Amer­i­can Brian Bon­ner ex­plains why he likes as­pects of his coun­try’s tax sys­tem and how it can help Ukraine

Franklin De­lano Roo­sevelt had it right: Tax­a­tion should be pro­gres­sive, or based on the abil­ity to pay – with the rich­est who ben­e­fit the most from the econ­omy pay­ing the largest share. But there are lim­its.

Kyiv Post Legal Quarterly - - Contents - Brian Bon­ner bon­ner@kyiv­

Most peo­ple have a hard time get­ting ex­cited about taxes and gov­ern­ment bud­gets. I love th­ese dis­cus­sions, but not be­cause I am a pol­icy wonk.

Show me a na­tion's tax code and I will show you its pri­or­i­ties – whether it fa­vors the rich, the poor, promotes equal op­por­tu­ni­ties, whether it aims to in­crease eco­nomic op­por­tu­ni­ties for ev­ery­one or just the se­lect few. In short, taxes and bud­gets re­veal much about whether a so­ci­ety is fair, com­pas­sion­ate and just.

Taxes re­dis­tribute in­come – ei­ther up or down or just all around. They are the money we throw into the col­lec­tive pot for pub­lic ser­vices. Elected politi­cians (if one is lucky enough to live in a democ­racy) de­cide where the money goes.

If a tax code fa­vors the rich, they will be­come richer, in­come in­equal­ity will grow and

the econ­omy will be­come dis­torted in a way that works against the vast ma­jor­ity of peo­ple in ev­ery na­tion – the work­ing classes who are poor or swim­ming hard to stay in the mid­dle class.

Too of­ten in na­tions, priv­i­leges for the rich are hid­den in the tax code, through ex­emp­tions for cer­tain types of eco­nomic ac­tiv­ity, lower rates for type of in­come (in­vest­ment ver­sus pay­roll) and many other tai­lor-made fa­vors.

It's of­ten done on the tax side of the ledger, be­cause it would be po­lit­i­cal sui­cide (one would hope) to sup­port bud­get­ing bil­lions of dol­lars for bil­lion­aires or multi­na­tional cor­po­ra­tions.

My coun­try, Amer­ica, never had an in­come tax un­til 1913 – al­low­ing for great for­tunes to amass for cen­turies with­out much go­ing for the pub­lic good. Some peo­ple think this was a great era. I think it was hor­rific. I am a Franklin De­lano Roo­sevelt Demo­crat and be­lieve, as Amer­ica's great­est pres­i­dent did, that the best way to tax is on the abil­ity to pay – a pro­gres­sive in­come tax in which those who ben­e­fit the most from the econ­omy also pay the most in taxes.

There is a limit, how­ever. Maybe there are stud­ies that back me, but any time the tax bur­den is higher than 33 per­cent, peo­ple start look­ing for ways to evade taxes – per­haps even 20 or 25 per­cent is the trig­ger for this be­hav­ior in some peo­ple. De­spite the lib­eral in me, in­come tax rates above 33 per­cent strike me as con­fis­ca­tory and detri­men­tal to the econ­omy.

Amer­ica in 1913, while on its way to be­com­ing one of the world's great eco­nomic en­gines, would have been bet­ter with a pro­gres­sive in­come tax in place much ear­lier. Pub­lic ed­u­ca­tion didn't take hold un­til the 19th cen­tury – which, com­bined with the lack of in­come tax, al­lowed wealth and knowl­edge to ac­cu­mu­late for gen­er­a­tions among the elite few. The pre-in­come tax era of Amer­ica was also one of la­bor ex­ploita­tion, le­gal­ized racial in­equal­ity and such ex­tremes in wealth that grow­ing old was fre­quently a sen­tence of poverty or de­pen­dence.

Those are not the good old days – yet many in Congress, which fronts for wealthy donors in my view, want to drag Amer­ica back to those bar­baric times. Not a chance, if my vote counts for any­thing. I sup­port strong pub­lic ed­u­ca­tion, so univer­sity stu­dents don't go into debt; equal op­por­tu­ni­ties and la­bor unions, so work­ing peo­ple can get ahead; and a re­tire­ment in which the el­derly's net worth in­creases, be­cause of pen­sions, so­cial se­cu­rity and pri­vate sav­ings, so they can live out their golden years in dig­nity. I also be­lieve in mod­est in­her­i­tance taxes for any­one with more than $1 mil­lion in as­sets.

So what do the tax-and-bud­get poli­cies of Ukraine, my sec­ond home­land, say about its so­ci­ety?

It's not good. The por­trait pre­sented is one of an un­fair, cruel na­tion.

First of all, most of the wealth­i­est busi­nesses and peo­ple dodge taxes through off­shore tax havens and ac­count­ing schemes – through abuse of trans­fer pric­ing and other ways – that min­i­mize the taxes payable in Ukraine. This is a con­tin­u­a­tion of be­hav­ior that started when the oli­garchs made their first for­tunes in postSoviet Ukraine on the cheap, through scan­dalous in­sider deals in the first wave of rigged pri­va­ti­za­tions.

Se­condly, the way Ukraine treats many classes of peo­ple is sim­ply aw­ful. The el­derly, gov­ern­ment work­ers from school teach­ers

to garbage col­lec­tors, and stu­dents – all are treated shab­bily by pub­lic pol­icy. It is hard to see a so­ci­ety ad­vanc­ing un­der such con­di­tions.

Thirdly, the byzan­tine and cor­rupt tax col­lec­tion sys­tem put in place by peo­ple like ex-pres­i­dent Leonid Kuchma and ex-prime Min­is­ter Mykola Azarov en­cour­aged cap­i­tal flight, tax eva­sion and the explosion of a shadow econ­omy, which hov­ers around 40 per­cent of gross do­mes­tic prod­uct. Those who pay their taxes look like fools who put them­selves at a com­pet­i­tive dis­ad­van­tage. Not enough has been done to erase the dam­age.

So Ukraine is left with the abil­ity next year to levy taxes on $94 bil­lion in of­fi­cial eco­nomic ac­tiv­ity – the fore­casted amount of gross do­mes­tic prod­uct, even though the real size of the econ­omy might be twice that high but goes hid­den in the shad­ows.

Ukraine's state bud­get comes to $38 bil­lion, less than half of New York City's mu­nic­i­pal bud­get, but 40 per­cent of its en­tire GDP. The big four sec­tors of the bud­get are al­most un­touch­able: de­fense & se­cu­rity spend­ing (given Rus­sia's war), pen­sions, debt ser­vice and ed­u­ca­tion. So pub­lic of­fi­cials such as Fi­nance Min­is­ter Natalie Jaresko are left with try­ing to weed out the fraud and priv­i­leges, sim­pli­fy­ing mat­ters and hop­ing for the best.

Ukraine has much to do to get out of this down­ward spi­ral – more fairness, more growth and more ef­fec­tive­ness in gov­ern­ment spend­ing

are three keys. Only if th­ese el­e­ments fall into place will more peo­ple and em­ploy­ers be will­ing to come out of the shad­ows and pay their taxes.

Amer­ica has a high rate of vol­un­tary tax com­pli­ance for two key rea­sons. Firstly, peo­ple see how their tax dol­lars im­prove so­ci­ety. Se­condly, peo­ple are afraid of the In­ter­nal Rev­enue Ser­vice. I had a run-in with our tax col­lec­tion agency 30 years ago and never for­got the les­son: De­clare in­come and pay taxes or else, sooner or later, the IRS will find you and you will end up pay­ing more. In most cases, tax eva­sion is not an op­tion – the gov­ern­ment deducts the taxes from the av­er­age em­ployee's pay­check.

Com­pli­ance not only ap­plies to in­come taxes.

The ge­nius of the Amer­i­can tax sys­tem is that peo­ple can­not avoid taxes. They are broad-based and every­where. We have in­come taxes – na­tional, state and even lo­cal. We have sales taxes on all lev­els. We have real property taxes, not the nom­i­nal ones that Ukraine is only start­ing to in­tro­duce. We have ex­cise taxes, so ev­ery gal­lon of gas pur­chased is al­ready taxed. The list goes on and on. In the end, how­ever, tax rates in Amer­ica are low com­pared to many Euro­pean coun­tries. One rea­son is that ev­ery­one pays. It can be ar­gued whether ev­ery­one pays their fair share or not, but ev­ery­one at least pays.

My hope for Ukraine is that its tax and spend­ing poli­cies in 2016 re­flect the best of its val­ues, not the worst of them.

Tax eva­sion is ram­pant in Ukraine be­cause most peo­ple be­lieve that their money will not be well-spent by the gov­ern­ment. Mean­while, the wealth­i­est in Ukraine have cre­ated many tax-op­ti­miza­tion or tax­eva­sion schemes.

In many so­ci­eties, the poor end up pay­ing more of their share of in­come in taxes than the rich. In Ukraine, tax eva­sion is ram­pant at all lev­els, in­clud­ing among the wealth­i­est cit­i­zens and largest busi­nesses.

Ukraine’s econ­omy has re­lied on ex­ports of steel and agri­cul­tural com­modi­ties. Mov­ing to di­ver­sify and mod­ern­ize the econ­omy has been dif­fi­cult, con­sid­er­ing vested in­ter­ests that fa­vor the sta­tus quo and keep ob­sta­cles in place to dis­cour­age for­eign di­rec

Few peo­ple love pay­ing them, but taxes are es­sen­tial to fund­ing gov­ern­ment ser­vices, in­clud­ing ed­u­ca­tion, in­fra­struc­ture, de­fense and pen­sions.

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