Ukraine’s budget deficit cannot be more than 4 percent of gross domestic product next year. On the revenue side, tax collection and how the system is administered will determine how much the government can spend.
This is where populism enters the picture, because as economist Anders Aslund pointed out this week, “some prominent Ukrainians seem to think…that public expenditures should be increased and taxes should be cut… That is called populism, the disease Ukraine has suffered from since its independence in 1991, and which has caused Ukraine’s steady economic decline.”
Ukraine’s tax code furthermore should encourage economic growth: bringing the economy out of the shadows and making it difficult to evade taxes. A broad-based system should be introduced that doesn’t coddle the oligarch-controlled industries of oil, gas, mining and metals. No favors, period.
For this reason, cutting the excessively high payroll tax, which stands at 41 percent, is warranted to encourage more employers to declare employees and real salaries. Legal schemes to lower taxes, such as classifying employees as private entrepreneurs, should be curtailed.
The personal income tax should be progressive, or based on the ability to pay. The 20 percent sales or value-added tax should remain.
Property taxes should be raised significantly, and based on market value as best as can be determined, to arrest urban decay and to fund local governments properly.
To this end, Finance Minister Natalie Jaresko’s approach – lower rates, elimination of favored treatment for specific industries, simplification, overhaul of the State Fiscal Service – seems to be on the right track. She estimated this week that her tax plan will require finding savings of a hefty $2.6 billion. But that’s more manageable, she said, than a competing version promoted by lawmaker Nina Yuzhanina. Hers is unrealistic because it would force cuts of nearly $10 billion, or nearly a quarter of the state budget, according to Jaresko.
Most importantly, as an IMF blog correctly stated on Nov. 5, Ukraine must crackdown on corruption, the “hidden tax on growth.”
Fundamentally, people must believe in paying taxes and confident their hard-earned money will be well spent, to eliminate the prevalent attitude: “Why should I pay taxes when the folks in government steal it anyway?”
