It is our custom to sit down for a while and lose ourselves in thought when a family member is setting off on a long journey. We have seen off the second and seen in the third millennium. This is also a journey, only one much more complex and difficult. Thus it is worthwhile to recall and analyze some things, primarily those of the last decade of the second millennium.
Intentionally or through the oversight of pseudo-reformers, we went the wrong way: instead of encouraging production and carrying out market economy reforms, we chose the path of the speediest possible enrichment of the minority by plundering the majority, which the common people wittily dubbed prykhvatyzatsiya (grab-it-ization). The main component of this “economic” policy of the “reformers” has been the fusion of governmental and criminal structures. The people are completely disillusioned. Only structural changes in the economy can pull us out of this quagmire. Despite the assurances of our leadership, we cannot boast any major shifts in the economy, which resembles a patient more dead than alive. Whatever positive had been achieved at the end of last year is by no means due to the merit of government ministers.
Legitimate business began with the adoption of the Soviet law On the Self-Employment of USSR Citizens.” But what gave a real impetus to its development was the Soviet law On Cooperatives adopted in 1988, which brought about a massive influx of people into the mushrooming cooperatives. These were attractive thanks to their democratic forms of organizing work, high wages, and low taxes. Cooperatives laid the groundwork of the mass development of business in Ukraine, with the largest share of it being in the production sector, primarily in industry and construction.
In official terms, business began on March 1, 1991, when the law of Ukraine On Entrepreneurship came into force. Thousands of cooperatives began a mass campaign to re- register (both of their own will and under duress), and large factories began to set up small businesses. The abolition of cooperatives was a glaring mistake. It was decided to correct this a decade later: the President issued a decree On Measures to Develop the Cooperative Movement and Enhance its Role in Reforming the Economy on a Market Basis. As a whole, this is a good decree, but it seems to have been drawn up by Ukrainian Consumers Union executives who want to privatize what does not belong to them. Why have they not been doing what they were supposed to up to now? What puts me on my guard is Item 3, paragraph 3, “The Cabinet of Ministers is to draw up and put on the Verkhovna Rada of Ukraine agenda within three months a bill on restructuring the taxes and duties, which cooperatives and unions thereof owe the state budget and state-run special purpose funds, as well as penalties, etc.” The cooperatives set up in the nineties do not have such debts.
Small business in Ukraine found itself at the very outset in what may be called economic vacuum, such that most businesspeople have, on the one hand, to found and start running their businesses from scratch and, on the other, to clear the artificial hurdles of administrative subjectivism and psychological stereotypes.
The year 2000, like the previous ones, saw a negative trend in the economic performance of entrepreneurs: some of them folded; others were helped to do so.
The causes are legion: gradual cancellation of tax privileges, cancellation of privileges for joint ventures with foreign capital, mounting tax burden, ban on the setting up of small businesses by state-run enterprises and local authorities, etc.
Of all the many causes, the principal ones were and still are the inconsistent economic policies of various governments, fiscal tax system, along with continuous and unpredictable changes in the law. Is there any other country of the world in which business is governed by 33 national laws, 22 cabinet resolutions, and 15 presidential decrees? Plus about 1000 amendments and additions have been made to these acts since 1997. This resulted in a worsening production and financial situation and an ever-increasing number of bankrupt small businesses.
Analysis shows that the main reasons why entrepreneurship has slowed are the absence of any effective mechanism of state policy in support of small business, the incredibly heavy tax burden, slow pace and distortions of property reform, absence of the relevant and respective regulatory and legal framework for small business as a whole, paucity or total absence of material and financial resources, an imperfect accounting system, limited access to information and consulting services, and an imperfect system of staff training and conversion.
“The eyes are more accurate witnesses than ears,” Ancient Greek philosopher Heraclitus of Ephesus noted centuries before Christ. I recall these words every time I hear from high and not-so-high rostrums that the state is supporting small business, trying to create conditions for the formation of a middle class, a foundation for it, pins its hopes on small businessmen, and that only entrepreneurs are capable of pull this country out of its long-lasting economic crisis.
PROMISING SUPPORT
Presidential Decree No. 906/2000 of July 15, 2000, On Measures to Support and Further Develop Entrepreneurship, inspired hope in entrepreneurs for the future, but the subsequent supplements, amendments, and other legislative acts brought it to nothing.
In the tenth year of independence, parliament finally passed the law of Ukraine On State Support of Small-Scale Entrepreneurship. There is no question of quality, for this act should be supplemented by about a score of additional acts. The law simply will not work until they are passed, which in fact negates all its positive provisions.
Businesspeople also pinned great hope on the newly-formed State Committee for Regulation Policies and Entrepreneurship. It is very much in need, but not within the Cabinet of Ministers. We proposed that it be placed under the President of Ukraine. This committee set up its regional offices last year, but businesspeople turn for advice not to it but to the Protection Commissioner who works, incidentally, on a volunteer basis.
PROMISE TO CREATE THE NEEDED CONDITIONS
Let me bring to your attention the current situation with the law of Ukraine, On Making Amendments to the Law of Ukraine On Using Electronic Cash Registers and Cash- Accounting Books in the Sphere of Trade, Public Catering, and Services. Should it not be repealed in the nearest future, it could greatly jeopardize the conduct of small business, especially that of small enterprises and natural persons as subjects of entrepreneurial activity. They will either wind up their activities or go into the shadows forever.
According to marketplace vendors, the new law will so worsen their conditions of work that commerce will lose any sense at all, and this will resuscitate the system of extortion by oversight bodies, extortion which disappeared after the introduction of a fixed tax. Is it so difficult to understand that marketplace trade will still survive but local budgets will be stripped of the bulk of their revenues?
Actions like this will strangle business, boost unemployment, and raise prices, for the cost of goods will include expenses for the acquisition of cash registers, receipts, and account books. This could threaten a social explosion. The whole law, not just some of its clauses, should be annulled. If the law’s authors had stayed a day or two, for the sake of curiosity, at a kiosk or market counter, they would have never drafted or introduced this law in parliament.
The recently passed law of Ukraine On the State Budget again proposes funding the Tax Administration in proportion to the taxes and duties it collects, without taking into account the amount of fines and penalties. Still in force is the system of tax self-sufficiency, obviously contravening the logic of how a government body should perform. The right of tax officials to get a share of what they raise will further aggravate the financial plight of taxpayers. Again, the regions will get plans to raise the taxes that have to be shouldered by the obedient taxpayers. Entrepreneurs will continue to be fleeced by being fined for negligible offenses. The new Cabinet resolution No. 1755 of November 29, 2000, and Supplement 2 on licensing the wine and tobacco trade will wipe out such small businesses as cafes, bars, shops, and kiosks. It places small businesses in unequal conditions against large wholesale bases and stores.
The license fee is a uniform UAH 5,100 for wholesale and retail trade in liquor, and UAH 5,100 and 2,550 respectively for wholesale and retail trade in tobacco. This will benefit only the large structures having a well developed network of outlets. They receive one license but pay UAH 17 for each copy going to retail outlets. This is fine for them. But have you ever seen a kiosk, bar, or a store selling alcoholic beverages or cigarettes at the price of a license? For some reason it failed to occur to anybody that this resolution is undermining this country’s economy as a whole. Will it really be possible to draw up next year’s budget if we buy a license for the future? Mr. Yushchenko is certain that he has come to stay. I beg to disagree. For only someone who just marks time can do so. I agree that one should keep promises to pay off pension, wage, and salary arrears, but not in such a barbaric way. We have said many, many times that registration and licensing should be carried out by a single body. But nothing has moved an inch. None of the ministries wants to remain without additional earnings that are completely unaccounted for.
PROMISE TO EASE THE TAX BURDEN
The law still does not regulate the relations between businesspeople and the oversight bodies. The presidential decree to this effect is still being violated. Inspections are being conducted without the necessary documents, without prior notice, but with the abuse of power. The tax police is authorized to check the shelf life of a commodity, although this is a consumers defense organization prerogative. There is no end to examples of this kind.
Also troubling is the inadequacy of fines for violations and legally-established deductions from fines in favor of the inspecting bodies, which fosters bribery. A tax code would be of vital importance today, but not in the tax department’s wording.
In my opinion, a tax code should be as thin as a collection of traffic rules. All direct action rules should be easy to understand for both the entrepreneur and the tax service. This will save government funds on the maintenance of tax officials tens of times over. And they will cease to be a state within a state.
Now about taxes and all kinds of duties: they are innumerable and rates exorbitant. I might be told in reply that in other countries they are still higher. But we should not refer to those we still have to catch up with. The profit tax should not exceed 20% of the gross income, while the value added tax ought to be abolished altogether. Economists, I stress, economists, know that this tax is only introduced if goods have been overproduced. I wish we could only reach our 1991 level.
Unless we revise the tax laws, the situation will not change for the better. Reduced taxes will set industry in motion.
PROMISE TO FACILITATE ACCESS TO LOANS
Last year the state allocated no funds to the Ukrainian Entrepreneurship Promotion Fund or its regional branches. Oblast councils might have found some resources to finance the latter. But they did not.
And how much talk there was of allocating UAH 50 million for the development of small entrepreneurship as a separate item in the 2001 budget! I read the law several times but failed to find what was promised. Our elected council members in Khmelnytsky oblast, as a joke puts it, are of medico-pedagogical origin with some civil servants embedded. And in Verkhovna Rada are things any better?
Our banks like short money, while entrepreneurs need long-term loans. And the conditions? Collateral becomes a noose around the neck. Where will a small business get it? The result is nobody refuses and nobody gives. I will leave interest rates unmentioned.
It is the state that can draw the greatest profit from investing in the development of entrepreneurship. These investments will raise economic efficiency, create new jobs, reduce unemployment, increase the profits of businesses and the incomes of the people at large, and will enable the state to fulfill its budget by expanding the tax base and number taxpayers, which will exceed thousands of times over any initial investments in small business.
Our leaders do not seem to understand this and continue to think in categories of a distributive economy. In their understanding, money that goes down the drain is money well spent. They must have forgotten a maxim as old as the hills, “The greedy pay twice, fools forever.”
The state says it is short of money. No, the point is it does not know how manage and make the money work for society. There will never be any money, of course, because the government has only been putting out economic fires for the past ten years.
The president set a goal to create an additional million jobs in 2000. Some say this goal has been achieved. Perhaps so. Indeed, about a million jobs were created last year in a 1:9 ratio such that 100,000 jobs for of those who pay taxes and 900,000 for those who live off these taxes.
Verkhovna Rada should address today the urgent problems of small business. Solving these problems will promote the economic and social stability of society as well as build confidence of business in the authorities. All laws should be passed only after public debate. I do not believe that a person who has never hammered a nail into a wall in his life can write the instructions on how to use a hammer.
It is high time to understand that it is only the golden heads and hands of our people, not Hetman Polubotok’s legendary keg of gold in an English bank or expectations of IMF money infusions, that can make Ukraine prosper. Talented people must be given an opportunity to work normally, while mediocrity and grayness should be driven out of our economic leadership. Only those who have already done something useful for themselves and their country should come to power at all levels.
Small businesspeople are doomed to becoming a political force that will oppose the oligarchs (in my opinion, those who have amassed wealth in a dishonest way), who always solve their problems by getting around the law. Only in this way can we become a normal democratic state with a market economy.
This is all very difficult to do this. But I am convinced that, unless we come to power, we will remain the slavish hostages of arbitrary bureaucrats, all kinds of governmental parasites, and other connivers.
