The arguments for trade liberalization are very strong, while the arguments for putting any additional restrictions on imported used cars are weak at best. In light of recent developments, it is time to expose Ukrainian producer to real competition.
Category: Fiscal Policy
At the beginning of 2016 as part of its reform of the tax code, Ukraine reduced significantly the social security contribution (SSC) paid by firms. The payroll tax rate was massively reduced from an average of 44% to 22%. The idea behind this reform is to reduce labour costs, so that firms become more competitive, boosting exports, investment and real wages. A further motivation is to reduce the level of the significant shadow economy in the country. Does it work in Ukraine?
Trust and rules are critically important for conducting economic activity. If Ukraine wants to succeed economically, and thus politically, the authorities should focus on increasing the security of property rights and minimizing the ability of the state agencies to void contracts that were concluded and executed in good faith.
According to the recent Tax code update, Ukrainians should pay more for alcohol & tobacco products in 2016. The excise taxes have increased steeply: tobacco products – by 40%, low alcohol beverages – by 300%, beer and wine – by 100%, alcohol beverages – by 50%. The expected contribution to Ukraine’s 2016 budget of these increased tax rates is projected at 18.1 billions UAH. Vice taxes thus have the potential to generate substantial revenues for the Ukrainian budget, so the Ukrainian government might well want to consider additional vice taxes.
Discussions around agricultural tax exemptions have been in the focus of a hot political fight between the Ministry of Finance and agrarian lobby for more than a year. More than UAH 20 bn of forgone budget revenues is at stake. On the New Year eve, some compromise was reached, whereby agricultural lobby and the sector lost a great deal of its tax benefits. Agricultural lobby, however, does not give up and prepares for a revenge. Oleg Nivievskyi demonstrates some of the empirical evidence showing no impact of tax benefits on agricultural sector productivity growth.
The 2016 “budget package” approved by Ukraine’s Parliament in the end of December represents a step in the right direction, for it notably lowers the taxation of salaries and redistributes significant resources from the public sector to the private sector. However, it should be viewed as just a first step forward with broad reform agenda remaining in the budget-related sectors and beyond.
‘Equal conditions for all’ is not a bad idea. However, as Vladimir Dubrovskiy explained in previous articles, it should be first realized with respect to the general system. As long as the latter is repressive, discretional, unfair and full of really large leakages, there is no point in harmonizing the STS with it – simply because as of now it is much healthier in itself. Instead, Vladimir Dubrovskiy admits it could be better to make an opposite harmonization – try to make the general system equally simple in use, straightforward, predictable, corruption-proof, and equal for all.
This article is a contribution to the tax reform debate in Ukraine. The shadow economy makes a significant contribution to the economic growth of Ukraine. Experts have different interpretations of the shadow economy indicators, and it determines their expectations about the reduction of the shadow economy. The paper analyses the methodologies for estimation of the shadow economy size in Ukraine. It is shown, that the value added of underground activities, according to these approaches, is largely included in the official statistics. It means that the expectations of significant positive effects of the reduction of the shadow economy are too optimistic.
There is no doubt that the tax reform carried out by the Mikhael Saakashvili’s team after its ascend to power in 2004 was a success. But the Georgian government did not start the reform by sharply reducing the tax rates. Before anything else, it reviewed the motivation system within the tax service. It was impossible to fire all the tax inspectors instantly, as it was done with the police. Therefore, the government decided to alter their mindset by restructuring the system of their motivation. First changes in the tax legislation were adopted already in 2005, when a new tax code and a law on tax amnesty were introduced.
Before one suggests an aggressive fiscal consolidation to balance Ukraine’s budget, he or she should contemplate if Ukraine is prepared for another 5-10 percent decline in GDP. A sensible macroeconomic policy includes maintaining the level of public spending, increasing efficiency of government spending, improving tax collection and compliance, and borrowing from foreign sources to cover temporary fiscal deficits.