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Fiscal revolution: for or against?
Iurie Gotisan, April 1, 2007
Finances waiting for answers of economy
The Government has recently examined the draft tax policy of Moldova for 2008–2010, in which several scenarios of policies have been evaluated, including very bold ones on reduction of taxes. In particular, it seeks the reduction of income tax for individuals by two percentage points, from 20 percent in 2006 down to 18 percent in 2008, as well as of the tax on corporate income. Also, annual exemptions for individuals are expected to grow from 4,500 lei in 2006 up to 10,800 lei in 2008–2010 and a 12-percent single taxation quota. The Government is preparing a "fiscal revolution", but many economists and businessmen call it evolution. However, the public debate could be seized by concern to demonstrate superiority of a certain fiscal commitment.
I do not think that there is any economy to function perfectly (even the developed western states have problems) and a fiscal optimum to satisfy the taxpayer and the state, which collects the taxes, is a rarity. Finally, the real economy does not go one direction only. In other terms, we must see which system is better: the one based on progressive taxation in our country or the one of the single taxation rate implemented in many states in the region (Russia, Estonia, and Lithuania, which achieved very good results). It is important that future changes not to affect the budget, private and corporate taxpayers. Of course, the estimates must be legally made, while changes in tax policy must be announced with at least one year before, so that population and business environment benefit of minimum predictability.
At the same time, I do not think that the fiscal burden would be too heavy for economic agents and investors, as the 18-percent tax is among lowest rates in the region. Of course, it must be gradually lowered to manage a balanced budgetary execution (incomes/expenses). These are institutional pressures, rather than exaggerated fiscal pressures that businessmen often signal. Moldova has a deficit of right interpretation of laws in legal system, which is often described as corrupt and bureaucratic, as well as a chronic deficit of execution of judgments, not a deficit of laws (even more, we may speak about a legislative inflation). If businesspersons are not confident that judges in Moldova make justice and they do not sell it to the one who pays more, we may work out inspired laws because we will have fewer investments than the economic system could absorb.
Structure of budgetary incomes
Reports by the Ministry of Finance concerning the execution of the budget reveal that 70 percent of revenues from state treasury are "extorted" from indirect taxes, notably VAT, excises, customs duties, and only 30 percent from income taxes, profit, etc. This is a structure of the budget that cannot be balanced. The economic theory says that 60 percent of budget incomes should be raised from direct taxes (income tax, corporate income tax plus social contributions, estate taxes, real estate taxes, etc.), and indirect taxes should cover up to 40 percent in a viable and functional economy. Or, the situation in our country is exactly reverse. The explanation is very simple: the structure of Moldovan economy does not allow other budget collections because the productive sector in our country does not go the same step with the internal demand. As a result, imports are massive (the big difference between exports and imports, trade deficit, etc. are a proof) and the indirect taxes prevail in the structure of budgetary collections. Of course, we have a consuming rather than productive economy.
Single taxation quota
Many economists and specialists of finances share the opinion that the single taxation quota would increase the budgetary incomes. The need of implementing such a tax system would not result from high taxes, which are medium compared with those in the European Union, but from a variety of existing taxes, hardening the following and drawing from different budgets, maintaining an administrative apparatus with many public functionaries and encouraging the fiscal evasion and bureaucracy this way.
In Romania, for example, the single taxation quota introduced in 2005 reveals that the incomes have covered the expenses of the consolidated general budget. The single quota reduced the tax on profit and personal income. But this quota may be applied on incomes in very different manners in every state and it correlates directly with dynamic of economy (growth or stagnation). An evaluation of the impact of single quota would be welcome because its introduction could produce higher fiscalisation (how much of economy is taxed) and fiscality (where taxes may grow after introduction of the single quota). Thus, we may judge the way the single quota may encourage the rise of budgetary collections, other conditions being unchanged. I will mention below the potential advantages and disadvantages of the single quota.
- It is attractive because it is simple and convenient due to its low costs;
- It simplifies the tax system and this reduces the expenditures with a large, expensive and often inefficient fiscal apparatus;
- A simple and better fiscal control could combat the tax evasion concomitantly with "elimination" of fiscal facilities from legislation;
- It encourages larger revenues; so, it stimulates productive and commercial activities and even the production of goods and services;
- The single quota would reduce the social polarising, giving a chance to the middle class to multiply its affairs;
- Less money could be raised but from more taxpayers;
- Revenues from shadow economy would decline;
- The single quota was implemented very successfully in Russia, Estonia and Lithuania.
It may be concluded that the single quota in Moldova could enhance the social polarising because it may affect those earning low salaries and will favour those with high and very high salaries. The list of advantages and disadvantages of such a tax system regarding the use of the single tax as a lever of tax policy could continue, but I think that this topic should be preserved for further analyses.
- The budgetary deficit may grow;
- It is not popular because the restructuring of the administrative apparatus could produce contesting social movements;
- It encourages the non-declaration of incomes from illicit activities, which are easily controllable in fiscal terms.
Effects of fiscal concessions
The state has often awarded fiscal concessions and has forgiven debts of some state-owned enterprises in the past years and this fact perpetuated some financial holes in the national budget. However, the risks of applying a debt freezing programme are very high. They could come from two directions. Firstly, such a measure induces the idea of a harmful fiscal treatment in economy. Big state-owned debtors could believe that they will be able to benefit of such fiscal alms again sooner or later. They could be encouraged not to pay their debts toward budget, following a simple reason: the state will pardon us again. Of course, small or private taxpayers that honour the payments to the budget with regularity and in the due time would not afford such a reason. They know that the tax services are not so tolerant with their debts toward budget. Fiscal controls "sting to the quick" as regards their debts toward budget. Here we face the second major risk: such a measure is eminently against principle of competition. Of course, this is a discriminating treatment between those enjoying facilities and those who do not enjoy them.
Instead of conclusions
We have the same "conserved" budget built on principle of surviving day by day for 2007. The state budget remains fixed at less than one forth (about 24 percent) of GDP (see the table), no matter if the GDP grows or declines, if taxes are high or low. This share in West Europe exceeds 50 percent. The tax policy failed to grow, at least for the time being, and this is calls taxation basis. In other terms, the taxpayers did not change in Moldovan economy. In my opinion, this is one of reasons why the officially triumphed higher budgetary incomes are hardly observed in a better education, better healthcare or sanitary system, better infrastructure, etc. As a consequence, the taxation is not an essential problem of market economy and it may be also subdued to logic of electoral process. If a governing does not apply new and new taxation opportunities, another political administrator will introduce them after four years.