You're reading: Jaresko adviser says flat tax will trim corruption

Slovakian lawmaker Ivan Miklos is bringing his flat-tax, less-government regulation advice to two ministers – Finance Minister Natalie Jaresko and Economy Minister Aivaras Abromavicius.

He comes with top credentials. Miklos, 55, was named as a top business
reformer by the World Bank’s Doing Business report in 2004. In Slovakia, he
served as deputy finance minister and privatization minister.

He’s a believer in less government involvement in the economy. “All of
my professional life is about reforms,” Miklos told the Kyiv Post in an
interview on Dec. 8.

Ukraine’s cumbersome tax system today is similar to what Slovakia had
before 2005.

“Which means it’s very complicated, it’s full of exceptions, deductions,
special rates, special tax regimes, it is very distorting… very low tax
administration efficiency, very high corruption,” Mikos said.

For Miklos, price deregulation, liberalization and
privatization are even more important than overhauling courts and prosecutors.
His reasoning is that by closing down corruption in business, there will be
less lawbreaking.

Ukraine’s army of 54,000 tax officials will be trimmed by 32 percent by
year’s end, if Jaresko’s tax reform package will follow through.

But the best way to simplify life is through introducing a flat income
and corporate tax rate, which will make tax administration simpler and less
corrupt.

After reform, Slovakia’s flat rate became 19 percent. Before, rates
ranged from 10 to 38 percent. It did not hurt the poor because the government
raised the income threshold to qualify for exemptions of taxes.

“We tripled it… and we reduced the marginal tax rate,” Miklos said. “The
low income people in the new system are paying in reality zero, because their
income is lower than the tax-free income.”

From 2004 onward, 40 percent of Slovaks didn’t pay any personal income
tax, whereas the rest paid only 19 percent.

This is the direction that Jaresko is taking, Miklos said. Instead of
having approximately 100 tax rates in Ukraine’s four main tax categories –
value-added tax, social security, personal income and corporate income taxes –
the current ministry is proposing one.

Ukraine’s average 41 percent tax rate will be reduced by more than a
half. “The Ministry of Finance proposal is a really good proposal, in some
regards it is even better than my proposal in Slovakia,” Miklos said.

But whether the rate is 19 or 20 percent shouldn’t be the major concern
for policymakers. “Rates are not so important as the content,” Miklos said.

A broad tax base weeds out corruption and promotes economic growth.

“You have less motivation for tax evasion but you also have less
opportunities,” Miklos said. “Because if you have a simple system, if rather
than dozens of rates you have just one, then it’s not so easy to escape from
taxation.”

His tax reforms were also based on the following principle: any
favorable policies that are aimed at specific groups should be done on the
expenditure side of the state budget instead of the revenue side. For example,
instead of giving local farmers tax exemptions, the government should provide
them with subsidies.

Miklos says the same applies to helping the poor cope with rising energy
prices in Ukraine. “The best way is to have market prices for gas, electricity,
households, and then those who really need (help) should be supported with
subsidies,” he said.

In an Oct. 5 tax reform report, the World Bank said that Ukraine’s
proposed tax reforms are going in the right direction, as long as deficits
don’t grow too large. Miklos agrees. “This is the main difference between
the finance ministry’s proposal and this alternative proposal of the
parliament’s tax committee,” he says. In his view, the Rada’s proposal backed
by lawmaker Nina Yuzhanina is fiscally unsustainable.

Lawmaker Tetyana Ostrikova, member
of the Committee on Taxation and Customs Policy,
says the government was
taking too long to come up with a plan, so members of parliament presented
their own.

Jaresko said parliament’s plan would create a monstrous deficit that
would either require draconian budget cuts or force Ukraine off the
International Monetary Fund lending program.

“The alternative proposal unfortunately would create a much, much bigger
gap – about Hr 200 billion – without any compensation measures on how to cover
this gap,” Jaresko said. That amounts to cutting $8.5 billion out of a national
budget that is only $38 billion – or less than half the size of the New York
City municipal budget.

The Finance Ministry is pushing for tax changes by the end of 2015 so
that results can be seen next year.

Miklos said that he didn’t see the concealed part of the economy emerge
from the shadows until two to three years after changing the tax system.

Ukrainians won’t simply start trusting tax officials overnight or start
paying taxes right away, but those things have to happen.

“This is not only about the voluntary change of the behavior, but it is
also about diminishing space for tax evasion,” Miklos said. “It’s necessary to
explain to the people that these hardships are not the cost of the reforms, but
are the price paid for the lack of reforms over the last 25 years.”

Kyiv Post staff writer Ilya Timtchenko can be reached at [email protected].