TCS Daily

Champagne Dreams

By Larissa Apasova - December 16, 2003 12:00 AM

Ukrainian taxpayers will usher in a joyous New Year as the Ukrainian government is set to reduce the income tax rate to a flat 13 percent starting 1 January. This limit on the scope of governmental taxation will have important consequences for the quality of the economic life of citizens, and, most importantly, our children and grandchildren. It will pay off in a big way for the Ukrainian government, too.

Russia's experience with implementing a flat income tax shows that where rates are relatively low, the national output tends to be larger and to grow faster. According to official data, since 2000 personal income tax revenue went up 28 percent in 2001 and another 21 percent in 2002. At the World Taxpayers Conference in St. Petersburg (September 2003) officials from the Ministry of Finances and Taxes said that they are satisfied with course of tax reform in Russia and the consequences of flat income tax implementation.

In this way the Ukrainian government is also going to solve some problems, by reducing unregistered economic activity and increasing investment activity in Ukraine. But the Ukrainian income tax rate is even more attractive than the Russian one because deductions can reduce the rate of personal income tax by 11.5 percent. Will this make things more attractive for business? Yes, to be sure. Compared with the previous progressive tax schedule, which ran from 10 percent to 40 percent, a flat tax is much more attractive to people with high income levels. Just look at the reforms in the Slovak Republic where rates will be reduced to a flat 19 percent in January of 2004. Due to the fact that level of deduction is around $300, the tax rate for people of average income would be zero.


What will Ukraine offer to the average citizen? The official average wage in Ukraine in 2002 was 376.33 grivnas (around $70) but it's only 25 percent of real salary levels. It's no secret that a lot of firms pay wages in two steps: one small part they pay officially and another in an "envelope." This is understandable when you consider the huge burden that employers currently must bear from a payroll tax levied to pay for social security benefits and state pensions. The tax is a thumping 37.5 percent: State Pension Fund Fee (32 percent), Mandatory Social Insurance Fund Fee (2.9 percent), State Employment Fund Fee (2.1 percent) and Accident Insurance Fund Fee (from 0.5 percent to 13.8 percent). So, companies have a big incentive to understate their employees' true wages. The government promises it will fix the problem, but has yet to come up with a concrete plan.


Questions about the fairness of taxing lower-, middle-, and upper-income workers at the same low rate remain. But today we hope that the flat-tax experiment will pay its way in solid, dependable revenues for the government -- and satisfaction among the taxpayers.


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