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22 July, 2011

Quantity Without Quality

Recent amendments to the Tax Code fail to add clarity to legislation but do solve a number of problems for some businesses

As one analyzes amendments to the Tax Code recently passed by the Ukrainian parliament, Murphy’s law immediately comes to mind. It only needs to be slightly paraphrased: no matter what MPs and ministers say in the Verkhovna Rada, it is all about money. I will not consider specific reasons for this amendment or any other – they are countless. Let me instead formulate the general reasoning behind these modifications. For example, the new version of the chapter on rent charged for using Ukrainian natural deposits opens the way to corruption. The proponents of this change never mentioned to the parliamentary committee why one type of rent should be lowered and another one raised. There is a similar situation with the excise duty – the logic of transformations is never explained. I asked the initiators about these and a number of other changes but have not received a reply.

In reality, the interests of private companies are behind many corrections, but it is hard to say how much they can gain from them, because neither math nor sociology was taken into consideration as these amendments were considered. This is totally unacceptable, because altering any taxes, and especially the excise duty which has a direct effect on consumers’ welfare, requires an understanding of the consequences and forecasting – or at least a desire to understand.

On the one hand, those who feed from the budget are interested in knowing whether the state will have more money, how it will be distributed, and so on. On the other hand, entrepreneurs and top managers have an interest in learning the parameters for increasing or lowering the fiscal burden. This is elementary math! Our committee has not performed any such calculations. The amendments have not been considered in detail at all. There is nothing strange in this: when a committee passes a decision, the majority, which of course consists of pro-government MPs, prefers not to study the adjustments. Indeed, why should they, if the government’s position is already clear?

The Tax Code was an utterly heterogeneous and fragmentary compilation from the onset. It could have been hoped that after the declared changes were made, the document would be more coherent and logically harmonized. However, amendments were passed in a chaotic fashion and this served merely to aggravate the existing contradictions. American philosopher Henry Thoreau suggested that everything needs to be simplified as much as possible to find the truth. After all, from where did the Tax Code come? In the 1990s, when Ukraine’s fiscal legislation was taking shape, I was often criticized for norms that hurt the standard of living. I suppose that this could have been; perhaps the criticism was even fair. But the Tax Code consists of 90% of laws drafted with my participation – they were then put together in a heap, but only served to complicate life even more instead of making it easier. By definition, this approach cannot be perceived as reform. Many taxpayers have already received “satisfaction” from promised “tax holidays” and “simplified administration.” They are now in for changes under pension reform.

The effect of this “reform” will not be experienced by everyone immediately. If you are, say, young, have a college education and live in Kyiv, you are fortunate in that the changes in the law will most likely not affect you – or perhaps only indirectly through worse conditions for employers. But not everyone has this kind of starting position – 92% of Ukrainians will suffer from the new rules of the game and only a small segment of them will be able to adjust. The Tax Code expands the authority of the tax police and complicates the operation of small enterprises, which means that the number of the self-employed will go down. At the same time, the new norms in pension legislation lay the foundation for competition between the young labor force, particularly college graduates, and able-bodied employees of a more advanced age. But now that these transformations are taking place, no-one is analyzing the possible social consequences. I do not have ready answers, but the problem is that the questions are not being raised at all!

For example, certain MPs have an understanding why certain changes are necessary. In order to carry them out, some groups may even make concessions, for example, by somewhat improving the taxation mechanism for the business profit tax in the interest of all taxpayers, leaving VAT alone, and so on. But all these modifications are very eclectic and incoherent. Another approach to legislative changes is possible only on the condition that tax and social norms are not drafted in the street under the flags of various parties or in a rush. The above corrections are in fact very serious because in some way or another, they affect every family budget. In light of this, it should be understood that you do not want to elect a government and then later sit around wondering why citizens are so poor and MPs so rich. The government has to explain the meaning of laws to citizens rather than simply impose them. We are not the Central Committee of the Communist Party to tell others how they should live. This is something both Ukrainians and the politicians they elect need to acknowledge.


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