To save the economy or deepen the problems: what the government did not take into account in the tax reform

When planning the tax reform, the government hoped to strengthen the economy and increase public revenues, but, as is often the case, good intentions can lead to unexpected results. Instead of the expected economic growth, the reform may create new challenges for business and the population, changing the balance of power in society and the economy. Will tax reform really be a lifeline for the country, or will it only exacerbate existing problems?

The government’s tax reform – everyone sees what they want in it

The government’s tax reform, conceived as a tool to strengthen the economy and increase government revenues, may have very different consequences than expected. For businessmen, it represents the growth of fiscal risks and the potential curtailment of activities. In the midst of war and instability, any increase in tax pressure could be the last straw for many entrepreneurs who are already struggling to survive.

Instead, our European partners probably see this as a chance to attract even more economically active population from Ukraine. The increase in the tax burden against the background of the war can push the most progressive and mobile layers of business, primarily representatives of the IT sector, to look for better conditions abroad.

For tax corrupt officials from the DPS and their patrons in the Verkhovna Rada, such a reform becomes an opportunity for personal enrichment. The growing demand for tax evasion schemes creates an opportunity for them to receive significant illegal income, which will be collected not for the state budget, but in their pockets. And, finally, ordinary citizens, voters, are already beginning to feel that something is going wrong. Every day there is a growing awareness that instead of the promised improvements, the reform may lead to new economic and social problems.

What consequences should be expected from the reform

The tax reform proposed by the government of Ukraine may have significant consequences for both the country’s economy and the well-being of the population.

Outflow of economically active population and enterprises. One of the most serious consequences of an increase in the tax burden may be the outflow of skilled labor and businesses abroad. Tax increases, especially in wartime conditions, will make doing business in Ukraine less attractive. This may lead to the fact that many enterprises, especially in the field of IT and other progressive industries, will start looking for more favorable conditions abroad, in particular in EU countries, where the tax system can be more stable and predictable.

Decrease in investment attractiveness. Rising tax burdens can also deter both domestic and foreign investors. High taxes reduce the profitability of investments, which, in turn, leads to a decrease in the volume of investments in the country. This can slow down the rate of economic growth, which is especially dangerous at a time when the country needs significant resources to rebuild after the war.

Rising unemployment. If businesses begin to wind down due to unfavorable tax conditions, this could lead to an increase in unemployment. The loss of jobs, especially in times of war, can increase social tension and lower the standard of living of the population.

Increasing the tax burden on the middle class. A tax reform that does not take into account the specifics of different social groups can lead to an increase in the tax burden on the middle class, which already bears a significant burden. This can lead to a decrease in the purchasing power of the population, which in turn will affect the domestic market and economic stability.

Loss of trust of international partners. The reform, which is perceived as economically unprofitable and unfair, can worsen the image of Ukraine in the international arena. If Western partners see that the reforms in Ukraine lead to an economic downturn or an increase in the level of corruption, they may lose confidence in the Ukrainian government. This may affect the amount of international aid and credit, which the country desperately needs at this critical time.

An increase in the level of corruption. Tax increases can encourage an increase in corrupt practices, as businesses will look for ways to reduce their costs through tax evasion. This will deepen the already existing problems with corruption and negatively affect the perception of Ukraine as a reliable partner.

Declining recovery rates after the war. Economic difficulties caused by the tax reform may slow down the country’s post-war recovery process. Instead of focusing on rebuilding infrastructure and economic growth, the country may be forced to deal with the economic and social consequences of failed reform.

Migration of qualified personnel. If ways are not found to reduce the tax burden and create favorable conditions for business, Ukraine risks losing a significant part of its skilled workforce. This can lead to a shortage of personnel in important industries, which will reduce the country’s competitiveness on the world stage.

If measures are not taken to correct the course, the tax reform, instead of becoming an instrument of development, may turn into a real economic and social fiasco.

There are optimal ways to get out of this situation

To get out of this difficult situation, it is important to determine from which sources we can get support. First of all, it is necessary to clearly convey to our Western partners that without their help we will be forced to make our tax system even less attractive for businesses and citizens. Against the background of the fact that 4.2 million of our citizens have already become full-fledged consumers in the EU (which is 15-20% of our economically active labor resources), the reduction of Western aid and the pressure to raise taxes may lead to a conflict of interests between Ukraine and the EU. Our labor resources moving to Europe not only fill the labor shortage, but also contribute to the economic growth of the EU. For example, Poland admits that its annual GDP has increased by 1-2% thanks to Ukrainian migrant workers.

Therefore, we should actively discuss this issue with the EU, emphasizing the need to avoid conflicts of interest in the field of competition for labor resources. After all, without labor resources, the economy cannot function effectively, and our task is not only to prevent a new outflow of personnel and businessmen, but also to return those who have already left.

Regarding internal reserves, it is necessary to review the policy of the National Bank of Ukraine. On average, the NBU’s daily debt to banks for certificates of deposit amounts to 350-400 billion hryvnias. These funds are actually immobilized within the framework of the inflation control program. Perhaps there will be no catastrophe if 150-200 billion hryvnias of these funds are sent to the Ministry of Finance for urgent closing of budget gaps. These funds can be replaced on the balance sheets of OVDP banks, which the Ministry of Finance will issue on market terms. Such an approach will allow to avoid significant monetary inflation even with the additional introduction of 200-250 billion hryvnias into monetary circulation.

One alternative option for tax reform that could prevent the current problems should be a 10-10-10 reform, which would provide for the establishment of a single tax rate for all types of income and transactions. If these changes had been implemented then, we would have avoided many economic difficulties now.

What should be the principles of the reform

It is important to note that the main principles of tax reform should be simple and transparent.

The first principle is the creation of a single tax perimeter without benefits and preferences. This means that no matter where your income comes from – whether it’s wages, deposits, your company’s bonds, government bonds, FPO income, etc. – all income must be taxed at the same rate. Such a system would reduce opportunities for corruption and tax evasion, since arbitrage between different rates is one of the main sources of corruption in the State Tax Service and among the deputies who support it.

The second principle is to provide the fiscal authority with access to databases of electronic payment systems (ESP) and the National System of Mass Electronic Payments (NSMEP). This will allow the tax authorities to track all transactions of citizens and businesses, as well as to effectively monitor tax payments. If you open a bank account, your tax code should be linked to it, which will automatically track your income. This will create a transparent system where tax evasion will be virtually impossible. In parallel with this, the National Bank of Ukraine should stimulate non-cash payments, reducing the share of cash in the money supply to 10-15% (now it is 37%). This will also contribute to reducing the level of the shadow economy.

The third principle should be the strengthening of responsibility for non-payment of taxes and the fight against corruption in the tax sphere. Tax evaders should be held strictly accountable, and those who facilitate them should be held criminally liable and in prisons, not the halls of parliament. Without serious consequences for violators, any reforms will remain on paper and will not bring real results.

In conclusion, the tax reform should be aimed at creating a transparent, simple and fair system that would stimulate economic activity and reduce the level of corruption. This requires a complex approach and political will, as well as close cooperation between all branches of government. Only then will it be possible to achieve real changes that will benefit all citizens of Ukraine.

An existing example of the work of the fiscal system of Ukraine

Let’s consider one of the most blatant cases that illustrates the sick state of our fiscal system – the case with the “green Lamborghini”. The story gained wide publicity after the customs value of this luxury car was reduced by 5-6 times its market price. Such a decision raised serious questions not only among the public, but also among representatives of the tax service.

When the regional tax office tried to understand this situation and understand how such a value was approved, they unexpectedly received an invitation to speak to the head of the tax committee. This is not just the chairman, but the same official who is currently considering the new tax bill of the Cabinet of Ministers. This is a vivid example of how the “circle of hell” of our fiscal system works: where clear and fair rules of the game should be established for everyone, we see the opposite – the protection of the interests of individuals or groups.

This case once again emphasizes how important is the need for real, not formal tax reforms. If a system similar to 10-10-10 or its analogue is implemented, such cases would be practically impossible. A single tax rate for all types of income and transactions, which would be the same for everyone, could significantly reduce opportunities for corruption and tax evasion.

But if the implementation of such a radical reform is not possible in the short term, it may be worth considering other, less drastic steps. For example, the introduction of a small “inflation tax” that would apply to everyone. This approach, while not ideal, may be fairer and less damaging to the economy than what we have now. The alternative in the form of “green Lamborghinis” and other similar cases looks not just unfair, but frankly disgusting and unacceptable for a country that strives to build an honest and transparent economic system.

Thus, the case with the “green Lamborghini” demonstrates the depth of the problems of the Ukrainian fiscal system, which needs not just cosmetic changes, but deep structural reforms. Only in this way will we be able to create a system that will work in the interests of all citizens, not the chosen ones.

Fighting corruption: what Ukrainian partners need to know

One of the key tasks in cooperation with our Western partners is to convey an important message: active fight against corruption is ongoing in Ukraine, but these processes cannot give immediate results. This is a complex and long-term work that requires a systematic approach and significant resources. Therefore, instead of reducing financial support, our partners should consider increasing it, especially for those reforms aimed at rooting out corruption. A vivid example of such a reform is a qualitative tax reform.

However, it is worth noting that communication with our partners is often subject to distortion by the executive power. For example, when the IMF mission comes to Ukraine to discuss tax issues, one gets the impression that the State Tax Service (SST) does not always represent the interests of the entire society, but rather defends its own, often corrupt, interests. Should we expect the DPS to advocate a simplified taxation system for individual entrepreneurs (PEOs) or to support the concept of 10-10-10? Unlikely.

Moreover, the National Bank of Ukraine (NBU) rarely talks about a fair reprofiling of the government’s debt to the NBU, even when it could become an effective tool for stabilizing the country’s financial situation. Instead, the opinions and interests of top officials of executive bodies are often revealed in official IMF documents, and then submitted to the President’s Office under the guise of “recommendations” or “requirements” of international partners. Such actions lead to the fact that important initiatives, such as the 10-10-10 reform, can be consciously or unconsciously forgotten or “buried”.

However, the situation requires changes. Ukraine needs the support of its partners in carrying out systemic reforms, and this support must be actively sought and attracted. In the current environment, it may be necessary to return to ideas that were previously rejected or neglected. The 10-10-10 reform is one such example. And although it was “buried”, it is very likely that it will have to be “unearthed” in the near future, as it can become the basis for creating a more transparent and fair tax system, which will contribute to the development of the economy and reduce the level of corruption.

Therefore, in interaction with Western partners, it is important not only to explain the current state of affairs, but also to emphasize the need for long-term investments in reforms that can change the country for the better. Their involvement in this process will not only help Ukraine in the short term, but will also create a solid foundation for future development.

Therefore, the tax reform proposed by the government carries significant risks both for the economy and for the social stability of Ukraine. It is important that the government considers all potential consequences and conducts additional consultations with business, civil society and international partners to find a balanced solution. The success of this reform depends on the government’s ability to find a compromise between the need to increase tax revenues and maintain economic activity and social stability.