Is there an alternative to repression? What is needed for real tax reform
At the end of 2024, the government approved the National Revenue Strategy (NRS). The document struck with a number of repressive measures. Senior economist of CASE Ukraine Volodymyr Dubrovsky in an article for ZN.UA analyzes whether we got the desired effect for the state when we made such sacrifices?
Key theses:
1. What is included in the NRS
– no later than the beginning of 2027, we will begin to implement measures that will limit the possibility of business entities returning to the application of the simplified taxation system (STS) after the transition to the general taxation system.
– The strategy provides for administrative reforms: protecting the confidentiality of tax data in the systems of the State Tax Service of Ukraine (STS), together with the NBU, international partners.
– The authors of the strategy assured: any repressive measures will be implemented only after “restoring trust in tax authorities.” However, this point is not adhered to.
2. Questionable trust indicators
– The NSD cites World Bank data as evidence: “from 64 to 75% of respondents trust the professionalism and integrity of the State Tax Service.”
– But: in the spring of 2023, a similar survey showed different results: 24.9% of respondents categorically disagree with the statement that tax officials are fair; another 24.6% rather disagree; only 7.8% completely agree.
– In a representative survey by CASE Ukraine (InfoSapience): 28% of respondents believe that tax officials contribute to shadow schemes – this is 5% more than those who believe that the tax service is fighting them.
– Conclusion: the declared 64-75% of trust is very doubtful as a basis for repressive measures.
3. Why repression is not the solution
– The NSD strategy focuses on eliminating the SSO and increasing income taxes – although these taxes are among the least effective, due to the large scale of evasion.
– The real “holes” in the budget are large-scale evasion schemes, conversion centers, etc. But the NSD does not admit that the first priority should be to reform the administration and reduce discretion.
– The key to increasing revenues is, first of all, administration. Instead, the NSD proposes to first eliminate the SSO.
– If we “kill” microbusiness for the sake of growth, say, 2% of GDP – this will deprive the country of the most promising post-industrial sectors and worsen the business climate.
4. How to get these 2% of GDP Those 2% of GDP, for which the NSD is ready to resort to repressions, can be obtained without destroying the SSO, through a radical reform of the customs service, good faith tax administration and a reboot of the Bureau of Economic Security of Ukraine (BEB). Focus not on “pressure on business”, but on modernizing administration, transparency, fighting the big shadow, and not on the self-employed entrepreneur.
For a real tax reform, it is necessary:
– Reducing the discretionary powers of tax officials.
– Reducing the need for inspections due to simpler, non-discretionary taxes (for example, land/real estate tax), replacing income tax with a tax on withdrawn capital.
– Introducing KPI indicators – for example, tax-compliance gaps (gaps between the tax that should be paid and the actual income) for the State Tax Service.
– Focus on administration, not on creating new punitive/repressive instruments.
– The Cabinet should be open to the business voice and change the team that formed the current NSD — and not just continue politics as before.
Read the entire article (by the way, there is an interesting reader survey under the article)