Tax proposals of the Cabinet of Ministers will lead to a lack of investment in Ukraine

The government wants to collect an additional UAH 140 billion in new taxes, although it has all the tools to avoid increasing the fiscal pressure on businesses and the population of Ukraine. The total effect of the proposed measures is approximately 4-5% of GDP. If these tax changes are adopted, it will mean no prospects for investment in Ukraine and the country’s development in general.

Tax changes

The Cabinet of Ministers has prepared a draft law to increase taxes by UAH 140 billion in 2024 and by an estimated UAH 400+ billion annually for several years. The main items include the following:

• increasing the military tax rate from 1.5% to 5% for individuals;
• introduction of a military fee for legal entities in the amount of 1% of income;
• introduction of a military fee for individual entrepreneurs in the amount of 5% of two minimum wages, except for the 3rd group, which is 1% of income;
• introduction of a military duty on certain transactions: 5% of the value of banking metals, 30% of the value of jewelry, 15% of the value of cars, 5% of the tariff for the use of mobile communications, etc., 5% for the first sale of real estate;
• introduction of an advance payment for the payment of income tax on gas stations;
• reducing the threshold for taxation of international parcels to EUR 45 from EUR 150;
• introduction of an excise tax on sweet water.

Assessment of the innovations

The Cabinet of Ministers has been planning this tax increase, which is not caused by the current need to cover budget expenditures, for a long time. It comes as a package with the budget bill and, according to the Cabinet of Ministers, should be adopted together.

If you analyze the specific changes in the budget bill, you get a very unattractive picture:

1. Without the approval of the IMF and Western partners, the Ministry of Finance decided to increase the security budget by UAH 500 billion, with the main emphasis for some reason on its own procurement for the Armed Forces – UAH 296 billion (in fact, the main emphasis is on this, with a high probability of corruption risks), less than UAH 100 billion – an increase in salary costs, and UAH 112 billion – other expenses of the Armed Forces. Even if 112 billion UAH (other expenses of the Armed Forces) are payments for the deaths of servicemen, these funds cannot provide payments for more than 15-20 thousand people, which is obviously inadequate to our needs.
2. The deficit is going to be covered by restructuring commercial debts, reducing interest payments on debts in 2024 to UAH 356 billion. And also by an additional issue of domestic government bonds worth UAH 220 billion, plus a terrible package of tax increases.

One of the most negative characteristics of the proposed changes is the need to adopt them immediately – “off the cuff”, without assessing their feasibility and economic calculations. This form of tax increase is not a temporary measure that will be in effect until the end of the war, it is permanent. Because these taxes will continue to be in effect after the war.

If these tax changes are voted in July, the tax increase will take place on August 1, and if they are voted in August, it will take place on September 1. By the end of the year, the Ministry of Finance wants to collect additional taxes worth UAH 138 billion. However, this raises questions: why didn’t the government simply transfer UAH 138 billion to the Ministry of Finance from the NBU? Or what prevented the government from increasing its own purchases for the Armed Forces by UAH 160 billion instead of UAH 300 billion, given that the free transfer of Western military products amounts to about UAH 800 billion a year? These are unanswered questions. But it is clear that there are no fundamental alternative reasons for raising taxes and introducing new ones.

And a few more figures:

1. A military tax on legal entities of 1% of income is comparable to a 5% increase in the VAT rate. The increase in budget revenues from such a decision would amount to approximately 2.5% of GDP.
2. A military tax on salaries of 5% will reduce the income of all employees by 3.5% of the economy and will bring in approximately UAH 90-100 billion in additional revenues to the state budget.
3. At the same time, tax officials are being given a twofold salary increase.The bill also introduces draconian powers to oblige any taxpayer to conduct an inventory at the request of the tax authorities, which often involves a lot of labor, and in case of refusal, to seize property.

Consequences

Overall, I estimate the fiscal effect of the proposed measures at 4-5% of GDP. Therefore, it is likely that the National Revenue Strategy is no longer taken into account in decision-making. But if, in addition to such a tax increase, we are also waiting for the measures described in the National Revenue Strategy, then the bottom of the destruction of the Ukrainian economy has not yet been reached.

The consequences of such a decision will be 15% inflation, a drop in consumer demand, the economy going into the shadows, entrepreneurs leaving for other countries and, in principle, no prospects for investment in Ukraine and the country’s development in general.

Apparently, our officials do not know that when government policy is aimed at making the rich pay more, it leads to an increase in the overall number of poor people in the country. But they know very well that when the policy is aimed at raising taxes for everyone, it leads to poverty for everyone except the officials themselves.