The Ukrainian government has fallen into the trap of virtual statistics. The data with which the country’s leadership is operating are incomplete, to put it mildly, and this affects the quality of economic policy. Of course, the State Statistics Committee is doing a great job of collecting information based on the financial statements of businesses. But the country’s tax system makes it unprofitable for them to fully reflect production and sales volumes in their accounts. As for exports or imports, in this case it is much harder to conceal trade volumes because of the customs controls, but what is sold on the domestic market is often excluded from the financial statements. The 7.3% GDP increment in the four months of 2003 is evidence of a positive trend in the official sector of the economy. Meanwhile, what is happening in its unofficial part is anyone’s guess. Understandably, not having a complete picture, the government and parliament make mistakes when planning the country’s economic development.
The Cabinet of Ministers has supported a conservative tax reform scenario. First Vice Premier Mykola Azarov said in an interview with UT-1 television that the government will propose reducing the VAT rate to 17% in 2004 and 15% in 2005. According to him, reducing VAT gradually will help the state budget avoid substantial loses. Simultaneously, he said nothing about the aim of lowering the tax rate and carrying out the tax reform in general.
It would be logical to assume that such a move is aimed to stimulate small and medium businesses to leave the shadows. But has anyone polled businessmen on what VAT rate would convince them to shun tax evasion? Although in this case it would be more reasonable to conduct an opinion poll on all the taxes forming the tax receipts of the state budget. The policy of a noncommittal tax reform is even now mocked by many businessmen. “VAT is not the tax, reducing which will help the government achieve anything. In this case the problems stem from tax administration. Meanwhile, the government deserves nothing but pity for its indecisive tax cuts. Nothing will change,” one law firm director told The Day. According to him, the taxes that force businesses into the shadows are the income tax and wage fund deductions.
Mykola Azarov announced plans to ease the tax burden on the wage fund from 37 to 32%. “That’s all we can afford,” he said.
It appears that the government does not know that wage funds of many small and middle-sized companies are five or six times the amount declared in their financial statements. Businessmen interviewed by The Day believe that in Kyiv this ratio is even higher. But even in their irresolute statements none of the government officials mentioned the aim of easing the tax pressure. Since if the lion’s share of Ukrainian private businesses keeps paying wages in envelopes, a 37 or 32% VAT rate will not make much difference.
The government has still not identified the overriding goal of the tax reform, that is, the legalization of shadow cash flows. It does not take an expert to understand where it has gone wrong. Statistics on what businesses think about Ukraine’s tax system or on the actual size and structure of the shadow economy are not available. The NBU thinks such estimates must be made based on the so-called uncontrolled money supply. The Ukrainian Union of Industrialists and Entrepreneurs believes the shadow economy accounts for between 40 and 50% of the official economy. Last year, Verkhovna Rada Speaker Volodymyr Lytvyn said the unofficial economy came to 34%. All this seems to be guesswork. Thus far, no purposeful efforts have been made to study all the components of the shadow economy. For this very reason the tax reform initiated by the Cabinet of Ministers looks unconvincing. One must know the enemy in order to defeat him.
Ironically, not only the government but also non-governmental analytical centers have been deceived by virtual official statistics. The week before last the Razumkov Center spoke about the unhealthy structure of Ukraine’s GDP, referring to a statistic that the ratio between exports-imports and the GDP in Ukraine comes to 89.7%. This allegedly signals the lack of a domestic market for Ukrainian producers. But everybody knows only too well that this is not the case. It is just that it is much easier to conceal the volume of goods sold within the country.
The abnormalities of the tax reform in Ukraine are reminiscent of the situation in the health care system. According to recent opinion polls, Ukrainians rate high costs of medical services as the second most pressing problem. Meanwhile, Verkhovna Rada continues to discuss whether Ukraine’s health care should remain theoretically free. In this case, self-delusion prevents lawmakers from devising real standards for a highly lucrative sector. Ailing medicine is a reflection of an ailing economy.
If the government and parliament continue to map out their economic policy blindfolded, the tax reform will be doomed to failure. Unlike in most European states, there is no dependence (in the good sense of the word) of the powers that be on businesses in Ukraine. Otherwise, we could say with certainty that red directors, coal generals, or the new wave of managers would explain to the ministers the need to effect a tax reform not for the sake of the slogan alone but as a lucrative business project for the state and economy.
