It took about three years for Ukrainian revolution to evolve from the slogan of a “simple and understandable” nine-tax system to the general declaration of income as a prerequisite of fair and efficient taxation. In fact, a brief review of the Government's legislative initiatives in the sphere of finance of the last year evokes a strong feeling of déjà vu with the initiatives of the Ministry of Revenue and Duties of Ukraine, 2013. The truth is that such feeling is misleading.
This is just another illustration of the immutable law of all revolutions – any successful revolution, which is in whole or in part based on an excessive tax burden, and always leads to increase in taxation. In the 17th century, the King of England claimed to levy additional duties, and this innocuous circumstance led to the King Charles's beheading and the introduction of about two hundred taxes by the absolute authority of Cromwell’s protectorate. A century later, the revolution exploded in the USA. Caused by the introduction of a sugar excise duty and a harmless stamp duty in the colony without its consent, the revolution led to the formation of a clear system of federal excises and other charges levied on the territory by the government. Utopic idea to cancel taxes at the beginning of the Great French Revolution was quickly abandoned by introducing new charges. These are some of the most vivid historical examples, the list of which has been replenished with events from the latest history of Ukraine.
It would be naïve to believe that Ukrainian revolution of February 2014 could foster a dream of a simple tax system. After all, the constant complication of taxation is not a fashionable global trend. Complex and burdensome procedures of tax systems react on the developing economic relations, sometimes even not keeping up with the latter. More than that, alignment of taxation is the only way to ensure its fairness in current circumstances. Experts unanimously agree with the above, which, however, does not prevent politicians and activists from mercantile exploitations. They are the ones to fuel the unsophisticated faith of the ignorant in a fairy tale about simple and low taxes, generating the demand of the society (mostly of the uneducated) on what Americans call “tax cuts” when they wish to exempt the rich from taxes, thus, “protecting” the rights of the poor.
Therefore, post-revolutionary government’s return to the idea of general declaration is quite natural. Moreover, the legislation establishing the provision that everyone or almost everyone must submit tax returns (except for pensioners and those who receive income only at one place of work) is fair, justified and necessary. Why? Let us figure out.
First, let us regard the shortcomings of the general declaration. The institute of taxation with no doubts burdens taxpayer with additional duties to account and calculate its income, and declare it, i.e. to file annual tax return to the tax authority. Implementation of such responsibility takes time. According to opinion polls, taxpayers in the USA spend more time per year on tax procedures than on sex. However, it is unlikely that a taxpayer gets more pleasure from filing tax returns, isn’t it? We are not trying to claim that declaring income prevents the reproduction of the U.S. population. We merely quote the statistic, which indicates that tax accounting and reporting take a lot of time, and this may be irrelevant, but still affects the country's macroeconomic indicators in general.
In addition, the general declaration obviously costs taxpayers money, gained with blood and sweat, a part of which the taxpayer spends on paying for the services of auditors, accountants and tax lawyers whose expertise is not a simple income tax. In fact, in the U.S., tax attorneys can deal with income tax, as well as its separate parts. The Tax Code of the USA, which regulates the collection of income tax, comprises 74608 pages. Over the past 100 years, the Tax Code has increased by 187 times! A mere mortal can hardly gain an insight into the regulation of this size, thus it requires hiring a very expensive expert. Indeed, failure to perform in full or partially its obligations to declare and pay tax entails the liability, including under criminal law.
Liability is another negative consequence of the general declaration for the taxpayer. Obviously, tax declaration entails the expansion of rights and, more importantly, possibilities of the supervisory bodies that obtain not only a huge database, but also the right to bring the taxpayer to responsibility instead of his tax agent. This also offers opportunities for the State to control expenses of taxpayers. Thus, over time, a taxpayer may be required to spend only the money whose origin he can explain. This initiative has already been discussed in the government.
It seems that drawbacks are enough to abandon the idea of the general declaration. However, it is not that simple. In fact, the Institute of taxation turns every drawback into advantage through having considered this new dimension to the topic.
It is a fact that general declaration is more challenging for the taxpayer. However, it can ensure the wide use of progression in the taxation of income. Moderate progression (several steps of 5%) is crucial for the fairness of taxation, which is ensured by a sacrifice that is equal to taxpayers with high and low incomes. It is obvious that the value of hryvnia is different in the income of the rich and the poor. Furthermore, the progression will simply increase revenues to the budget. It should be noted that the cost of the progressive tax collection is above the cost of the flat tax collection, not to mention the costs of accounting, auditing and declaring tax liabilities. However, we may state that this is a fair price.
Only within the framework of the general declaration can be successfully implemented the family income taxation project that operates in the developed countries. This approach to calculating income allows strengthening the traditional institution of marriage, a foundation of successfully developing society. Calculation of income, taking into account tax deductions for the entire family, including dependents, entitles traditional families to additional tax deductions compared with individual taxpayers. The decision to introduce family taxation should be preceded by a broad public debate. As a compromise, it is possible to envisage two alternative ways of income taxation (family and individual) in the legislation.
Another advantage of the general declaration is the possibility of a wider use of tax deduction mechanism that approximates income as the object of taxation to net income, and reduces it by the expenses of taxpayer that may not and should not be taxed (the cost of paid interest on loans not in consumer lending), medical care, education, other taxes paid by the taxpayer, housing rent and utility payments, possibly vacation on the territory of Ukraine, etc.). Undoubtedly, this will reduce revenues to the budget, but this is an allowable loss for the justice of taxation and support of national economy.
More than tax
The value of the general declaration to society goes far beyond tax collection as that. In terms of the general declaration, it is not about taxes, but about interconnection, mutual rights and duties of a person, state and society. This matter is much broader than it seems at first glance.
Taxes surround us daily. The existing income tax collection system is beneficial to the State. Usually the fact of tax payment virtually goes unnoticed; we do not consider it as a contribution to the common good. We merely do not notice how much the State costs.
More than that, according to the ancient Slavic tradition, we never perceive the State as an organization we pay for. Leviathan did not merely get out of control at once, in fact, he was never under control. Our beast has always dominated over us; just like a petty medieval feudal lord, he took away everything that his vassal could give without the risk of a rebellion. This perception of the world is our tradition that has been interweaving with the cultural code for thousands of years. This is the origin of belief in a good king, state construction of paternalism, inherent civil infantilism, and many other complexes embedded in our subconscious. All-time culture tradition cannot be broken overnight; however, it does not mean that we cannot at least partially adapt it to the modern world, or gradually amend it by instilling the values, inherent to all nations with a higher level of progress, to the elite and then to the whole nation.
It may sound lofty, but the general declaration is one of those measures that fosters a correct understanding of the role of the State in society, which is necessary for the development of the people in the modern world. It can make one aware of how much a particular citizen pays for the state per day, month and year. It entitles to claim fair, transparent and effective use of citizen’s money, as well as the qualitative provision of public services, albeit the amount of tax may be not economically equivalent to the cost of public services, and a citizen may never use such service.
However, as soon as a citizen realizes that he is a customer of public services who paid in full its share, it shifts the accents in the conscience of taxpayer, and changes the nature of the relationship between him and the state from “landlord-serf” to “executor-customer”. Awareness of citizen’s monetary participation in the State’s sustainability gives rise to unconditional right of such citizen to participate in its governance. Citizen’s right to demand is not based on a hackneyed illusion on the people as the source of power, which is provided in textbooks on constitutional law, but on the property alienated for the state purposes.
As soon as citizens understand that they pay for the State, they start reconsidering the role of the state, as well as the citizens and recipients of the State. We, who live, work and receive income on a certain territory, are united by one common goal – we maintain at our expense a public institution of power which not legally, but still belongs to us.
We are turning from fellow citizens into “co-owners”. This approach to understanding the right to the State (akin to the right of ownership), expressed in specific monetary units, unites better than any slogan about the unity of the right and left banks of the Dnipro, because property matters predispose to ordinary peoples’ susceptibility better than the most expressive ideological slogans.
The attitude of the taxpayer to tax evasion changes completely, if he consciously pays taxes under his tax return. Thus, a citizen used to approve it, as there is nothing unjust in evading legalized robbery, but now he condemns his neighbor who evades taxation, who does not only take part in realization of our common interests, but also pickpockets and redirects his tax burden to bona fide payers.
Pierre Bourdieu, followed by Lawrence Harrison, expanded the meaning of “cultural capital” as one of the factors necessary to ensure the economic prosperity of the people. Cultural capital is a set of values, beliefs, attitudes that lead society to achieve the goals of the UN Universal Declaration of Human Rights. Having analyzed dozens of modern civilizations, Harrison came to the conclusion that those nations are more successful on the way of progress, whose culture possesses certain values (the rule of law, fair play, individual rights, constraining state power, religious freedom, etc.). Unfortunately, they are not typical for us. It is impossible to achieve high indicators of well-being or progress without the totality of these signs of the people’s “character” (G. Lebon stated this about it 100 years ago).
We cannot fully accept the theory of L. Harrison due to its chauvinism, as after all, each nation has its own historical path and the welfare is not measured solely by the GDP growth. In general, the theory has a core, which consists in the fact that we do not want to fall farther behind the economic progress. In particular, we should not only nominally, but also in fact accept such values as faith in each other, importance of strong public relations, and responsibility to society of both the elite and ordinary people, supremacy of law. Moreover, the general declaration is not a cure, but the first serious step forward, as evidenced by the general declaration in the U.S., where 139.6 million taxpayers filed tax returns in 2014. This institution should not cause negative emotions, but unite us as one nation, not on ethnic level, but on a national level in the modern sense of the term. According to Gustav Radbruch, peoples become nations not when they strive for national identity, but when dedicate to the fulfillment of common tasks.
It is clear that the general declaration will have an extremely positive impact on countering corruption manifestations in society (as in the case of anti-corruption activists’ electronic declarations). It is ridiculous to expect the reduction of corruption of the whole society, but this is the aim to be achieved by declaring incomes and expenses of the officials. However, it is possible if we fight the corruption as such, rather than seek revenge for a single official.
The possibility and need to keep financial matters in order is another obvious advantage of the general declaration. It is a rare quality for Ukrainians, whose fathers and grandfathers lived making ends meet. It may come as a surprise, but a clear understanding of a current financial situation is a mystery to the overwhelming majority of Ukrainians. Undoubtedly, it takes time, requires additional actions and perseverance, but it also allows us to organize ourselves, develop so much needed prudence, that is also one of the components of the nation's success, according to L. Harrison.
It is crucial to note that the introduction of the general declaration is impossible without well-conducted tax amnesty. It will form the necessary background for the implementation of advantages of the institute, and legalization of the "gray" capital, gained by Ukrainian taxpayers throughout the period of independence of Ukraine.
Huge “gray” incomes were received by citizens without direct violation of the law, but certainly by means of its circumvention, without making obligatory payments to the State for obtained income. Automatically, the majority of Ukrainian citizens was unable to explain the origin of their income, and thus moved into the category of potential offenders. The question is not about the income received as a result of criminal or corrupt activities, but about the sources of income recognized in our society but consistently denied by law. In general, though, a conscious taxpayer refuses to declare his income due to obligations to other participants (e.g., the employer), and on the other hand, due to the burden of previous years of tax evasion, which makes no sense to transfer his financial affairs to a legal field in the future.
At the same time, the State is not able to effectively deal with tax evasion as it faces inability to prove the illegality of the origin of any - small or large - states. After all, a 30-year-old taxpayer can always explain the source of origin of his funds, obtained during the period of independence, when incomes were not subject to obligatory declaration, they were not even taxed. It seems clear that the capital amnesty shall be paid, occur in time of peace and political stability in the country (accordingly, trust in the Government), and be accompanied by sound guarantees of an exemption from liability of all payers, who participated in it. Amnesty shall be widely accompanied by the media activities.
In addition, it is obvious that the general declaration, besides its advantages, which were introduced after properly conducted tax amnesty, provides the taxpayer with a unique opportunity to start his financial life anew. He receives legal income that he can openly use both in Ukraine and abroad, income that State officials cannot take away, that is fully protected by the State. In other words, the taxpayer remains calm about his future as his property rights are protected.
We can perceive the general taxation as another attempt to attack citizens' rights, an unfair way to fill the gap in the State budget at the expense of poor Ukrainians, or simply call the Government's proposal an attempt to establish a tax tyranny. And we will be right. This is the viewpoint of people crippled by their inhibitions, aggression and innate suspicion, those who struggle and oppose to the progress, deny rapid development of the world. Then it is likely that we postpone the introduction of the general declaration for a while, exchanging the fight for our future for the peace of the Status quo. Nevertheless, introduction of the general declaration is inevitable. For this purpose, we must realize that filling tax return is much more necessary to the taxpayer than to the State, which does not mind a good old collection of taxes by tax agents. We can perceive the value, regularity and fairness of this institution, its necessity for the State, society, and our future. The choice is ours…
Author: Danylo Getmantsev