Which taxes Ukraine can afford without suffocating itself

What do we think about our Ukrainian tax system? – It’s awful! What do we think about our pension system? – It’s horribly unfair! Have I guessed your answers correctly? No polls or surveys needed. There are just too few respondents with a different opinion to take them into account – they are just beyond the margin of error.

And you know what? This is not only our opinion. You can ask citizens of any country on the European, North or South America continents the same two questions, and the answers will be the same. That’s why such polls are not held at all. The governments just act as they please, trying buy Windows 10 Professional Key to find a reasonable balance between the tax rate that cannot be too high, and the social  payments (including the pensions): of course, every cabinet would like to raise the latter as high as possible for its electorate. (By in. Obviously, it’s done at the expense of the business and of the employed part of the population.

Moreover, the issue that we are referring to is crucial for the economic agenda of the elections in all developed democratic states. It has been so for at least the post-war period. It’s only our politicians who have been using the people’s economic ignorance en masse for the entire 20 years of independence and promise shamelessly to cut the taxes and raise the pensions (the social payments).

One cannot fool anyone with those tales in the West. The democrats in America, members of the Labor party in Great Britain and other left-oriented politicians such as the socialists in France and other European countries have to admit honestly that in order to raise the welfare payments to the poor and unemployed by certain per cent, they would have to raise these and those taxes by certain amount. This would be the price for fulfilling their pre-election promises.

Meanwhile, the Republicans, the Tory and other right-oriented politicians need to be reminded that the business and the employed part of the population are able to handle the tax burden only up to a certain point. Beyond that point, the business loses the investment instruments and moves the manufacturing cheap Windows 10 Professional Key facilities to China. If our country does not want to lose the international competition at all levels and therefore aggravate the unemployment, we need to cut certain taxes correspondingly. Yes, for that purpose we would have to cut certain social payments programs that they can even call irrelevant or redundant. This is the price we have to pay to survive in the modern world, the right-wing politicians say.

Eventually, everything revolves around the parties arguing about the so-called general fiscal GDP per cent – the share of the national income that the government will take from the employed citizens and the business next year in the form of taxes and reallocates it via the budget in a manner that it considers appropriate.

No wonder that the GDP fiscal per cent issue (i.e. the share of budget or state expenditures in the GDP amount) is one of the most fully researched in modern macroeconomics. Thousands of research papers are dedicated to this issue (including at least three Nobel prize winning works); annually, top economists at international organizations publish their analytical reports devoted to the experience of different countries on this problem and to the most efficient models.

Of course, this global problem, just as any other similar one, doesn’t have a one-stop solution. This is an endless argument, just as the argument between the interests of the labor and the capital in political science. In economics, the GDP fiscal percent actually reflects the same thing.

The modern world can be roughly divided into 4 groups of countries depending on the tax burden on the economy. Based on that, we can briefly describe their basic characteristics and objective development patterns. For the purposes of such analysis, I would suggest focusing on the two most recent decades: the years 1991 to 2012. That encompasses our country’s existence as a new economic actor on the world map, as well as the period that settled the world order in economics and politics that is still effective nowadays: with the hegemony of the USA, the expanding China, and the two world crises (the 1997-1998 and  the 2007-2008 one). Respectively, we have two continuous eight-year-long economic growth cycles (which is supposed to soothe the statistical fluctuations within and give us the generally clear and correct picture of the ongoing patterns.

The European Union

Let’s start with the Euro zone. The EU as we know it, with its monetary union, emerged only in 2000. However, the tax and budget systems of the member states have evolved towards its current state during the whole period of their post-war history. Strictly speaking, since 1992 (signature of the Treaty of Maastricht that introduced unified and universal criteria for the external debt size, for the budget deficit, exchange rate and inflation), they have virtually been implementing a coordinated macroeconomic policy. The average fiscal GDP per cent for the group of countries known as EU-27, used to comprise 38% in 1991; by 2000, this indicator exceeded 41% and during the entire following decade, up until the last year, it sank to 38.8%. However, this decrease is an illusion, because the majority of Euro zone countries have forgotten the “Maastricht stability criteria” after the 2008 crisis, and, instead of the maximum budget deficit of 3% from the country’s GDP, the EU states have state expenditures that exceed the current profits by 7% or even 10% of their GDP. Without much ado concerning Brussels, those countries finance their deficits without slightest problems by accumulating debt with borrowed funds and drawing these excess 10% of GDP from investing into their own economies. Unfortunately, this proves that by the end of the second decade of the greatest economic experiment in modern history, the governments of the EU states take away every other Euro earned by the business entities and use it to maintain the previously mentioned world’s highest system of social standards characteristic for this group of countries.

As for us, we can claim that the GDP fiscal per cent for the Euro zone on the level of 50% is the highest index of joint business and citizen taxation not only in modern history, but in the entire written history of economy, starting from the ancient times. However, a number of researchers interpret the notion of “GDP fiscal per cent” more widely and calculate it not only as an inevitable extraction of money from the economy and into the budget and the state pension fund. These economists are absolutely right to include into that notion allocations to the private and corporate pension funds and the payments that have been made as obligatory as taxes, and also the mandatory medical insurance paid by the employees or enterprises. Therefore, if you use this method to draw up the calculation of money extracted from the economy and placed into the budget and into other social funds, the result will be the following: the group of “Swedish socialism” states such as Sweden itself, Finland, Netherlands and Denmark have their fiscal per cent differing from averages of 60% to 70% of these countries’ GDPs.

It’s illustrative that the economic growth in the Euro zone was the average of 1.7% from 1991 up to 2012. Meanwhile, since the EU was created, within 200-2012 this index changed to 1.1%.

USA

The second group is represented with one country only – the US that is itself a huge economic conglomerate on a par with a quarter of the world’s entire economy.

Despite the world hegemony and the corresponding military expenditures (those are the largest in the world and up until 2008, they exceeded the joint military expenditures of all the other countries of the world), the USA has one of world’s best systems of education, healthcare and social welfare. Of course one might argue whether the US healthcare system is good enough compared to, say, the one in the EU. In my opinion, it is definitely inferior to the German and the Swiss ones, but at the same time is undoubtedly better than the British and the Spanish ones. But no one, even the sceptics, will say that the US social welfare system is much worse than in the EU, right? However, the GDP fiscal per cent in the USA… is twice as small as in Europe! We have to admit that within the last two decades it increased from 25% to 31% of the GDP (including the 34% peak of 2007-2008), but still: 70 cents from each dollar a business entity has earned, stays within that business (until recently, this amount was 75 cents)! According to the liberal economic theory, a businessman who earned that money knows better than anyone else, what is the most effective way to invest those 70-75 cents, in order to provide employment as well as the new taxes. For this, the economy had always thanked the US financial authorities with an economic growth of 5 to 7 per cent within the period of the uprising in the economic cycle. During the downward stage of the cycle, the fall did not exceed 0.5%. Europe, with its pattern of withdrawing 50 to 60% of money for the budget hasn’t had such growth rates for more than two decades, although the economic situation had changed numerous times (mostly it was quite favorable).

“The Arabic economic world”

The third group of countries is hardly illustrative for Ukraine. These are Middle East and Persian Gulf countries. Those are very unequal, they have differing income levels and differing indices of crude oil export incomes in their GDP. However, these countries are important for us as a model for analysis.

Therefore, we will agree to call them “the Arabic economic world”. Unlike the notorious “Russian world”, this is truly a “world”, related with common sociocultural characteristics and an amazingly similar economy structure, in particular, the taxation based partly on the religious doctrine. For example, the Arabic banks have no right to lend money with an interest rate and must not repossess the borrower in case if project financed goes bankrupt. However, they have the right to lay claim to a share of profit. That’s why the Arabic banks represent a highly complicated system of joint-stock companies with intricate and elaborate corporate rights. Roughly speaking, everyone is connected to everybody else through small, but still common business bonds.

The second significant characteristic of this economic system is, of course, commitment to an export profit from selling hydrocarbons. This system included the relatively pauper Iran and Iraq that directed crude oil for export; Libya prior to overthrowing of Kadhafi (it mostly exported processed petrochemicals and thus provided 700 dollar salaries and welfare payments for its scarce population); also, the system includes the most highly developed country among all these – the United Arab Emirates that, using its oil dollars as a trampoline, has built modern production facilities, technical parks and logistics centers all over the place, in the middle of the desert. Nowadays the share of crude oil export counts for less than 5% of its GDP.

Their experience is not exactly applicable to us: we will never have so much oil; however, their example is interesting for us as just another group of countries with an inventive type of business-state relation. This type has the following number of common characteristics. The revenues are generally drawn due to state’s ownership of extractive industries and the accompanying infrastructure (the pipelines, the oil refineries, the seashore terminals, the cargo carriers). Often the surplus profit of the extracting monopolies is distributed by means of direct equal sponsorship of the population (namely, in the UAE and Lybia at times of Kadhafi’s Jamahiriya, each citizen of country received a bank account opened at his name at birth, and part of the oil export profit was allocated to that account).

With all of that combined, the majority of these countries had neither income tax nor small business taxation whatsoever. In the conditions when the traditional Muslim family substitutes for the pension and the welfare systems, no one is motivated to conceal their incomes, which allows the small business to develop at unprecedented rates, with no restrictions and barriers at all. The moderate 10 to 15% of income taxes for larger non-state companies, coupled with lease incomes are able to fill up the budget within the necessary limits that are sufficient to finance the army and the modern healthcare. If it hadn’t been for the extraordinary, unprecedented population increase, they would have never had unemployment at all, and all the other social problems of the Arabic world would have been solved back in the 1990s.

The average fiscal per cent rate in this group of countries is about 33% at the expense of a high ratio of the state sector (it can be found in the IMF statistics). However, in fact, as proven by the separate reports on the Arab world, the tax withdrawals do not exceed 17% of the GDP (12 to 27%). The average rate of economic growth is more than 4.7% per year (I shall not provide a precise calculated index, because the picture is largely distorted by the statistics of the enormous economic breakdowns in a number of Northern African countries after the notorious “Arab spring” events). Anyway, if it hadn’t been for the problem of unemployment caused by overpopulation, there might have been no “Arab spring” at all.

China and the “Asian tigers”

Finally, the fourth group of countries comprises China and other “Asian tigers”. This is a number of states each of which deserves a close analysis; South Korea, Hong Kong and Singapore that have started out earlier than others. In their turn, China, Vietnam and Myanmar started out later on, chasing their competitors with a lag of two to three decades and managed to reach the peak of their growth rates nowadays. All of these countries share a similar recipe for success. Manufacturing outsourcing at the expense of cheap labor, plus the highest possible attractiveness for investments, plus the centralized (and often oppressive) management of the country based on long-term planning, plus offshore attractiveness for the financial capital, plus development of homeland tycoon capital via the cheap manufacturing, and finally, the counterattacks of the Western markets with their own brands. No one could assume in the late 1990s that “Siemens mobile” would be purchased by the Chinese funds, while the main rival for “Apple” in Europe and America would be not even a Japanese but a Korean brand – “Samsung”.

At the early stages of accelerated development (as a rule, we are talking about the first two decades when we refer to the “Asian tigers”), there wasn’t even a slightest hint of social welfare (China managed to prosper all the way through the 1990s and the 2000s with no pension fund whatsoever), that’s why the GDP fiscal per cent in this group of countries did not exceed 10%, as a rule (until lately, China had this index at 8%).

Therefore, this exact region managed to achieve outstanding results in terms of economic growth. The GDP of the “Asian tigers” grows by 8 to 10 to 12% annually, virtually doubling each 10 to 15 years and decreasing by 4-5% in the years of crisis. Those 4 to 5% are, in fact, the peak indices of growth in the European Union. These are the figures characteristic not only for China but also for the majority of the region’s countries that have the aforementioned budget to GDP ratio.

***

The “Asian tigers” phenomenon is a matter of long and exciting discussion, as well as the Arabic world is, but I would like to stop here on purpose to draw an important line and finally speak the tendency that I hope is already obvious for you: the higher the GDP fiscal per cent is, the lower is the economic growth rate. Should your GDP fiscal per cent be too high (almost 50% or more), then it’s just a matter of time when your country begins to:

  • age slowly and brings those growth rate figures to a zero;
  • loses all companies and manufacturers that can be possibly lost due to high taxes;
  • accumulate debts, as the Greeks or the Swedish did, to feed those who are left;
  • and, finally, you are swept away completely by the swarms of immigrants, or, as an option, you are forced to announce default.

Ukraine: a brief overview of the taxation history

21 years ago, a new country appeared on the economic map of the world. It had neither a currency of its own nor an army, let alone the taxation system. To be precise, it had a certain taxation system that it inherited from the “last pre-perestroika government of the USSR”. But the tax rate themselves, as well as the plans for the tax revenues amounts were made redundant in 1991-1993 by the raging hyperinflation. Only by the year 1995, our country managed to achieve its basic financial stability in terms of the exchange rate and the price inflation, simultaneously having created a basic infrastructure for money emission and turnover.

During these first five years of our modern history, the succeeding six prime ministers and the three heads of the National Bank combatted the permanent crisis on-the-go, as they say, and kept building our new financial system.

If any of them had had his own understanding or knowledge of the aforementioned models, maybe Ukraine could have availed from its historical chance to choose its taxation model independently, including the very best elements found in the East and in the West.

But, of course, nothing like that happened. We just copied the “European sample”, assuming it is the best possible example on the planet. If someone had got up and exclaimed then that the EU is the oldest and least effective fiscal model, that it is an outdated concept in the macroeconomic theory, and that it had reached its ceiling a long time ago and is stagnating slowly – that person would have been just laughed at. However, even today the credibility of such statements, I dare say, is not obvious for most readers. Although the idea of the “thing of yesterday”, “the ceiling” or the “stagnation” is, in fact, the quintessence of the most recent articles by the leading theorists economists in the European press.

Nowadays, upon looking back, we feel even more hurt that we hadn’t used this chance, because the chance to radically build the outstanding and effective macroeconomic models of entire countries is a rare opportunity. In the first half of the 1990s, we had a tabula rasa for a country! The pensions were equivalent to USD 5. The salaries in the industrial sector were equivalent to USD 10. The GDP fiscal per cent until the year 1995 (the year when the inflation of hundreds of per cent was finally curbed) – could not even be measured adequately. But, as far as we can judge, it was about 20-25% of GDP – together with the State Pension fund. Taking into account that the country had a stable six-month-long pension payment debt up until 1999, it’s quite possible that the tax burden on the country’s economy together with the inflation tax did not exceed 20%.

However, as we all remember, all of this had absolutely no stimulating influence on the economy. In the country where the exchange rate was only occasionally stable and the year with inflation rate of less than 30% was considered a successful one, the economy was just dropping steadily in 1991 to 1999, having lost, in general, 60% of its GDP (as it was at the moment the USSR collapsed).

That’s why the first two five-year periods of its modern history, our country spent with an income tax that was differentiated to a rate of 30% to 90% depending on the sphere (also, this tax was universally avoided ever since it was implemented), and profit tax for citizens with a progressive scale of up to 40%. The maximum rate was applicable to the monthly profits of USD 700 and more – that means, if it was still active, all of our today’s middle class would have to pay the maximum according to that rate.

The whole decade of 1990s was spent in making experiments: they kept either adjusting the Pension fund (with its permanent deficit) to the budget or disconnecting them. In 1998, introducing the 38.5% payment rate to the Pension fund and other social welfare structures forever put the Ukrainians into the shadow. They stayed in that shadow even despite the unified plain income tax rate of 13%. By the way, those 13% were the only “non-European” borrowing in the Ukrainian tax legislature system of those days. We just copied the corresponding project in the Russian Federation, which, having faced similar problems in 1998, at least spent some time for macroeconomic planning.

Thus, the very first year when we can speak of an adequately calculated GDP fiscal per cent in our national bills system is the year 1996, then the state expenditures of the consolidated budget and the pension fund accounted for 37% of our GDP. Since then, it has been growing steadily, and experienced a slight decrease only in 2002-2003, until it reached its current value of 48% in 2012. On the Ministry of Statistics official web page, you will find a smaller value but the author did his own calculations based on public data on the expenditures from local and central budgets, the Pension and other social welfare funds). The same year, the European Statistics entity reported their 38.8% of weighted average of tax over GDP burden) in the EU-27 countries. Taking into account the fact that they traditionally do not include the obligatory pension fund payments into the tax burden index (which is 9 to 12% of GDP), one might say that we have already achieved the average European 50% or we are at least a couple per cent away from our “perfect picture”. This is irrelevant because it’s tragic. 20 years ago, we GDPd a choice, but we pushed ourselves in exactly that group of countries that have no potential for swift economic growth.

Ukraine: the attempt to ask the obvious questions

I’ll try to give you the simplest figures concerning our current situation on GDP fiscal per cent. The GDP, recalculated according to the current hryvnia to USD exchange rate, is approximately USD 176 billion: it has increased by 2.5 times within the last two decades. The official (!) average salary, according to the Ministry of statistics data, has finally exceeded USD 400 (in equivalent) in our country within the last month. Meanwhile, we realize that the “unofficial” salary figure is even higher. In Kiev, even the official one has already almost reached USD 700. In 1991, it was USD 10 per month; in 2000 it was USD 120 per month. You can calculate yourself how much it increased in dollar equivalent during each of the two decades. Undoubtedly, the sceptics can remind us of the “dollar inflation” phenomenon, but even they are unlikely to say that in Ukraine the dollar was devalued as to the goods by 2000%.

That’s why I dare mention (quite fairly) that none of those “Asian tigers” has displayed such growth rates in such short periods of time – I mean the income of the population.  For instance, the much-praised China has built up an average salary level only from USD 7 to 130 per month within these two decades.

In general, the economic historians will have to explain the outstanding breakthrough, those fantastic growth rates that our economy demonstrated within 2000-2008. Our GDP grew by 7-12% per year. In fact, these are virtually China’s growth rates for the same period, at which the whole world stared in awe. But China demonstrated those rates with a general tax burden in the economy reaching only 8% of the GDP. As for us, we entered the so-called “golden 2000s” with a cumulative tax burden of 40% (a figure comparable to the European one), and finished the period with an even more “European” rate of 48% from the GDP.

No other country in the world had showed such growth rates! Even the oil-bearing Russia and Kazakhstan, which had similar and even larger growth rates in the 2000s, withdrew respectively 33 and 25% into their GDPs. So what’s the reason of our economic growth that hadn’t been praised by the politicians?

The answer may seem as a paradox: an entire number of spheres in the Ukrainian economy were and still are an internal offshore zone (according to the European standards).

More than once, the Ukrainian politicians used the words “shadow economy” upon encountering this phenomenon. They used figures such as 40-50-60% of the “shadow GDP”. However, I’ve always found it hard to imagine how some kind of a metallurgic plant secretly produces each other ton of output, takes it abroad illegally in some manner and sells it for cash; or a supermarket manages to sell each other package of sausages past the cash machine.

That’s why I never trusted those exaggerated opinions. Meanwhile, a plant, as well as a supermarket can easily save money at taxes, and the way they do it can be simply explained by any business school graduate, and also put into practice.

I will describe just the three primary “offshore holes” in our taxation legislation. Ever since those exist, all the “European investors” who keep complaining at all business associations about the adversities of doing business in Ukraine, but at the same time, those investors have been immensely thrilled about it for 15 years and making use of them happily.

The first “offshore hole” was the small business. The opportunity to pay while you are at a unified tax (1.4% to 6% of the income) is unprecedented not only for Europe. At most of the offshore islands of our planet you’ll find much worse conditions.

However, this is where the “nirvana” for the small business doesn’t end. If your private enterprise or LLC is within the general taxation system, you will pay 7% for encashment (since 2010, the rates increased to 13%), and you can forget about the VAT and the corporate tax forever. That’s why, despite the usual “ritual curses” towards every government from the small business, the fact is that the number of private café networks or shops almost doubles annually in large cities. Here, the main problem has been the oversaturation of the market and the competition, not the visits that the tax service pays you.

The second “offshore hole” is the agriculture. In case if you have no idea about this: in order to “support the national manufacturer” the agricultural sphere was the only one allowed in the end of 1990s to buy agricultural products “for cash” without displaying their turnover for the tax service and even for the banking system. They could abstain from paying the VAT as well as the profit tax pretty officially. They are in a challenging situation; they are “reviving” the Ukrainian village! After all, what does it cost for the small and middle-sized farming enterprises to do business without registering a commercial entity. I think that if you offered such conditions to French or Polish farmers, they would immediately refuse from those much-praised EU agricultural subsidies – all to live in that “tax paradise” called Ukraine!

The third tax hole is transfer pricing. The Ukrainian parliament seemingly decided to start combating it in 2013, although USA and the EU filled the gaps in their tax legislations before the 2000s started. In Ukraine, you could still legally sell products to your own offshore company from your own enterprise almost at a loss for yourself, even if the delivery is performed within the country and not for export. Taking loans from your own offshore company for 35% interest rate per annum in euro or in dollars in order to repatriate the profit to some island with a profit tax rate of 0 to 5% each year – with no problems and no taxes.

By the way, this scheme is good for exporting raw materials from mining and processing complexes, while for exporting high-maintenance products like metallurgical ones it is virtually useless.

Who would pay those awful 48% from the jointly earnings of the official economy as taxes? If the small business does not pay, the agrarians don’t pay and the metallurgists optimize it? Let all the others pay!

I mean, for example, state enterprises – starting from the “NaftoGaz” and ending with “UkrTeleCom” that have nothing to optimize in the tax sphere – those have it all clear and transparent. Just take a look at the cost estimate of any of the two aforementioned organizations (those are open data): 70 to 80% of the money goes for taxes! Into the budget! All the energy companies do that. How can you hide the electricity bills? The machine building industry pays it all, in full amount. They pay the VAT, the profit taxes and the salary-related taxes. Generally, all the large enterprises (with a hundred or, even more, thousand employees), honestly make all the necessary salary-related payments, including those to the Pension fund: you can’t distribute salaries “in an envelope” to thousands of employees, it’s not even worth trying.

That’s why the conclusion is the following: a country with a cumulative taxation rate of 40 to 50% of GDP could not have had a 10% growth rate for an entire decade! Such things were nowhere to be seen and, moreover, it has never been witnessed throughout the entire economic history of the world! For an econometrician, the main proof of the scale that our shadow economy reached is our economic growth! Mathematically, it would be easy to build a model and show the average figures as well as the turning points of the admissible tax burden with maximum growth indicators on various countries in the 20th century. But the first book that the author of this article decided to publish with his own name is called “Popular Macroeconomics”, and that’s why I’ll share with you the conclusion I drew from the calculations: our actual GDP fiscal per cent is twice as small as the official one and it between 25% and 30% of the gross income of the country. It’s twice as little than in Europe, and approximately comparable to the USA. That’s why an economic growth rate of 5% during the growth period of the cycle is possible and normal for us.

But, as it was described above, this indicator differs in various spheres and clusters of our economy, from 7% to 70%! It destroys some and pushes the others to offshores.

I don’t know the ratio of our shadow economy. Also, I have no idea how large the shadow salaries are. But, as an economist, I can give you the formulas for you to calculate. Do you want those? There you go.

According to the statistics, every month the citizens deposits USD 500 to 900 million with the banks. It’s been so for the last three years! If you trust the official data on the salaries and incomes of the population, it turns out that the latter brings every fourth grivnya it earns to the banks. Do you personally know anyone who would put a quarter of his or hers monthly salary to the bank because there’s nothing to spend it on? That’s absurd. I would trust this statistics if it mentioned at least every tenth grivnya.

But in that case, we would have to assume that the income of the population do not constitute 32% of the GDP. We would have to start searching for the “lost” 30-40% of the GDP of someone’s unregistered incomes in the national accounting system. These are tremendous amounts of money.

Even economics students are aware of the fact that at the beginning of the 20th century, John Maynard Keynes, set forth a system of formulas to build his national accounts system and unite all the economic indicators into one chart. Thus, so that the officials of no country could claim that the inflation doesn’t exceed 3% when in fact it is 30%. Just so that other 8 indicators go awry because of that and everyone sees how wrong the “sleeve is attached to the jacket”.

Or, on the contrary, so that the opposition claims that the government lies and the inflation is not 3% but 30%. I shall repeat once again, any student of economics can check those calculations easily. One can understand which of those is lying by just jotting down two or three equations on a napkin. It’s just there is no such inflation level that wouldn’t influence the goods and services sales indicators and, as a result, the internal demand and consumption levels.

In fact, Keynes’ verifying equations have been a source of constant headache for our Ministry of economy for the last 15 years. You shall laugh but we have lots of discrepancies in the macroeconomic statistics all the time, and we really have to match, “reconcile” and draw it together all the time.

The simplest example is the following: after a fall in 2009, our economy was growing for two and a half years and started slowing down in the second half of 2012. At the same time, with GDP growth by 3 to 4%, the retail goods turnover grew by 12 to 24% annually. In three years, we accumulated a composite interest of 43%, or more than UAH 220 billion of unrecorded sales growth. Any economist will tell you that it’s either unrecorded growth or unaccounted inflation!

Because the internal consumption is a part of the GDP, it cannot grow by itself. Either it grows together with the GDP or its ratio within the GDP structure grows. However, the structure did not alter dramatically. The inflation can be easily cross-checked via the monetary indicators. There is no error there too. Then it must be unrecorded growth.

Some unrecorded and officially unaccounted part of the economy has earned excessive 15% of our GDP in three years and gave this money to the population, which, in its turn, gladly spent those unaccounted USD 25 billion (!) to build their cottage houses, to buy food and so on.

Here is the story with the statistics of ours.

So what should we do with our GDP fiscal per cent which is officially 50% for us, but for someone it’s 7%, for someone it’s 70%, while the actual figure is 25%? Shall we raise it? In conclusion, I’ll be honest with you: one should not raise those in any case! Maybe there is a reserve capacity for somebody to raise it. But how do we know, what if these small businesses close because of that and pour one and a half million of unemployed into our streets? It’s high time for someone to lower the taxes and introduce fringe benefits. For whom and in what amounts? You can see that in a simple chart called “The growth and fall according to sectors”. It is available freely on the Ministry of statistics website, it is updated quarterly. It’s not your “average” figure of 3-4% of the GDP; it’s very illustrative on who needs to lower the taxes or who should have done that a long time ago.

Of course, while lowering the taxes, we must have the corresponding political will and at least not hesitate to support the taxpayers who provide our living. We have to remember that the budget that is constantly short on money, we will also have to be cut to some extent. But as soon as we take an unbiased glimpse on it, you will be able to make a lot of discoveries there yourself. Because if I share some of my observations with you, you won’t even believe at first that our “poor government” spends SO much money on it. But this is a topic for another chapter and another vast issue.

The personality

Mikhail Kukhar was one of the first authors to cover economic issues for “Zerkalo Nedeli” back in 1995, together with Alla Yeremenko and Mikhail Kolomyets. There were the publications in the “ZN”, according to Mikhail himself, were crucial for his career in the late 1990s.

Since then, he has managed to work as an assistant editor and an editor of several economic magazines, on- and off-record author of books on economics and economic programs for three successive governments, one presidential candidate and even an economic analyst at a joint research project that IMF and World Bank in Ukraine.

Next year, Mikhail will turn forty; he gives lectures and runs an open Facebook account, promoting the ideas of economic liberalism. Besides, he finally decided to write his first book as an author and name it accordingly: “Popular macroeconomics”.

 

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