From The New International, Vol. IX No. 1, January 1943, pp. 17–19.
“Upon what meat hath this our Caesar fed
The manner of swelling the State Treasury appeared in an innocent enough guise. On December 5, 1929, the Central Committee of the RCP passed the following resolution: “To instruct the Peoples Commissariat of Finance and Supreme Council of National Economy to draw up a system of taxation and government enterprises on the principle of a single tax on profits.” 
“The single tax on profits” turned out to have two sections: (1) a tax on profits which comprised 9–12 per cent of the state budget and (2) a turnover tax which comprised 60–80 per cent of the state budget. It is the latter tax which is crucial – sufficient to finance all industrialization and militarization. Let us examine it in detail.
The turnover tax is a tax applied to all commodities at the point of production or immediately upon acquisition of the goods by the wholesaler. The wholesaler pays the tax direct to the State Treasury before selling goods to the retailer, who, in turn, pays the tax before selling it to the consumers. However, there is absolutely no doubt that the burden of the tax is passed on to the consumer masses since the law obliges the retailer to include the tax in the sales price of the commodities.
Contrary to the usual sales tax, which is a fixed percentage of the base price of the commodity, the turnover tax is a fixed percentage of the total sales value of merchandise, including the amount of tax. This means that whereas a 90 per cent sales tax raises the price of merchandise 90 per cent, a 90 per cent turnover tax increases the sales price tenfold. Here is how the turnover tax affects the sales price in various instance:
With a tax of 20 per cent, the price increases by 25 per cent.
To get the full significance of the turnover tax, as contrasted with an ordinary sales tax, we need to consider how it affects a single commodity. Let us take bread – the staff of life of the masses – upon which the tax is 75 per cent. This means that the proletarian, in paying a ruble for his kilo of black bread, pays 25 kopeks for the actual cost of the bread, including production, distribution, transportation and delivery, and 75 kopeks of that ruble goes to the state as turnover tax.
The tax is very unevenly spread, tailing light on means of production and heavy on articles of mass consumption, which are the very “meat” of the tax. The tax on essential products of heavy industry seldom goes as high as 10 per cent. – Contrast this with the average rate of 82.8 per cent on agricultural products and recall that a turnover tax of that percentage will increase the sales price nearly sixfold! On food industries the average rate of turnover tax is 50 per cent and doubles the cost to the masses – and on spirits the rate of tax is 82.1 per cent! The tax on light industry is 20.3 per cent. If we once again take individual commodities, the disparity is even more shocking. The tax on coal is .05 per cent and on machinery 1 per cent. But on textiles it is 25 per cent, thus increasing the cost of clothing one-third. Moreover, the tax on light industry is not without its fine discriminations: while women of the “intelligentsia” are taxed 68 per cent for their perfume, the peasant woman is taxed 88 per cent for her kerosene. The Stakhanovite pays 21–37 per cent of the price of her silk garment in the form of turnover tax but the working class woman pays a tax of 48 per cent on her calico!
Biggest of all taxes is the turnover tax on bread and agricultural produce. When the turnover tax was first introduced in 1930, a considerable increase in the state revenue immediately resulted. But it emerged as nothing short of a “socialist victory” in 1935 when rationing was abolished  and the price of foodstuffs leaped up. Thus the turnover tax from all agricultural produce sold to the population rose from 4,340 million [A] rubles in 1930 to 24 billion rubles in 1935.  By 1940 it was 35 billion, or 20 per cent of the entire budget!
Marx once said that “The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.” Never was this truer than in the case of Russia, where the whole cost of industrialization and militarization has been borne by the people through that ingenious scheme known as the turnover tax, which provided 79 per cent of the total state revenue in l937. Of the 178 billion rubles in the state budget in 1940, 106 billions came from the turnover tax – a “socialized” form indeed of financing the Plans! The “national wealth” grew from 19 billion rubles in 1931 to 178 billion in 1940 ; the per capita national income increased from 52 rubles in 1928 to 198 in 1937. But the real wages of the proletariat decreased to half of what they were in 1928! 
On June 30, 1935, Izvestia proclaimed: “Ahead of us are struggles for profit, for elimination of subsidies.” Thereafter steps were taken to create a private incentive for making a profit and achieving industry’s capacity to avoid complete state subsidization. By April 19, 1936, a decree established what was known as a directors’ fund, to be at the disposal of the management and to provide for paying premiums to the administrative staff and workers. It is a secret to no one that these funds are used mainly as premiums for directors and Stakhanovites and not for rank and file workers. This fund is made up of 4 per cent of the “planned profits” plus 50 per cent of profits achieved by the enterprise in excess of those planned for it by the state. But how are profits planned and how is it possible to have, besides, “surplus” profits? We can find the answer if we examine the modus operandi of a Soviet enterprise.
A Five Year Plan or an annual plan is elaborated which allows for a planned profit to accrue to each enterprise. The prices of commodities, as we have seen in the section of the turnover tax, are pegged considerably above the cost of production and the cost of production is measured by the cost of labor power and raw materials and by the depreciation of fixed capital which includes amortization charges. The planned profit is likewise included as part of “the cost of production.” Each individual undertaking has considerable discretion in the manner of executing the plan. For instance, the management can make profits over and above those “planned” for it by economizing on the cost of labor. The minimum wage law – and that has been in effect only since 1937 – the management has to obey. But the minimum is low enough, no to 115 rubles a month – and between that and the highest wage – 2,000 rubles monthly – there is sufficient room for maneuvering.
When the First Five Year Plan was launched, capital expenditures came wholly out of the national budget. There was then an automaticity in granting credits to all Soviet enterprises. However, since 1930 by the Credit Reform Act and subsequent banking legislation [12*] in 1931, particularly the Act of June 25, 1931, automatic credits to industrial and commercial enterprises were stopped. There was introduced what was known as the “ruble control,” that is to say, the under-takings were to be conducted on principles of cost accounting, as in any money economy. A working capital was given them and they were to function unassisted by bank credit. Where credit was necessary it was extended only to those whose credit was good. Thus there was created an incentive “to fight for profit,” and a control was established over the industrial and commercial enterprises by the banks, which saw to it that the slogan “fight for profit” was achieved – with the threat of having the enterprise declared “bankrupt” and taken out of the hands of the management.
By February 1941, Voznessensky could report to the Russian CP conference: “The profits of socialist industry are increasing from year to year. The net profit of the plants of industry rose to nearly 14 billion rubles in 1940.” The gross profits were considerably above that figure of 14 billion as the profits tax to the State Treasury for that year amounted to 21.3 billion. The achievement of these profits was in turn helped not a little by the mode of functioning of the enterprises. Since it is state owned, a Soviet enterprise is considered to be “socialist property.” However, the worker in it does not “share the profits,” whereas the “enterprise,” that is, the management, is permitted to accumulate funds both from the planned profits and from the amortization charges. In 1940, 32.5 of capital outlays [13*] came from these sources. This permitted the diversion of the state budget for national defense, without upsetting the funds for industrialization. Defense expenditures jumped from 3.5 billion (or 8.9 per cent of the entire budget) in 1933 to 56.1 billion, or 32.4 per cent of the entire budget in 1940! Although state investments in the national economy more than doubled in volume since 1933 (they were only 25.1 billion in 1933 and were 57.1 billion in 1940), they dropped, in ratio to total expenditures, from 60.8 per cent in 1933 to 33 per cent in 1940.
Not only have the industrial enterprises achieved this miraculous “elimination of subsidies” and not only do the individual members of the management of the enterprises receive a salary considerably above the no minimum rubles but the managers are able to up their 2,000 rubles monthly salary by various means. It is Malenkov, the secretary of the RCP, who reveals one of these methods to the 18th party conference, which had been told so much of “socialist accumulation.” Malenkov relates the following incident: the Middle Ural Copper Mills in the Sverdlovsk region sold plumbing materials to the Non-Ferrous Metals Supply Trust for 100,000 rubles and had them carted to the Trust. The responsible agent, who did not know about this transaction but saw the materials when he visited the Trust, bought these materials for 111,000 rubles and had them carted back to his own plant. Malenkov remarks, after he awaits the peals of laughter from his audience :
“Since it is the State Treasury that bears the expense of such twofold transactions, the director and the responsible agent must have each gotten a bonus, one for making such a smart sale and the other for such a smart purchase.”
After the laughter subsides, he adds that this was the reason for promulgating the decree of February 10, 1941, forbidding the sale and/or exchange of machinery materials. And – we might add in a serious vein – that this is only one more reason why it is difficult to estimate the exact income of a factory director. His basic salary of 2,000 rubles monthly is merely the first contrast to the 110 to 115 rubles monthly minimum salary of the factory worker, before the former’s is swollen by bonuses, premiums, exemptions from income tax, once he has succeeded in obtaining the title “Hero of Labor.” That title can be gained not only when fulfilling the Plan by having the factory show a profit but also when one “proves” this his particular tasks have been accomplished “honorably,” although the factory he manages has not fulfilled the plan. No wonder details of the latest income taxes revealed such unbridgeable “differentiations” as earnings above 300,000 rubles a year when the “average” annual income is 3,467 rubles! [14*]
1. Along with all other “original documents,” this bill of goods was passed on to the Webbs at face value, with the result that in their 1,100 pages on Soviet Communism the Webbs find room for but one sentence on the tax, reading: “The principal (tax) is a tax on the output or turnover of all industrial enterprises of any magnitude which are now all state-owned.” How the State Budget can keep on expanding from taxing its own state-owned enterprises, instead of the “non-state-owned” masses, the Webbs fail to explain.
2. Due consideration should, of course, be given the inflation of the ruble.
3. Cf. section on proletariat.
4. Report in Pravda, along with stenographic notes of the conference, February 18–21, 1941.
11*. Cf. article by Baykov in The Economic Journal (London), December 1941.
12*. Cf. Soviet Money and Finance, by L.E. Hubbard, and Bank Credit and Money in Soviet Russia, by A.Z. Arnold. The latter is evidently a Stalinist but if the rationalization is thrown out, the banking legislation is there in full. In Russian the legislation (as well as all decrees mentioned in this article) can be found in Compendium of Laws, 1929–40: also, the daily press generally carries decrees the day after enacted.
13*. Cf. Yugow, Russia’s Economic Front for War and Peace.
14*. Cf. Boris M. Stanfield: Private Property Rights in Russia, in International Conciliation, No. 375, December 1941.
A. In the printed version “billion”, but from the context “million” would appear to be more appropriate.
Last updated on 20 February 2105