Some 80 per cent of all income tax is collected from the wages of governmental employees for one reason alone — it is nearly impossible to dodge the tax on government wages. The private sector chooses to pay its workers under the table to avoid the tax altogether. Similarly, only 0.4 per cent of all tax payers contribute about 70 per cent of the value-added tax; the rest pay very little or nothing at all. This completely distorts the philosophy of this important tax base.
A true reform, not half-measures or piece-meal work, is long overdue. This is why David Clark’s recent discussion of the imminent changes in Ukraine’s tax laws and the surrounding politics is so surprising. It leads one to doubt whether Mr Clark knows his subject.
There are currently two competing legislative proposals on tax reform: the so-called conservative government version, authored by the finance ministry, and the liberal parliament version. The latter has already been registered with the legislature as Bill 3357.
Here is Mr Clark’s take on the two proposals:
A political elite with a mature understanding of the Ukrainian national interest would welcome the progress that has been made over the last year in restoring macroeconomic stability and recognize the [Finance Minister] Jaresko plan [for tax reform] as another important step towards that goal. But Ukraine remains badly served by some of its leaders and the response of the parliament’s tax committee has been to table a counter proposal that maintains the worst features of the current system and adds a huge, unfunded tax cut equivalent to around 10 per cent of GDP for good measure. It contains no meaningful element of simplification and no steps to make the system fairer.
Mr Clark is referring to Bill 3357. This bill was authored by some 130 members of parliament, a truly unprecedented number in the history of Ukrainian parliamentarism. The amount of work that went into the preparation of this legislation is also unprecedented. The draft law is often referred to as civil society’s version of tax reform in recognition of the hundreds of professionals who volunteered their time and efforts to this project, including highly accomplished financial experts, economists, auditors, legal scholars and business people.
There have been dozens of public hearings on the proposed law throughout the country. The results of these hearings were submitted go the drafters of the law and taken into account.
The outcome of this truly popular effort is one of the most liberal tax reforms in modern Europe. Scores of well-known politicians, civic leaders and reputed experts put their names on the line for it when they address the public in the nation’s media.
Contrary to what Mr Clark suggests, this legislation has never been conceived as a counter proposal to anything. When it came into being, there was no government version of the reform. In fact, most of the government proposals have not been made public to this day, nor sent to the legislature. There have been only a few presentations of the government draft, which made the experts instantly agree that there is no contest between the two versions of the reform when in comes to spurring economic growth and fighting corruption — the parliament version is well ahead. It sets taxes lower, makes the system more transparent, and helps bring much of the economy out of the shadows as a result. It makes administering the tax system much easier and cheaper. It replaces the infamous and corrupt militarised tax police with a specialised tax service within the finance ministry and it ensures that most of the communication between a taxpayer and tax authorities is conducted electronically to diminish corruption.
The only aspect of the parliament version of the tax reform that has received any level of intelligent controversy is the larger budget deficit it would deliver than that under the government’s proposal. However, it is nowhere near the 10 per cent of GDP Mr Clark cites. The authors and proponents of the parliament tax reform disagree with the oversimplified linear models the finance ministry used to reach this figure. For example, these models completely disregard the high level of inflation destined to spill over into the next year at about half of its prior year’s rate and cover part of the deficit, at least nominally. They also discount all the revenue incidental to bringing much of the economy out of the shadows and inviting new capital. Ideally, the authors of Bill 3357 see the deficit as being much more moderate and in line with the expectations of the country’s creditors.
As parliament is gearing up to take the tax reform to the floor, the Ukrainian media is rich with reporting on the subject and financial analysts and experts are ubiquitous. The goal is to make sure that information on the reform is accurate and to the point, in Ukraine and abroad.
It is truly remarkable that a piece of fiscal legislation has been gaining this much notoriety among everyday people in Ukraine. It is also pretty remarkable that in the nation where so much of the population relies on government support, so many people would agree on and stand behind a liberal tax reform and a profound change.
Then again, Ukrainians often take difficult choices if those choices are right. Otherwise, they would not have gone to Maidan two years ago…
Nina Iuzhanina is a member of the Ukrainian Parliament and head of its tax committee.