Tax reform «10-10-10»: analysis

LET’S START WITH THE POSITIVE

The first is the recognition of the toxicity and inadequacy of the current tax system. In its current form, it is a powerful brake on the economy, a source of corruption, discrimination, and discrediting of the authorities. To leave it in its current form is to deprive the economy of even a ghostly hope of success. The proposal of 10% income tax, 10% personal income tax, and 10% VAT is undoubtedly a better option than the current one. But let’s go beyond PR beauty and tell the truth. This is not the “10-10-10” regime but the “10-10-13” regime because the military levy automatically increases the personal income tax rate.

The second is recognizing the need to reduce the tax burden and tax administration costs. The size of the State in the Ukrainian economy is ~45% of GDP, regulatory costs of producers of goods and services – ~17% of GDP, and transaction costs – ~7% of GDP. Leaving everything as it is like leaving an enemy division in the rear of an army.

The third is the recognition of the need to eliminate the sources of corruption that are “sewn” into the current tax system. Without deep tax reform, it is impossible to stop tax fraud, no matter how many anti-corruption agencies are created.

AND NOW FRIENDLY CRITICISM

Evaluation of the voiced offer in the context of the actual situation, challenges, and threats facing Ukrainian producers of goods/services and consumers.

The first weakness is the fragmentation and selectivity of the tax reform. Of course, such a reform can be called radical. The halving of tax rates and the abolition of the tax on the salary fund are rightly called radical. This is an emotional assessment, but consider this measure in the broader context of fiscal policy.

The abolition of one tax, even if it is harmful, does not radically change the structure of the tax system. From the view of administration and control costs, two other, perhaps the most destructive, taxes remain – VAT and income tax. They are harmful at both 20% and 10% rates. Mechanisms of accounting and control, rationing of costs, and preservation of discretion of state and control bodies remain the same. Why keep the income tax in a situation where the Ukrainians have already lost and will lose tens of billions of dollars during the war to support the front and rear?

The argument “the EU/IMF/OECD will oppose the cancellation” today is similar to the opinions of the UN, German, and French politicians to stop fighting the Russian aggressor and make concessions to him. To what? To appease and satisfy the left in the West and give it another chance (the first was after the collapse of the Soviet Union) to survive after Ukraine’s victory in the war?

A 10% income tax is better than 20% or 30%. Still, today the optimal rate is either a 0% rate while formally maintaining this tax (a compromise with the EU/IMF) or its elimination because the income from this tax in wartime and post-war recovery stages will be negligible, even more, significant than the costs of administering this tax.

I have similar claims regarding the retention of VAT. It’s good that the rate is 10%. This is one of the lowest rates in the EU (not counting preferential rates from this tax in many EU countries). But why make value-added tax a sacred cow? Today, even the EU has significant problems with the VAT administration. The costs are very high. Therefore, countries such as Ireland and Switzerland have preferential rates of 7% and below. Reducing the VAT rate to 10% is undoubtedly a positive phenomenon, but why not abandon this tax altogether? Why not eliminate administration costs?

VAT is essentially a sales tax paid by the final consumer, only the road between the raw material producer and the retail counter has many barriers where the tax is removed from the value added at each stage. Abolition of this tax will reduce administration costs by ~5% of GDP.

A more attractive alternative to VAT is the tax on retail sales of goods/services. Its main advantage is that it radically reduces producers’ costs of goods and services. With a flat scale, it is easy to control. The neutrality of the tax system is guaranteed. Plus obvious bonuses from the much broader coverage of this tax compared to VAT.

The tithe (PIT) is the optimal tool. There is no controversy here, although forcing people to pay it during a war is hardly advisable. It is better to increase the retail sales tax rate by a couple of percentage points.

In addition, the risks and threats from the tax model proposed by the Office go beyond “10-10-13”.

First, reformers demand full access to information about bank accounts. This is a violation of the basic principles of freedom and privacy.

The second threat, the defect of the proposed reform, is much more severe. It refers to compensators, i.e., sources of financing of budget expenditures after reducing tax rates. One of the authors of this tax reform, R. Shurma, says: “…From a pure tax point of view, we do not tax enough such things as environmental pollution or harmful consumption, i.e., tobacco, alcohol, petroleum products.”

The authors do not talk about a certain marginal level of state spending, the maximum permissible tax burden, but only about reducing the rates of three taxes, canceling one of them with a sharp increase in the risks of increasing the rates of other taxes. Probably, it is about increasing excise duty rates and introducing other taxes on “harmful consumption.”

The introduction of the “10-10-13” system does not exclude the introduction of other taxes. This is how R. Shurma views the additional tax on the purchase of currency for import in a Marxist, collectivist way: “We consider this tax not as a way to fill the budget, but as a way to fight against speculators. This tax should reduce the demand for foreign currency from unscrupulous businesses, which can make settlements within 180 days. Accordingly, this will equalize the balance of payments and reduce the pressure on the hryvnia.”

Thus, the positive aspects of the proposed tax model (positive compared to the current situation) can and most likely will be destroyed by the redistribution of the tax burden, but not by its reduction or radical reduction in the size and functionality of the State..

In addition, the proposed model rightly causes claims and complaints from the National Bank. Fully justified precisely from the point of view of the Liberal agenda. According to R. Shurma, “hryvnia issuance can easily amount to 30 to 60 billion hryvnias per month.” With inflation over 30% per year, and the destruction of the old structure of production and consumption, making such statements is pure populism. This is a mechanical transfer of fiscal policy problems to monetary policy. He said inflation is not scary.

Money printing and the resulting inflation are an extension of state interventionism, a blow to liberalism and the institutions of private property. Inflation is not an insignificant side effect but a destructive tool for redistributing resources, creating high risks for investors, producers, and consumers. Therefore, the position of the National Bank against monetary corruption, which has already reached threatening proportions this year, is fully justified.

A team of reformers proposing tax policy solutions to expand economic freedom cannot simultaneously stifle that same freedom with monetary policy.

Crystalline honesty, scientific principle, and worldview consistency — this is what is essential in the formulation of the reform program.