Let us turn to how all this actually works. What matters here? Two points. The first is purely economic. The key peculiarity of taxes is that their payment can be shifted. An economist analyzing a particular tax must determine who ultimately bears it. In the end, despite the variety of taxes, the burden falls on owners of primary factors of production—land, capital, and labor.
This understanding leads to a further conclusion. Since taxes shift and the ultimate payer is generally known, analyzing tax rate levels is hardly the pressing issue. The total tax burden is the state’s punishment of owners of primary factors of production. Its effect is straightforward: the lighter the burden, the faster economic growth, and vice versa. Yet the burden’s magnitude alone can hardly stop growth or cause decline. People adapt to any system, however convoluted, with the most outrageous and “economically unjustifiable” rates—growth will still appear in state reports. Legal and semi-legal ways around any idiocy will always emerge. The main thing is that the system must not change. What matters far more than the tax rates themselves are changes to them—these alone can kill everything alive and leave a desert behind.
Characteristic of this is the fact that tax authorities worldwide understand these circumstances perfectly. Stability of legislation is an unthinkable notion for them. Our tax chief says this directly in an interview with Zerkalo nedeli: “All this is logical and correct. Fiscal policy must be flexible, since the economic situation changes rapidly. I can cite the example of France, where tax legislation is traditionally revised annually during the adoption of the state budget. Or the United States, where the rules for taxing citizens’ income change every year.”
Thus, from the perspective of those who produce national wealth, tax reform should pursue goals directly opposite to those of the tax authority—namely, first and foremost, the immutability of tax legislation, with only the possibility of reducing the list.
Here we arrive at the second point to keep in mind when analyzing tax innovations: government agencies are, in fact, enterprises operating in search of profit. The nature of this profit differs somewhat from that of “ordinary” enterprises, but the patterns of activity are exactly the same. For the tax authority, “profit” (setting aside the corrupt component) consists of reporting—i.e., “tax collectability.” An enterprise with such a goal will strive to make achieving it as easy as possible for itself, to “collect” enough for favorable reporting under any circumstances. To ensure “collectability,” the tax authority must be able to constantly change the norms within which it operates, both at the legislative level and at the level of “violations on the ground,” and this legislation itself must be maximally opaque, so that the taxpayer can never be certain whether he is guilty—and if guilty, of what. Tax administration must be maximally complex and confusing, and taxation must cover the maximum number of operations conducted by economic entities. Roughly speaking, any legal action by an economic entity must fall within the tax service’s “area of responsibility.” Any tax authority in any country, by default, strives for such capabilities, as they guarantee profit in the form of proper reporting, and therefore also opportunities for “budget spending.” It is obvious that the very existence of the tax authority and its activities are the cause of tax chaos and the damage it inflicts on society. In this sense, countries differ from one another only in whether the local tax authority has managed to achieve ideal conditions for its business, or not. The Ukrainian tax authority, existing in a society where property rights are called into serious question, has undoubtedly managed to do so; others are still only striving for this.
Thus, the innovations proposed by the tax authority are nothing more than the usual practice of profit-seeking by a company operating in the bureaucratic market. Modernization is carried out in response to the needs of reporting (balance of trade deficit) and in response to the economy’s adaptation to previously adopted measures (turnover tax, in addition to VAT).
If we speak of tax reform in the interests of society, not the tax service, then it should consist of something entirely different. We must strive to reduce the impact of the tax burden to something resembling radiation—harmful, but even and predictable. Therefore, first of all, we must eliminate the specialized tax service, the profit-seeking generated by its existence, and its consequences. All tax legislation must be precisely that—legislation, excluding executive authority intervention and rule-making; it must include everything the taxpayer needs, down to sample reporting forms. Changes, as I have already said, may only concern reducing the list. These changes should be guided by the principle “paid and forgotten”; ultimately, all taxes should be reduced to a single tax for individuals, and then eliminated altogether as unnecessary. That would be real tax reform.