Ukraine’s tax system is failing the nation. The punitive rates continue to force the economy in the shadows, robbing the state treasury. This has been the case since Ukraine became an independent nation in 1991.
Unreasonably high payroll taxes on employers are such a burden that many employees are simply not counted or their incomes hidden. Honest employers are forced into this dishonesty of paying salaries under the table, in cash, because many would not financially survive if they paid the official tax rates.
While oligarchs and insiders hide their profits offshore, employers without such nifty arrangements are supposed to fork over to the state from their own pockets 50 percent of the amount they pay their employees, as payroll contributions.
The onerous yet widely ignored burdens are punching holes in the nation’s pension fund. Coupled with the nation’s demographic slide, these factors caused Ukraine’s pension fund deficit to widen last year to 1 percent of gross domestic product – to Hr 13 billion from Hr 7.9 billion in 2010.
While oligarchs and insiders hide their profits offshore, employers without such nifty arrangements are supposed to fork over to the state from their own pockets.
The obvious solution is not news to President Viktor Yanukovych or anyone who has been paying attention for the last 20 years.
One of his loyal lawmakers in parliament, Anatoly Kinakh, eloquently described the problem in an interview on Tonis television channel this week.
According to Kinakh, Ukraine’s payroll tax is roughly 50 percent, at least twice as much as other European countries. By lowering the tax to a less onerous 27-30 percent, the nation would gain more revenue by coaxing employers and their employees out of the shadows and onto the books.
Employees who show more of their real salaries will also benefit the state through increased income tax payments. Gradually, the perpetually broke government will be on a solid and sustainable fiscal footing.
The words of Kinakh, a former prime minister, are welcome. But too often this talk is never followed up with actions by those in power.
Yanukovych has monopolized power in Ukraine to such an extent that he has the opportunity to make almost any changes he wants, at the moment.
If he truly seeks to reduce the size of Ukraine’s shadow economy, he and his team should slash payroll taxes – and do it now.
