Prime minister says government will act on reducing shadow economy (01/11/98)

Prime minister says government will act on reducing shadow economy

by Roman Woronowycz
Kyiv Press Bureau

KYIV - Prime Minister Valerii Pustovoitenko announced on January 3 that his government will focus in 1998 on drastically reducing the shadow economy in Ukraine, which he said is a major reason for shortfalls in budgetary revenues that have caused ongoing financial instability in the government.

Speaking at a closed session of the Cabinet of Ministers, he said the goal is to "break the existing negative processes in the economic sphere." The prime minister added, "The government must work to head off problems and not to simply ascertain the situation."

Prime Minister Pustovoitenko's call for a war against the shadow economy steers clear of a new tax reform initiative. During the January 3 Cabinet of Ministers meeting the discussion emphasized tighter control over tax payments, including holding "chronic tax dodgers" criminally responsible, strengthening anti-smuggling measures, the use of indirect excise duties and development of more trust among corporations and individuals in Ukraine's banking-credit system.

The Ukrainian government collected only 76.1 percent of its total projected budget revenues for 1997. That figure includes a 36.4 percent shortfall in tax collections. Much of the revenue shortfall has been attributed to a large underground economy that does not pay taxes, does much business by barter and illegally moves goods into and out of the country.

Speaking at the same Cabinet meeting, Minister of the Economy Viktor Suslov said the shadow economy provides 43 percent of Ukraine's gross domestic product (GDP) and that nearly half of the country's total cash volume flows through it.

The root cause of the substantial underground economy is a tax system that does business no favors. Ukraine has a corporate income tax rate that stands at about 57 percent. When that is added to the other taxes that have been imposed on entrepreneurs, some businesses say they end up turning over around 90 percent of their profits to the government. So many simply hide their profits, and at times the entire business, by not registering the company with the government.

Former Vice Prime Minister for Economic Reform Viktor Pynzenyk tried tax reform in early 1997, but his efforts failed and resulted in his resignation. The 1997 budget was held up for a year as the government and the Verkhovna Rada bickered over how reform should proceed. The government wanted a comprehensive restructuring of the tax system along Western European lines, while the Verkhovna Rada wanted incremental changes and retention of large social safety nets in the budget financed by a broad-based tax system.

In the end the Verkhovna Rada national deputies had it their way, and the budget was passed with no substantive tax reform.