Society is upside down when the number of millionaires grows, while average citizens pay more in bribes than taxes

You don’t have to be a genius to see that something is wrong with a country where most people do not pay income taxes, yet regularly get shaken down for bribes to officials in a government controlled by a small business and political elite. Meanwhile, the official number of millionaires grows while many more remain uncounted and untaxed.

According to a senior tax official (see Business Briefs on page 6), 7,423 Ukrainians admitted earning more than one million hryvnias in 2008, 400 more than in the previous year. Tax officials say, however, that many more are concealing billions of hryvnias in income.

Meanwhile, less than 546,000 of Ukraine’s 22 million workers (out of a population of 46 million people) filed tax declarations for income earned in 2008. They declared Hr 22 billion, down from Hr 30 billion in 2007.

So, if most Ukrainians are evading taxes, are they getting richer? Not likely. Instead of paying taxes that get transparently spent on public needs, citizens are coerced into Ukraine’s thriving form of black-market taxation. Transparency International recently estimated that up to 10 percent of Ukrainians’ incomes are spent on bribes. Tax officials, government inspectors, professors, doctors and teachers are all part of this complicated and corrupt culture.

The problem is that bribes are regressive taxes. Payments go from the poorest and least powerful segments of society to the most powerful or most entrenched ones. Income taxes, on the other hand, are progressive – based on the ability to pay.

Where is most of the money going? After 18 years of independence, the money still helps perpetuate a system created by business tycoons, bureaucrats and lawmakers. Together, as a class, they promulgate complicated laws and regulations while keeping key public institutions – such as law enforcement – serving private, not public, interests.

Ukraine remains a highly corrupt and bureaucratic nation where the influential mine natural resources and get rich, while much of the population remains in poverty. In this environment, subsidies and insider deals – to put it kindly – are all part of the landscape.

Rinat Akhmetov, as the nation’s richest billionaire, and his charity Foundation for Effective Governance,are worthy of being singled out. Since Akhmetov is on top of the pyramid no matter which government is in place, he has more influence than anyone else in moving the nation to an open and competitive economy, a progressive tax system and ridding it of the opaque machinations of Ukrainian-style business. If Akhmetov really wanted these reforms, as his Foundation for Effective Governance claims, the changes would likely have been accomplished by now. After all, he calls the shots in government and in business more than any other Ukrainian.

Big employers such as Akhmetov also must start paying livable wages to employees. Why should Ukrainian steel mill workers or coal miners earn several times less than counterparts in Poland? Instead, Akhmetov and other billionaires, by their actions, demonstrate no interest in changing in an economy based on the exploitation of cheap labor and natural resources.

Society is upside down financially and will remain so until regressive taxes (bribes) are squeezed out of the economy and replaced with income taxes that everyone, especially those more able to do so, pay.