ECONOMY FOR 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