Ukraine's leading English-language newspaper since 1995

Without consultation, the government's rammed through radical tax law changes. They should slow down

has gone in trying to reform Ukraine’s tax system recently. It’s too fast. Their reform seems poorly thought out, it will be bad news for the small businessmen and entrepreneurs who should power Ukraine’s economic development, and it will likely have the opposite of the intended effect, serving to drive employees and employers into the shadows.

One of Ukraine’s open secrets has for years been its lax tax regime, which has made paying taxes more or less optional. That, of course, is not the sort of tax regime that a responsible country should maintain, so it seemed reasonable when the new Yushchenko government indicated that it would try to rationalize matters. An opportunity beckoned, and residents of Ukraine trusted Yushchenko enough to let him take it. For most of the history of independent Ukraine, paying taxes has, frankly, seemed like a hustle: a matter of turning over one’s money to a gang of buccaneers and thugs. Now it seemed tax-paying could become what it is in the West: part of the social contract.

In March, the government changed the tax regime. This stipulated that employees and small entrepreneurs would have to pay a flat tax of Hr 200 per month (about $40). It also allowed businessmen to classify their employees as private entrepreneurs, thereby letting them – the businessmen – off the hook when it came to paying the high “social taxes” that employers have to pay on the basis of their each employee’s salary. This was perhaps not the ideal tax mechanism, but it did represent an attempt by the government to come to terms with a dilemma: how do you get people to start giving up their money?

Then, bafflingly, the situation changed – without warning, without discussion. Now, as of July 1, employees will have to pay 13 percent of their salaries in income tax. Employers will have to pay a series of “social taxes” on each employee that will add up to almost 40 percent of each employee’s salary.

What’s this all of a sudden? For many people, 13 percent of their monthly income is more than Hr 200. They have a right to ask what the government has in mind with these sudden and seemingly arbitrary changes, which yank people back and forth. Employers, meanwhile, have the right to be outraged. To have to pay 40 percent of the value of each of their employee’s salary to the government is extreme. That’s a confiscatory tax rate if there ever was one.

This is not the way to make tax policy, not least because it will make businesspeople into criminals as they find ways to keep their employees off the books. It will also turn employers against their own workers, since the latter might want to be on the books, paying up. Doing so feeds their pension accounts.

The government should slow down, stop the arbitrary shifts, and institute tax reform in a more reasonable manner.