• Українська
  • Русский
  • English
Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

ECONOMY FOR THE WEEK 

20 April, 1999 - 00:00

Does the Tax Administration's

 Modest Nosing Around Paralyze

The Taxpayer's Will?


Ukraine's number one tax inspector Mykola Azarov's every public appearance,
when reporting on the accounting period's results, causes mixed feelings
in the audience of millions, and April 9 was no exception. In fact, it
left viewers and listeners astir for the rest of the week.

The State Tax Administration's modest results as of March 31 left a
tangible impression: 20.4% (one-fifth!) of the budget tax returns (Hr 979
million) was exacted by STA using coercive measures. One-third of this
amount looks like a nice premium for the tax inspectors for their meritorious
work. All told, STA "mobilized" Hr 4.8 billion worth of taxes for the consolidated
budget - 17% (Hr 830 million) more than in the first quarter of 1998. According
to Mr. Azarov, by March 31 property worth Hr 11.1 billion was pledged against
outstanding tax payments, and Hr 461 million worth of such property had
already been sold with the proceeds transferred to the budget.

However, one does not feel particularly happy about these STA achievements,
as Hr 13.9 billion was never mobilized (the first quarter saw a Hr 4 billion
- or 40% - increment), and the "unmobilized" amount is rising steadily:
in 1998 alone, the shortfall grew by Hr 8 billion.

The media has developed a traditional response to such STA declarations,
either condemning the state for its outsized fiscal appetite or taking
unholy joy in the tax people's futile attempts to combat tax evasion. In
fact, journalists have a point in both cases. Still, we suggest the reader
look at the problem from a somewhat different angle and try to understand
why most taxpayers put up with such treatment. Why don't they protest?
And if they do, why are their remonstrances so weak that the tax system
gets worse every year?

To begin with, the reader ought to recall our recent economic history.
Any manager running a state or private business must vividly remember that
sometime in 1993-94 he treated the tax laws with utmost respect. He could
delay payments to suppliers or even wages so all tax payments were made
on time. Eventually, however, the total amount of returns proved less than
expenditures - tax obligations (more on this further on), wages, and at
least partial payments to suppliers. Thus, if that manager continued to
respect the tax laws his business would have collapsed by now. Sooner or
later all currently operating enterprises would find themselves unable
to pay any taxes. Thus emerged outstanding tax liabilities, and then the
penalties started.

Precisely when an enterprise found itself heavily indebted to the budget,
for various reasons being unable to do anything about it, its system of
priorities underwent significant change. Tax payments would be shifted
to the background - and the same was true of those who could pay taxes
but would rather not. The reasoning was simple: no one else is paying,
so why should I? At that stage the government still could stamp its foot.
On the one hand, it could have made improvements in the tax system to stimulate
effective business performance and timely tax payments; on the other, prevent
evasion, including imposing bankruptcy proceedings. Needless to say, neither
measures were taken, bringing forth the next stage of business-state relationships.

If conventional market debtor (enterprise in default) - creditor (the
state) procedures were, mildly speaking, discarded by the latter, their
relationships inevitably became "informal." In this sense, state enterprises
were required to make just one "political decision," refusing to announce
itself bankrupt and keeping the management intact, in other words, to keep
functioning. Here all methods were used, ranging from threats of a nationwide
strike and social cataclysms to the disappearance of sources of bribes.
Parallel to this, such enterprises built new relationships with their partners.
Money would vanish from use, wholly or partially. Remarkably, doing such
"business" without money turned out more convenient, not only because one
did not have to pay taxes, but also because the costs established by such
partnership contracts were no longer pecuniary but barter (i.e., sky-high).

In turn, building this specific hierarchy of costs and a more or less
clear-cut structure of interrelationships between barter, clearing, and
money prices was not only harmful; when preference was given to money payments,
a smart manager could lower the disbursing price of raw materials and own
products substantially, thus switching to a break-even pecuniary performance.
Yet the economy never took advantage of this opportunity. If in 1995-96
the Cabinet had allowed the enterprises to rid themselves of inactive assets
and prevented tax-dodging and getting away with it, and if it thought better
of creating a bait for financial capital in the form of a superprofitable
stock market, there would now be real economic growth. However, nothing
happened. True, weak attempts are made to do so now (remember gas auctions
with money costs half the clearing ones), but too much time has been wasted.
In fact, the costs of end gas products betray no such favorable difference.

Viktor Lysytsky, NBU macroeconomics advisor, refers to this system of
nonmonetary relationships as an "economy of fictitious costs" and offers
his recipe for putting things right. In part, he believes that file system
No. 2 and unconditional charging off from bank accounts must be discarded;
instead, property owners' rights should be strengthened; that the standing
practice of constant changes in the laws must be stopped, and of course
"restrict state consumption," something that can never be accomplished
without structural reform. Mr. Lysytsky is quite right in finding faults
with Ukraine's economic policy, but why have none of the taxpayers ever
come out with similar demands, while having to formally serve this "state
consumption"?

Because our taxpayers find living with such an "economy of fictitious
costs" quite comfortable. Over the past several years they have become
virtuosos in techniques for getting yields out of it not only in hryvnias,
but also in hard currency. And they are wholeheartedly supported by central
and local authorities getting their pieces of the pie, providing in return
the "right to life." Is there a way out of this vicious circle? A good
question, considering that no one is willing to cut the ground from under
his own feet. Strange as it may seem, there is one, except that this way
out is not likely to found at this stage.

Regrettably, there are still very few taxpayers who are simultaneously
owners of effective businesses. And they are the only ones capable of putting
forth a serious initiative to rationalize business-government relationships,
because they are the only ones able to afford to discard those "informal"
relationships and start paying taxes. All it takes is helping this "minority"
to survive, lest it vanish entirely.

By Iryna KLYMENKO, The Day

 

Rubric: