt from taxes.

In Azerbaijan, the lowest tax rates were on livestock products (3 percent) and crop production (10 percent). Taxes were 20 percent on consumer goods, 25 percent on scientific and technical cooperatives, and 40 percent on public catering establishments. The highest tax rate of 50 percent was set for confectioners and the trading cooperatives. The cooperatives which were exempted from paying taxes were those involved in ecological work and those which created jobs in regions of the republic with high unemployment. In Belorussia, there was a 5 percent tax rate on agricultural activity, 15 percent on everyday services, 20 percent on medical and scientific-technical cooperatives, and up to 60 percent on middlemen in the trading coopera-tives. Belorussia completely exempted from taxation those funds which went to finance capital investment. In the RSFSR, the tax rate on cooperatives producing agricultural products was 10 percent, on the production of goods it was 30 to 50 percent, on scientific-technical cooperatives it was 35 to 40 percent, on public catering it was 40 to 50 percent, and trading cooperatives paid a rate of 60 percent.¹⁰⁷ One of the umbrella cooperative organizations claimed that in fact “many cooperatives must pay up to 70-75 percent of value added.”¹⁰⁸

Reformers protested loudly, saying the legislation was destructive of the reform process. A leading liberal Soviet newspaper raised the apocalyptic question: “Is this the end of cooperatives?” Posing the question of whether the legislation was designed to “stimulate the cooperatives,” the newspaper sarcastically answered that it was meant “to equalize [cooperatives] with the state sector, according to the principle that everyone should be equally poor.”¹⁰⁹ The reform-minded Moscow News carried an article reacting to the new tax rates in the RSFSR in which one author wrote in ominous tones: “There can only be two explanations for this tax—either a complete lack of economic know-how or the conscious desire to liquidate those involved in cooperatives ‘as a class.’ ”¹¹⁰

Objections notwithstanding, the February and June legislation of 1989 stood. It represented only the first step in the use of tax policy as part of a systematic attack on cooperatives by Soviet officialdom. On September 26, 1989, the USSR Supreme Soviet passed legislation that obliged cooperatives to pay taxes on the growth of their wage fund if it grew more than 3 percent. The increment was calculated in relation to what wages were during the corresponding quarter of the previous year, after adjusting for the number of workers in the cooperative.¹¹¹ The clear intent of the policy was to induce cooperatives not to put their income into high wages and salaries, but to direct them to more “productive” uses, such as investment. The tax schedule on increased wages was extremely punitive: if the increase in the wage fund was 3 to 5 percent, then for each ruble increase in wages, the tax would be one ruble. If the growth of the wage fund was between 5 and 7 percent, the tax would be two rubles for each additional ruble of wages;¹¹² for wage fund increases over 7 percent, the tax would be three rubles per ruble of payment. In other words, there was a 100-300 percent tax if a cooperative raised its wages and salaries by more than 3 percent!

The next major modification in tax policy, which came in the form of a resolution of the USSR Council of Ministers on October 17, 1989, offered a carrot rather than wielding a stick to production cooperatives: (1) those cooperatives which sold their output at prices no greater than state prices would receive a 20 percent decrease in their tax bill; (2) there was a 30 percent decrease in the tax obligation of cooperatives which produced or processed agricultural products, and for those cooperatives doing construction work or making construction materials if they accepted state orders and would sell their output at less than official state prices; (3) the tax bill decreased by 50 percent for cooperatives which took over failing state enterprises and fulfilled state orders; (4) if at least half the employees of a cooperative were either handicapped or on a pension, total tax payments fell by 80 percent; and (5) there were no taxes for cooperatives if at least half of their services went toward charitable activity.¹¹³ In essence, the government was trying to drive cooperatives in the direction of doing the state’s and society’s business, rather than directly meeting the demands of the general population. In addition, these fiscal carrots were designed to engineer a shift in the employment patterns of the cooperatives away from able-bodied young workers, and to keep prices artificially low. These last two goals were unrealistic, given Soviet economic conditions.

In late 1989, another form of taxation was imposed on those cooperatives importing goods for their workers. On April 1, 1989, the law governing foreign economic activity by state enterprises and cooperatives gave them the right to use up to 30 percent of their hard currency on imports for their own workers. It was a bonus in a country where such goods were so scarce. When they entered the country, relatively low customs duties were to be paid. But instructions issued by the State Customs Control Main Administration in November 1989, directed solely at cooperatives, altered this situation. Instead of paying customs duties, cooperatives had to pay the cost of the good, multiplied by some rate fixed for a particular group of goods. In an example given by Izvestiia, if a cooperative imported a video recorder for $300, at the official exchange rate, it would be worth 200 rubles. When multiplied by the rate fixed for foreign video recorders, which was seven, the video recorder was regarded as worth 1,400 rubles. That was the amount the cooperative in question would have to pay to the state for importing a video recorder for a member. The rate for coffee was twenty-one, which meant that a $5 jar of coffee would cost the cooperative 63 rubles. When asked what justified singling out the cooperatives for such treatment, A. Komin, first deputy chairman of the USSR State Committee on Prices, said that this was socially just: “Surely you do not want cooperatives to be able to get hold of goods in such short supply dirt-cheap unlike the rest of us.”¹¹⁴ The fact was that cooperatives paid world market prices for what they imported. There was also no recognition of the fact that they earned the hard currency they used to pay for the scarce foreign imports.

Described at the time as the first phase of a series of radical reforms of the tax system, the omnibus “Law on Income Tax on USSR Citizens, Foreign Citizens, and Persons without Citizenship” was passed on April 23, 1990, and went into effect on July 1, 1990. This legislation taxed individuals earning income from work in the new production cooperatives, whether they were members of the cooperatives or were employed as contract labor, at exactly the same rates as those that applied to workers in state enterprises.¹¹⁵In Table 4.1 the effective average tax rates for individuals have been calculated for selected incomes up to 150 rubles a month, and then for seven of the upper income brackets. For the latter group, the tax rate is calculated at the midpoint of the tax bracket and for the highest income in that bracket. Tax rates start at zero for those who earn 100 rubles or less a month and then keep rising.

There was an outpouring of complaints about the tax rates contained in the April 1990 law. But these rates cannot by themselves be considered prohibitive, and in fact rates were reduced somewhat for the lowest tax bracket.¹¹⁶ Certainly, these taxes would not be enough to persuade workers to stay away from the cooperatives, given the high incomes that could be earned in them. What placed the great burden on cooperatives was the combination of three different taxes on cooperative income: there was the tax on the cooperative itself, the tax on incremental increases in the wage fund, and the individual income tax. Thus, despite the rather reasonable rates of the April 1990 law, the entrepreneurial organizers of cooperatives simply saw yet another tax.

Those who sought to maximize incentives for entry into private enterprise argued that tax legislation was passed without regard for the economic implications.¹¹⁷ Nikolai Shmelev, a nationally known economist at the Institute for the Study of the USA and Canada, said in mid-1989:

I understand the cooperatives must be taxed. But everywhere else in the world cooperatives are given a few years to make good. Only then are they taxed. But I am categorically opposed to one point. . . . How, tell me, can one tax investments going into the expansion and modernization of production? All over the world these expenses are either tax-exempt . . . or only nominally taxed. This, incidentally, is indicative of the state’s intentions. Either we have a long-term programme of development or else we [cooperators] grab millions and escape from the market.¹¹⁸

Table 4.1 Tax Rates on Individual Income

^(a) Tax rates are calculated on the basis of ruble obligations at various levels of income. Source: Calculations based on the new tax tables in Ekonomika i zhizn', no. 20, May 1990, p. 16.

In conclusion, it can be argued that Soviet tax policy ran absolutely counter to the broader aims of the policy that gave rise to cooperatives in the first place. Cooperative earnings were taxed three times, as costs, as organizational income, and as personal income. In view of the highly inelastic demand for consumer goods and for high-quality goods of all kinds, higher tax rates could only lead to higher prices as they were added to the cost structure of cooperatives. Punishing cooperatives for charging high prices by imposing high tax rates in fact probably served to exacerbate the price problem be-cause the tax hikes were passed along to consumers. Moreover, higher tax rates dissuaded entry into the market for those on the margin. The real solution to monopoly profits was not stringent taxes, but an increase in the number of cooperatives that would have intensified competition and driven prices down. But the political and ideological pressures on lawmakers prevented such a solution and worked to impose high taxes on cooperatives.

Several clear messages were sent by the multiple taxes imposed on cooperatives. The clearest message was that a conservative mentality was very much alive in Soviet officialdom. The popular hostility toward middlemen found a sympathetic niche in Soviet tax law. The high tax rates on trading cooperatives were consistent with other efforts to discourage their existence. In the minds of many, middlemen were the same as speculators, and speculators were the same as criminals and rapacious, exploitative capitalists. Public catering establishments were also faced with relatively high tax rates, a response to the animosity these cooperatives faced. Understandably, the public found it offensive that in an environment of food shortages, they had to pay small, private restaurateurs high prices for food they could not otherwise get in the state network because these entrepreneurs had themselves purchased food from the state.

Punitive taxation policies would have been unnecessary had the state instead increased its own prices. The monopoly profits earned by the coopera-tives were a direct result of the fact that there was substantial excess demand, and therefore state prices were well below market clearing levels. Government officials had two choices to diminish these excessive profits. They could have adjusted prices upward, in which case they would have angered the populace, or they could have raised taxes, in which case they would have angered the cooperatives. They made the political choice, not the choice for market efficiency, by raising taxes on cooperatives.