(Bloomberg) — Vladimir Putin’s political legacy may hinge on the technocratic skills of a little-known tax whiz who revolutionized Russian revenue collection and now aims to bring the same efficiency to the Kremlin’s ambitious spending plans.
With parliamentary elections a year away and Putin preparing the public for constitutional changes the would allow him to retain some power after his term ends, Russia’s president surprised the country by replacing long-serving Prime Minister Dmitry Medvedev in January with Federal Tax Service chief Mikhail Mishustin, a career bureaucrat who’s never held a political post.
Over the past several years, as Medvedev failed to implement the big-ticket infrastructure projects Putin says are needed to revive a moribund economy, Mishustin helped return the budget to surplus by doubling revenue from value-added taxes to about a fifth of all state income, behind only the extraction and profit taxes.
In a rush to get results in his new job, Mishustin, 53, is wasting no time reshaping the bureaucracy to his liking.
“He’s a good practitioner who understands what needs to be done, knows how to do it, and does it,” Putin, 67, said on Feb. 20.
Breaking with tradition, Mishustin convenes his first weekday meeting with subordinates at 9 a.m. sharp – practically the crack of dawn by Moscow standards – and then meets with his own staff on Saturdays and Sundays, according to two people with direct knowledge of the matter.A look at Mishustin’s decade-long tenure as the country’s top taxman may offer some indications about how he intends to govern. His streamlining of the tax regime won praise from international bodies like the World Bank, which cited those improvements as it gradually raised Russia’s ranking in its annual Ease of Doing Business survey to No. 28 last year from 120th in 2012.
His signature achievement was overseeing the nationwide installation of more than 3.5 million internet-connected cash registers at retail outlets and restaurants — all of which feed into two giant server farms, a main one near Moscow and an identical backup near Nizhny Novgorod. The system enables anyone with clearance and a laptop to sift through millions of transactions in real time.
“We even have import-export data, so we can surf through the entire economy to track the value-added chain from origination to final sale,” Mishustin’s successor and longtime deputy, Danill Egorov, said in an interview at the service’s headquarters in downtown Moscow.
Sitting at a table in front of a wall-sized monitor, Egorov was able to pull up a list of all the most recent transactions at a luxury department store nearby with just a few clicks of a mouse.
“Look, someone just bought a pair of jeans for 67,000 rubles ($1,000),” he said. “That’s a crazy price to pay for jeans!” Like all receipts in Russia, the one for designer denim noted that the price included a 20% surcharge for VAT, resulting in the ruble equivalent of a $200 windfall for the government.
Egorov, 44, then pulled up a map of Russia on his giant screen, clicked at random on the southern region of Krasnodar and drilled into one of the thousands of local companies that popped up. From there, he could find all the dates and amounts of VAT payments made by that company, as well as all of its suppliers and even the contractors of those suppliers.
Another innovation Mishustin introduced is the mandatory printing of a unique QR (quick response) code on every receipt. This allows consumers to log into the Tax Service’s portal, upload a photo of their code and verify that the store or restaurant they just paid money to is operating legally. It also helps authorities root out black-market activity.
“Mishustin created a nationwide information service, merging all available data together to enable analysis and management,” Egorov said. “His data-centric platform laid the foundation and we’ve been working step-by-step to build different solutions around it.”
The system’s algorithms are now able to identify discrepancies and instances of potential cheating in each step of the manufacturing process. Once spotted, suspect transactions generate automatic alerts that are forwarded to both the companies involved and the local inspectors who oversee them.The trove of information is so valuable that the Tax Service decided to open its interface to third parties, creating an incentive for both companies and consumers to help make sure retail outlets run each purchase through official registers.
Some 150 companies are already working to capitalize on the information. These include Edadeal, a marketing company that partners with product makers like Coca-Cola to offer cash-back rewards through a special app that scans QR codes and wires money directly to a consumer’s bank account.
With Mishustin now busy running the whole government, it’s up to his protege to finish the work they started in trying to conquer the final frontier in the hunt for new tax revenue: the self-employed.
An estimated 25 million Russians, a third of the country’s workforce, has some form of income that isn’t taxed — from taxi drivers and handymen to landlords and tutors. Always mindful of Putin’s diktat that the state should serve the people and not the other way around, Egorov said he’s approaching these people gingerly.
The Tax Service started a pilot program last year to help people legalize their “gray” incomes by paying a flat 4% tax through a special entrepreneur app — but not before gauging public reaction.
At the service’s request, Russia’s biggest online platforms asked their self-employed users how much they’d be willing to pay, and, to Egorov’s surprise, 60% said from 2% to 5% would be fair.
“I though everyone would say zero,” Egorov said. “I could easily find these people and urge them to pay, but such a Soviet-style approach would be too harsh and unproductive,” he said. “To paraphrase Adam Smith, a tax should be levied in the manner that’s most convenient for the contributor to pay.”
–With assistance from Anya Andrianova.
To contact the editors responsible for this story: Paul Sillitoe at [email protected], Brad Cook
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