Open Letter to the Experts and the Ministry of Finance from the VoxUkraine Group of Economists

The focus on the absolute values of tax rates and level of budget spending unacceptably simplifies the discussion, as it ignores other aspects of the tax reform that are at least as important. Whatever tax revenues a government needs to raise, it should look for tax collection mechanisms that minimally distort prices, production, consumption and distribution of the resources in the economy. This means that taxes should be collected from those commodities and services with inelastic supply and demand, and with low substitution effects (if it is easy to substitute production of a taxed good A to not taxed good B, producers will do so, thereby avoiding paying taxes).

To the Ministry of Finance of Ukraine

To the Expert Community

Over the last few weeks,  the reform of the tax system has been hotly debated in the Ukrainian expert community.

While there’s wide agreement that the Ukrainian economy is in crisis, and that tax reform is one of the priority tasks for the new government, there is much disagreement on the What and How of these reforms.

At VoxUkraine, we think it is crucial that the participants in the debate do not lower themselves to  “intellectual populism”, where loud and extremely simplified statements are made, statements that often lack any economic rationale. If one compares tax systems across the globe, one will see that, there is a great variety in tax systems and in the degree of redistribution of the GDP through the budget. Simple statements that a certain tax rate must be exactly equal to a specific percentage X or that the level of public spending in relation to GDP must be not less than (or no more) than a specific percentage Y are therefore not constructive and of little use for a decision-making. Indeed, the Ukrainian financial crisis, the lack of qualitative and quantitative data, regular changes in the legislation are all factors that make definite statement about  “the exact level of tax rate” or “the exact level of government spending” highly problematic.

Moreover, the focus on the absolute values of tax rates and level of budget spending unacceptably simplifies the discussion, as it ignores other aspects of the tax reform that are at least as important. Whatever tax revenues a government needs to raise, it should look for tax collection mechanisms that minimally distort prices, production, consumption and distribution of the resources in the economy. This means that taxes should be collected from those commodities and services with inelastic supply and demand, and with low substitution effects (if it is easy to substitute production of a taxed good A to not taxed good B, producers will do so, thereby avoiding paying taxes).

The discussion on tax reform should also be linked to discussions on the goals and the structure of the budget.  The optimal level of a government‘s budget during a war and a recession is far from evident, but it is as important to understand how effectively the current budget is used, how to decrease ineffective spending, and what directions of financing should be in priority.

Taxes and budget are not only an economic but also a political issue. Politically, there is not just one feasible answer on the question what the taxes and the budget should be. In some societies citizens want to see an active participation of the state in the economy, other societies prefer a minimal participation.

The low quality of the dialogue within the Ukrainian society, between experts and government carries the danger of conflicts and polarization, and as a result leads to mistrust to the reforms that will be implemented by the government.  If society does not understand the essence of tax reforms and does not trust the government, tax reforms will be ineffective and will not attain their goal.

It is crucially important that society understands clearly who is responsible for tax reforms and what steps need to be taken. To increase mutual trust and reduce conflicts, the process of discussing reform can be formalized, as it is done in some developed countries. For example, the government can present its vision of reforms, and the texts of draft laws and ask respected experts in the area and the public to provide (in written form) their well-grounded, and, ideally, based on calculations, assessment of tax reform proposals. This should not just be a formality, but requires a communication campaign, round tables with media etc. Afterwards, the government needs to give a  formal answer to these suggestions and, explain its position, or to adapt its proposed reform concept. Such process will make discussions more constructive and of higher quality, improve transparency and will strengthen support for reforms within the society.

Signatories:

Olena Bilan, Dragon Capital
Volodymyr Bilotkach, PhD, Newcastle University
Tom Coupé, Kyiv School of Economics
Yuriy Gorodnichenko, PhD, UC Berkeley
Veronika Movchan, Institute for Economic Research and Policy Consulting
Tymofiy Mylovanov, PhD, University of Pittsburgh
Ilona Sologoub, Kyiv School of Economics
Oleksandr Talavera, PhD, University of Sheffield
Oleksandr Zholud, International Centre for Policy Studies
Nataliya Shapoval, Kyiv School of Economics