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What does our business need for economic miracle to happen?

Author : Oleksandr Okhrimenko

Nobody argues that the growth of the Ukrainian economy is insufficient, but the reason is not taxes. It is clear that no one likes to pay taxes, but it cannot be said that a business cannot grow because it has large taxes. Rather, we have very high taxes for the population, but the income of the population is low
21:37, 14 November 2018

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We constantly hear the talks about the need to help our business in its development, as well as opinions that Ukraine has very strong fiscal pressure on business, and if it is reduced, there will be an economic miracle. But the facts are somewhat different from what we talk and fantasize about.

There are clear statistics posted on the State Treasury of Ukraine website, which shows the structure of tax payments to the state budget. The main tax that fills the state budget of Ukraine is VAT. About 52% of tax revenues to the state budget of Ukraine are precisely VAT which goes from business to the budget. But the VAT is actually paid by the population. VAT is a tax that is withdrawn through retail sales, and therefore the reason why prices for products are high, is not really “the damned speculators”, but VAT, which is included in the price and is withdrawn from the wallets of Ukrainians. And now, when we have not just VAT, but VAT accounts, the growth of retail prices is only accelerating, since VAT accounts have turned value added tax into sales tax, but the rate has not decreased. And then there are excises, which are also paid by the population. This money is simply withdrawn from the population when it buys tobacco and alcoholic beverages, gasoline and diesel fuel. And although the money passes in transit through the accounts of enterprises, it’s not necessary to say that this is the tax burden on the business, this is the tax burden on the population. Business here acts as an intermediary of the state, which helps to collect these taxes.

About 23% of tax revenues to the state budget of Ukraine are taxes on incomes of individuals. For comparison: the profit tax in the general structure of the state budget is only 12%. And here the population pays more than the business. And this is a fact. Our main taxpayer is the population, but they say that the business pays a lot of taxes and therefore needs help so that it develops faster and makes an economic miracle. But at the same time they forget that they already helped the business. The profit tax rate in Ukraine is small, but there is also a simplified taxation system, where an offshore scheme actually exists when the tax is scanty and the control of the fiscal services is minimized. What other benefits are needed if they are already there? But, again, now authorities want to abolish the tax on the profits of enterprises and impose a tax on the withdrawn capital. Thus, business is actually generally exempted from taxes and waiting for a miracle. It is clear that the abolition of the income tax needs to be compensated by something, since the state budget cannot completely abandon the income tax and wait for future income revenues in the form of a tax on withdrawn capital. Therefore, it is already proposed to raise the VAT to the level of 22-23% in order to compensate for the losses from the abolition of income tax. But VAT is a tax of the population! In other words, it is suggested that the population pay with their money for another business benefit. Good idea, but just not joyful for Ukrainians.

No one argues that the growth of the Ukrainian economy is insufficient, but the reason is not taxes. It is clear that no one likes to pay taxes, but it cannot be said that a business cannot grow because it has large taxes. Rather, we have very high taxes for the population, but the income of the population is low, and as a result, Ukrainians are forced to save money, rather than make active purchases. I think it would be necessary not to raise the VAT in favor of the business, but to lower the VAT and raise the tax on business profits and abolish the simplified tax system so that there would be less "shadow economy". That would really be an incentive for an economic miracle. Then retail prices in Ukraine would fall and make many products affordable for Ukrainians. As a result, sales and production would increase. There is an idea to reduce VAT to the level of 15% at least for the food products. But at the same time it would be possible to leave the VAT on imports at the level of 20%, and for domestic goods at the level of 18%. Then there would be a real incentive for the Ukrainian business to be more engaged in the production of its products, and not to import them from abroad.

Taxes can really regulate economic growth, but this should be done correctly and wisely, in order to create favorable conditions for those who need it, rather than create schemes for taking money offshore and call it beautifully a "tax on withdrawn capital."

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But the taxes are only one of the instruments for regulating macroeconomics. Lending to a business is much more significant for the growth or decline of the Ukrainian economy. Creating new jobs, increasing production, building new workshops and plants means more business loans. And in Ukraine we see a problem with lending. In fact, lending business is not working. Banks issue loans only to state monopolies, which are never redeemed, and to some non-resident companies, which do not really need loans. But the real Ukrainian business is excluded from lending, and not because the rates are high, but because the conditions for lending business in Ukraine are the EU ones, when the economic model in Ukraine is far from the EU. This is a contradiction and does not allow businesses and banks to develop lending.

Therefore, the business now lends itself and invests money in the business. And it really invests a lot at its own expense. In the first half of 2018, capital investment in Ukraine increased by 26.5% compared with last year. It is a very large indicator, so the talk that it is necessary to reduce taxes for a business so that they can invest more at their own expense looks clearly far-fetched. The business can now invest at its own expense; the tax burden on the business is small. Another thing is that investment restrains low demand in the consumer market in Ukraine. What is the point of building a new plant, if later it will be problematic to sell the manufactured products in Ukraine because of high retail prices? Therefore, stimulating investment and economic growth begins with stimulating the consumption market. The more goods Ukrainians buy, the more active the business is. That is the main reason for the growth or stagnation of the Ukrainian economy.

We often like to solve imaginary problems, but at the same time we don’t want to notice real problems and solve them.

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