Hefty payroll taxes are one reason behind Ukraine’s massive gray economy, in which millions of workers are simply never declared by their employers as official employees.
To move labor out of the shadows, authorities are proposing to drastically cut the monthly contribution, which funds the heavily indebted pension system. Proponents argue that a wider tax base will make up for losses.
The new
draft law on reduction of the unified social tax, a monthly contribution to the
state pension fund, would cut the tax from 32.6-49.7 percent of a worker’s wage to 18 percent. Proposed by opposition
lawmakers in late December and approved by the state committee in January, the
bill is expected to encourage legal employment by cutting its costs.
But
while representatives of the pension fund are worried about loss of revenue, others
say such a change will increase tax revenue if more workers come out of the
shadows.
“The main aim of this law is to enhance legal
labor relations,” says Pavlo Rozenko, a Ukrainian Democratic Alliance for
Reforms member of parliament and co-author of the law. “There are about 4.5
million small and medium entrepreneurs in Ukraine, but only 1.5 million are
paying the contributions to pension fund, which is the (main) reason for its
losses.”
Similar
changes were also suggested by Deputy Prime Minister Sergiy Arbuzov, who
recently said he is planning to file a draft law on reducing the payroll tax to 10-15 percent. His attempts, however, came under harsh criticism from pension fund
officials, who claimed they would lose billions of hryvnias if the law is
implemented.
“In this case, the pension fund will get about Hr 100 billion ($12 billion) less,” Liudmyla Poliovyk, deputy director of the fund’s
revenues department said during a roundtable in Kyiv on March 1, according to news agency
Interfax-Ukraine.
Pension
fund officials estimated a reduction of the payroll tax to 18 percent would
cost Hr 50 billion in lost revenue.
But
Rozenko says the fund’s fears are exaggerated. “We estimate the losses at Hr 15-19
billion during the first year which is not crucial for the fund’s budget as it
receives Hr 83 billion in state subsidies,” he explained.
He
expects a wider tax base, with more workers coming in, would make the program
break even within two years. In January, the number of full-time working places
in the nation of 45 million dropped to a record-low 10 million people, business
daily Kommersant reported.
“It’s
the optimal level for the tax, (so as to) benefit both employers and the
state,” Rozenko said. “We hope to get support for the law from ruling parties,”
he added. The first reading in parliament is yet to be scheduled.
“Experience
from other European countries shows that reducing the contribution rates could
help in reaching this goal, but that this measure alone is not a magic potion,”
noted Dragos
Adascalitei, a researcher at the Mannheim Centre for European Social Research (MZES).
According
to state statistics, Ukraine has 13.8 million pensioners, representing almost
30 percent of the population. A pension reform was passed last year to fulfill
International Monetary Fund demands, raising the retirement age and extending
the contribution period, but failed to address the country’s biggest problems:
a high pensioner-to-employee ratio and large deficits due to bloated spending.
“The
budgetary gains from these reforms were cancelled by increases in minimum
pensions ahead of the parliamentary elections of 2012,” says Adascalitei.
“The decrease in the contribution rates can lead
to unsustainable deficits in the pension system if not accompanied by proper
labor market policies,” the researcher explained. “Thus, in the short run, the main
challenge for Ukraine is to limit populist political maneuverings that affect
the expenditure side of the
pension system.”
In February
the government approved the pension fund’s budget with a Hr 21.8 billion
deficit, which is Hr 5 billion higher than last year. Ukraine currently spends
18 percent of its gross domestic product on pensions and has one of the highest
pension contribution rates among post-Soviet states, according a recent World
Bank survey.
Kyiv Post staff writer Anastasia Forina can be
reached at [email protected]
