Can Tax Cuts Reduce Corruption in Ukraine?

(Karol Mazur, Mises Institute) Ukrainian president Volodymyr Zelensky recently announced a drastic tax cut. The program, entitled 10-10-10, is designed to lower taxes and encourage residents to pay them in the hopes of reducing the shadow economy.

In Ukraine, the value-added tax (VAT) rate is uniform and amounts to 20 percent and personal income tax rate 18 percent. Zelensky proposes a reduction of income tax (from companies and individuals) from 18 percent to 10 percent, and a dramatic cut to the VAT rate from 20 percent to 10 percent.

It is worth mentioning that this is the first such drastic cut in the history of independent Ukraine. The new rates are only a proposal for now, but some would even call it a revolution in the tax system.

From the point of view of a libertarian strategy, one should of course commend the Zelensky administration for taking such initiatives. The problem, however, is the current state of the Ukrainian economy. Although weakened by the burden of war and the shift to a war economy, the focus of these tax cuts must shift from being centered around funding the war alone, to a much broader scope in order for these reductions to be effective in any way.

We must remember that Ukraine is facing enormous problems, and not just the ongoing war with Russia. One of the most expressive are the ubiquitous corruption and the plunder of the fruits of labor by the state oligarchy enfranchised at the time of the fall of communism era (we can call it right now as a crony capitalism).

Corruption there is similar to the level known, for example, from Russia. Corruption is widespread because the leading industries in Ukraine are key sectors such as energy, agriculture, and industry. The interest of politicians in these industries is obvious everywhere.

On the other hand, the proposal to cut taxes seems surprising because the patterns that Ukraine draws from other countries do not use this method. It seems that the whole concept of tax cuts dates back to 2016–18, when the minister of finance of Ukraine was, at least in his declarations, a supporter of free-market reforms, Ołeksandr Danyluk. It is clear here that Zelensky’s administration seems to believe in the classic mechanism of Reagan’s economy and the so-called Laffer curve.

Of course, referring to the Laffer concept is a pure experiment in the case of Ukraine, because it is difficult to estimate the results by looking at the scale of all problems. While we as libertarians are wholeheartedly in favor of this reduction or even the total abolition of taxes, one should consider whether this trend will continue if the war ends.

Furthermore, it’s important to what extent ordinary citizens will benefit from this initiative, and give thought to what extent this tax reform may be dictated by the policies of a predatory oligarchy, which still sets the standards of the tax system in Ukraine.

We must remember that the immediate goal of Zelensky’s administration is, after all, to strengthen the system of state apparatus to repel the Russian aggression. Zelensky’s revenues may increase by eliminating the shadow economy, which at the time of writing amounts to almost 44 percent of the national gross domestic product in Ukraine.

This initiative is therefore undoubtedly motivated by the current war situation. In order to carry on the war, as Gian Giancomo Trivulzio used to say, you need three things: money, money, and yet more money. The current Ukrainian leadership believes only a strong and efficient state is able to effectively resist the aggressor.

However, are the Ukrainians themselves ready to support these activities? The problem with these reforms, however, is that even with good intentions, it further increases the state’s control over its citizens. This is because the tax reform also allows tax office audits to have full access to citizens’ personal accounts and finances.

Although it’s difficult to state with complete certainty due to the influence of the shadow economy, it is estimated that the Ukrainian economy has continued to develop and grow steadily for the last several decades. This shows not only the disastrous economic stifling of the socialist past, but above all, that Ukraine has tremendous potential to spread its wings if not for oppressive state solutions.