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Tax Hell
Diagnosis of the tax system of Ukraine. The Four S's: Subversion, Stupidity, Savagery, and Suppressed Color Vision.
10 September, 2024
Fiscal Policy
Governance and Regulations
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Ukraine lives in a regime of chronic resource deficit. Money is always needed in times of war. The ends do not meet in the state treasury. People do nоt have money to keep their pants from falling down due to scragginess. Entrepreneurs are exhausted by the burden of circumstances and high costs, with depleted reserves. Investment and financial flows are pinched. Private property rights are nullified by a comprehensive regulatory burden. Energy networks are weakened or destroyed by enemies. The labor force hides from mobilization under the plinth or in forced migration. Instead of real scientists, nomenclature-power sorcerers deal with the economy in the Government. There is a severe lack of intellectual depth in the government, but all the organizations and institutions of the government are affected by the bureaucratic, corrupt contagion. By every budget flow and state asset there sit cynical rascals and beggars. Ukrainians are divided. Instead, VIP-disposers and consumers of other people's property are woven into a single knot against the economy and the country.
In such an institutional environment, with such quality of state administration, the Government proposes to sharply increase the tax burden.
To begin with, a few facts in order to assess the adequacy of this proposal.
In 2022, the country's GDP was $161.99 billion, which, with a deficit of 24.8% of GDP, gave us $40.2 billion. In 2023, the budget deficit of state administration bodies, excluding grants, was 26.1% of GDP or $46.7 billion, with a GDP of $178.76 billion in 2024. The planned budget deficit of state administration bodies at the level of 20.9% of GDP or for a GDP of ~$186.5 billion is estimated at ~$39 billion (see Іnfographic №1)
The government is raising taxes in order to collect ₴140 billion for the state budget, or $3.5 billion at the average annual rate in 2024 (₴40.3 UAH for $1). If we take the average annual exchange rate of the hryvnia forecasted by the Government next year at 45 hryvnias / 1 US dollar, then the proposed increase in the tax burden will add $3.1 billion to the budget.
One way or another, the additional tax revenues to the budget will not exceed 10% of the existing deficit, provided that all taxpayers pay properly and disciplinedly at the new rates.
The government and business evaluate the tax proposals of the authorities in direct contrast.
Proponents of the increased tax burden reason approximately as follows:
- wartime requires increased government expenditures
- additional money is needed for military, infrastructural, social needs, and even service of old debts.
It is assumed that in the hands of the officials, this money will get new colors, will become a real catalyst for growth, and the country's economy, after a modest GDP growth of 2.7% in 2025 (as stated in the Budget Declaration for 2025-2027), will start and sharply increase the pace growth to 7.5% in 2026 and 6.2% in 2027.
So far, no country in the world with public expenditures exceeding 60% of GDP, especially in the face of a full-scale war, has demonstrated such dexterity. But you can do whatever is needed to impress international donors and external creditors, can’t you?
Opponents of increasing the tax burden have a completely different assessment of the proposals of the Government and fiscal officials from the Verkhovna Rada. The state of Ukrainian business is already very tense.
With rare exceptions, labor productivity, cost effectiveness and profitability of commercial activities stagnate and decline. Tax burden + tax administration, regulatory burden and costs of business to meet the requirements of the state, together with the tension in the labor market and in the energy sector - all this together puts Ukrainian business on the edge of survival.
Raising taxes and duties on the income of individuals and legal entities, on cars, jewelry, sugary sodas and real estate, cellular services, and for participants in the fuel and energy market is not about growth and development. This is about a reduction in the purchasing power of businesses and the population, a sharp increase in incentives to move into the "shadow" economy.Share
As for the "shadow" business, Ukrainians have practically no equals in Europe. Checks and inspections of dozens of state administration bodies also push them into the pit of bankruptcy and insolvency.
As a result, due to the Government's desire to collect an additional $3-3.5 billion in taxes for the budget, the country will experience inhibitions, an increase in social tension and investment rejection. In such a situation, the growth rate planned by the Ministry of Finance for 2026-2027 with a high degree of probability is pure utopia.
Economic science and history do not know how to reduce the state budget deficit from 20.6% of GDP in 2024 to 10.3% of GDP in 2026 and 6.7% of GDP in 2027, while actually increasing the tax burden and maintaining the size of state expenditures at ~60% of GDP without radical liberalization of commercial activity and entrepreneurship. There are just no other recipes.
$8.3 billion are desired to be collected from Ukrainian taxpayers by Ukrainian VIP-disposers and consumers of other people's property together with the IMF/SB/EBRD and consultants/partners represented by ICU, Dragon capital, CES (Center for Economic Strategy), Concorde Capital, Vox Ukraine, BRDO, German Economic Team (GET), which support and largely influence the economic course of the Cabinet of Ministers and the proposals of the Ministry of Finance and the Ministry of Economy. It means more taxes than in the previous year! Therefore, Ukraine, which has climbed one more step in the rating of Tax Hell 2023, has every chance to be on top of it already next year.
Source: The 1841 Foundation
And all this after 2.5 years of a bloody, destructive war with blackouts, losses from the arrival of missiles, drones and the constant support of the Armed Forces by people and businesses?
It seems that the Cabinet of Ministers and the Verkhovna Rada have an old kerosene lamp with a magic genie that will suddenly pull 15-20% of GDP out of the shadows.
If we believe the forecast of the IMF, which for the Ministry of Finance of Ukraine is a guide and an indisputable authority in one bottle, the level of tax revenues in the next three years should grow steadily, and Ukrainians are wanted to be robbed with impressive dynamics (see Infographic №2).
The government of Ukraine probably makes such assumptions and forecasts, considering Ukrainian business to have large reserves that can be partially withdrawn from it through tax increases. But where from?
Ukrainian government fiscals stubbornly believe that additional billions of dollars in their hands will bring more benefits and economic growth to the country than if they remain in the pockets of people and businesses. Belief in the budget multiplier and the state investment multiplier – these tools were introduced by the shamans of the Church of Keynes/Samuelson back in the middle of the 20th century – is still strong in the government of the Ukrainian Leviathan.
The Government's assumption that the Ukrainian economy can show rates of economic growth of 6-7% with public expenditures of 50-60% of GDP, provided that the trade balance deficit is more than 20% of GDP, and the national debt is more than 100 % of GDP and annual expenditure of more than 10% of GDP on maintenance. Magic?
Of course, it can be assumed that the USA/EU/G-7 will inject $45-50 billion into the Ukrainian economy over the next four years, and the old creditors will forgive half of the debt, and the new ones will be generous due to the insurance of international organizations that are in Ukraine even during the war investors will flock to PEK, extractive industries and construction. It is one thing to draw such a castle-in-the-air scenario and poke it at all kinds of investment forums, but it is absolutely different to deal with economic policy in general and fiscal policy in particular on a scientific, not mystical or PR basis.
In the context of economic laws and taking into account all the factors affecting the state of taxpayers and the Government, we can draw certain conclusions regarding the tax policy of Ukraine and the reform proposed by the Government.
- This is Sabotage against Ukrainian producers and consumers. They already have an acute shortage of working capital and available resources, and there will be even less. Loans of 5-7-9% are for a small group of nomenclature favorites. Therefore, it will be more difficult to support their families and donate to the Armed Forces. Risks increase, leaving the market of those entrepreneurs who work for a minimum profit.
- Raising the tax burden under the conditions of a full-scale conventional war, when non-military expenditures significantly exceed military expenditures, state expenditures amount to 75% of GDP, this is outright Stupidity. It is impossible to find a scientific justification for such a step from the point of view of sustainable economic growth and strengthening the competitiveness of Ukrainian business.
- Increasing resources in the hands of disposers of other people’s property, when practically every state administration body is riddled with corruption, when expenditures are a complete mess, and no one analyzes the quality of budget expenditures, this is Savagery. This is an increase in anti-civilization practices, a deepening of the swamp of corruption, a weakening of the legal, legal institutions of the state, even more slipping into life according to concepts further from the civilized legal standard of life according to the Law.
- Increasing the tax burden is Suppressed Color Vision in terms of economy. Supporters of such a proposal see and present only positive short-term consequences for certain state structures. Their executives may have a few extra billion dollars in their hands. They assure that they will spend them responsibly for the benefit of the country. Is it possible to build trust in such a promise in the light of the quality of the budget and tax policy of Ukraine over the past 20 years?
Behind the frame of the analysis there remain:
- impact on the financial condition of businesses and households,
- dynamics of tax management costs,
- a change in the tendency to transition to the "gray" economy or to stop commercial activity altogether,
- increasing sources of corruption and official discretion.
Thus, the current tax system of Ukraine, as well as the changes formulated by the Cabinet of Ministers, the Ministry of Finance at the request of the IMF, are the weakening of the country, the deterioration of the condition of producers and the impoverishment of the population.
What we need is not an increase in the tax burden or the preservation of the existing tax structure, but a radical tax reform.
Universality, neutrality, simplicity, transparency, unequivocal terms, provisions, procedures, as well as fairness and one-time use - these are the principles of the tax system of a country that wants to turn fiscal policy into a source of a rapid, long-term economic growth at the expense of the country's own resources and its people, and not through state loans and consumption.
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Topics
Fiscal Policy
Governance and Regulations
Yaroslav Romanchuk
A well-known Ukrainian and Belarusian economist, popularizer of the Austrian economic school in the post-Soviet space. He specializes in reforms in transitional economies in the post-socialist space.
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