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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

A WASHBOARD FOR CRIMINAL MONEY Will tax simplification foster money laundering?

13 November, 2012 - 00:00

On January 1, 1999 a fixed agricultural tax will be introduced in Ukraine. Experimentally, the tax was introduced in Hlobyne, Starobesheve, and Uzhhorod districts in Poltava, Donetsk, and Zakarpattia oblasts at the beginning of 1998.

The new tax will supplant ten old ones: the communal tax, the tax on enterprise profit, on land, automotive machinery, roads, for geological studies, social security and pensions, the Innovation and Chornobyl Funds.

The present tax system demands from farmers deep legal and economic knowledge as well as the ability to keep up with constant legislative changes. Large collective agricultural enterprises can afford to hire and retain the needed experts, but for a farmer whose staff is usually as big as his family, this is almost impossible. Meanwhile, the number of taxes somehow grew to 19 in recent years. It is understandable that the fixed tax was meant to make a reporting and record keeping easier and to reduce tax pressure. We should also remember that the draft law was developed by the main fiscal service of the country, and thus one should not expect that this law would solve the farmers' problems. In particular, this fact is supported by results of the experiment in three districts mentioned.

The state estimated ten out of nineteen state services at 1.3% of the land's worth. It also agreed to accept barter payment. For example, farmers of the Hlobyne district have to pay 339 kilograms of wheat, including the VAT, to work one hectare of land in 1998. The farmers grit their teeth, but felt that the freedom was worth paying for. The Tax Service loves to audit on their accounts, especially in the middle of planting or the harvest. With the single tax all verification could be limited to measuring how much land there is. Every piece of land has its own price, which is calculated according to the Cabinet of Ministers' method. The average cost per hectare is Hr 3734 for arable land, Hr 1,842 for hayfields, and Hr 1,119 for pasture. Ownership or leasing these kinds of land is taxed at 1.3% annually. The price per hectare of forest is higher - Hr 13,927, but the tax is lower - 0.3%. In this way a farmer is to pay Hr 48.54 a year or monthly fee of as much as Hr 2.4: 40% of the payment may be delayed until January 20 of the following year.

The new law embodies the theory of American economist Henry George, which is already in use in Estonia and is being introduced in Czech Republic, Latvia, and Slovenia. Ukraine's introduction of these American ideas still reflects democracy and justice. Converting to the new system is voluntary, but only an actual producer of agricultural products can obtain permission to do so. Unfortunately, the bill still bears signs of Ukraine's post-Soviet mentality. Enterprises, for which the fixed tax will be too profitable (more than twice than their 1997 taxes) cannot convert to it.

The real share of the fixed tax will be 7-9% of profit. Experts say the rate is too high. Farmers Association President Ivan Tomych comments for The Day: "Our association initiated its development. However, in the present wording the bill, though less evil than the current system, does not reduce tax pressure enough. Taxes are considerably lower in neighboring countries. For instance, in Poland agricultural producers pay 200 kilograms of oats per hectare. Consider, that oats is twice as cheap as wheat. It turns out that Polish farmers pay less than one third as Hlobyne farmers do. In Romania taxes are even lower, with the result that, while under Ceausescu the country harvested two million tons of corn, now it gets over six million."

Economic Department Chairman of the Ukrainian Academy of Agrarian Sciences Oleksandr Stratylat says, "The catastrophic decrease of agricultural production has finally forced the Ukrainian government to turn to reforming the tax system. Of the two basic functions of every tax, fiscal and stimulus, the draft law includes only the fiscal. The fixed tax as it is will not stimulate increased production, because it does not depend on the results of labor. Ukraine has 7% of the world's land. Agriculture embraces 42 million hectares of land, of which 34 million are arable. 12,152 collective agricultural enterprises hold 70% of this land (24 million hectares). 87.4% of them were unprofitable last year due to the existing tax system and other organizational factors. The suggested tax will finally kill production on in the collective agricultural enterprises. Consider that they produce almost 50% of Ukrainian agricultural products. 11.5 million private plots produce the other half, comprising 11% of the land or 4.3 million hectares. 37,000 farms produce only 0.6%. It is good that small farms will not have to pay killing taxes: their effectiveness is 10-15 times higher. The generally known correlation between low taxes and high productivity, just as in any economy, is clearly seen. However, the latest wording of the draft law, issued in the decree of July 17 on the single fixed agricultural tax became more rigid due to the hardly visible notion replacement. The original draft stipulated taxing only those agricultural producers engaging in entrepreneurial activity. The presidential decree increases the list of enterprises to be taxed, which will particularly affect the Western oblasts."

Foreign experience shows that the idea of fixed taxes is rather old and is used in countries which fail to collect taxes effectively. Experts say simplicity of records and definition of taxation obligations is the undoubted value of the law. But it allows easy laundering of criminal money, because there are no limits on profits and income. Obviously the lawmakers, who will consider the bill will take into account these critical remarks, reduce the tax rate, and boost agricultural output in Ukraine.

 

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