PAYROLL TAXES INCREASE RESERVES IN UKRAINE
Nataliia
Volodymyrivna Ivanchuk
The
National University of Ostroh Academy, Ukraine
E-mail: natalia.ivanchuk@oa.edu.ua
Nataliia Anatoliivna
Mamontova
The National
University of Ostroh Academy, Ukraine
E-mail: nataliya.mamontova@oa.edu.ua
Submission: 2/29/2020
Revision: 5/13/2020
Accept: 6/3/2020
ABSTRACT
The authors analyzed the reformation of the payroll taxation mechanism in Ukraine, identified wage differences of the employees at the large, medium-sized and small business entities, figured out the reserves to increase tax revenues and cover the deficit of the Pension Fund of Ukraine by decreasing shadow wages and improving payroll taxation in Ukraine. Significant attention is paid to the salaries of the top managers of large business entities as a possible field of applying progressive taxation of personal income. Based on the analysis of the EU countries experience, the authors suggest imposing the second progressive personal income tax rate of 32% for the monthly income that exceeds 15 minimum wages. As well, the abolishment of the maximum unified social contribution base is recommended. In the paper, the authors prove the importance of reducing the level of the shadow economy in Ukraine by forming a public trust to the government policy and using accumulated tax funds appropriately. It has been proved that by reducing the shadowing of the Ukrainian economy to the EU level, the deficit of the Pension Fund of Ukraine can be covered only partially. This fact determines the necessity for Ukraine to ensure economic growth and increase wages.
Keywords: payroll taxation; personal income tax; unified social contribution; shadow economy
1.
INTRODUCTION
At
the present stage of the economic development of Ukraine, the optimization of
taxation processes of economic entities is an important precondition for
stimulating production and business activity. Paying taxes causes the loss of a
taxpayer's financial interest in their work, reduces incentives for further
expansion, and makes payer conceal some of their revenues and expenses.
Labour
relations in Ukraine are characterized by a significant amount of hidden
payroll that can serve an important tax base. The reform of the domestic
economy deals with the improvement of tax relations, and considerable attention
is paid to the mechanism of payroll taxation. These measures are taken to
reduce the shadow wages and increase tax revenues that can become the source of
income to the state social insurance funds, state and local budgets of Ukraine.
There
have been numerous suggestions on how to improve payroll taxation in Ukraine and
to reduce concealment of the payroll.
In
particular, scientists point out that one of the biggest problems putting the
brakes on the Ukrainian economy is "shadowing" of the domestic
business and wage payments. Therefore, to remove wages from the shadow, Ukraine
needs to turn back to a progressive scale of personal income taxation, reduce the
tax burden in the least protected segments of the population and increase it
for the persons receiving high incomes. Besides, it is necessary to impose a
differentiated minimum rate of the unified
social contribution for the various categories of employees, without any additional
restrictions, to reduce the rate of thе contribution and to determine the
minimum amount of pension in the proportion to the duration of compulsory
seniority has worked for the retirement (Boreiko, 2015).
Scientists
systematize the main ways to legalize remuneration of labour, which include
reducing the tax and social contribution burden, increasing the correlation
between paid social security contributions and the size of the pension,
redistribution of social security contributions between the employee and
employer. It is as well necessary to increase the responsibility for tax and
social security contribution evasion, improve tax administration, introduce the
indicative wages, improve the quality of social services (Sanduhei, 2017).
De-shadowing of the labour
market is considered to be a top priority task for the government. To fulfil
the task, one should simplify tax administration system and tax legislation,
prohibit tax changes for five years, reduce the payments to social security
funds, improve the quality of public services and reduce the number of tax
benefits (Danylyshyn & Stefankiv, 2011).
It is urgent to apply a comprehensive approach to wages de-shadowing,
using a set of administrative, economic and legal factors. In doing so, we
should take into account the interests of the state, employers and employees.
Direct active involvement of employees can help solve the problem of wage
legalization (Kulikov, 2016).
Controlling
the shadow part of the official GDP will not reduce the level of the Ukrainian
shadow economy. It should be done by the legislative increasing to the level of
highly developed countries of the payroll share in the output. The payroll
share should rise from the concealed part of GDP. However, at the same time,
Ukraine needs to eradicate corruption, reduce taxes and redistribute social
responsibility. Thus, the shadow economy can be a very important reserve for economic
growth (Kharazishvili, 2017).
The
analysis of the problems concerning the shadow payroll decrease in Ukraine has
shown that it is relevant to determine the reserves of tax revenues growth and
possibilities of covering the Ukrainian Pension Fund deficit by taxing the
hidden payroll. Aforementioned will enable discovering how much wage
legalization can help the state in the current circumstances.
The
purpose of the paper is to consider the reserves for the payroll taxes increase
by reducing shadow wages of employees and introducing measures to improve
payroll taxation in Ukraine.
2.
SURVEY METHODOLOGY
The
current mechanism of payroll taxation in Ukraine includes the collection of the
unified social contribution (USC), personal
income tax (PIT) and military levy (ML).
The
survey methodology involves analyzing the reformation of payroll taxation
mechanism in Ukraine, identifying wage differences of the employees in large,
medium-sized and small business, estimating the possibilities for increasing
tax revenues and covering the deficit of the Pension Fund of Ukraine by
decreasing shadow wages and improving payroll taxation in Ukraine.
While
conducting the research, we have utilized official statistic data from the
International Monetary Fund, the European Commission, the State Treasury
Service of Ukraine, the State Fiscal Service of Ukraine, the State Statistics
Service of Ukraine, the Ministry of Economic Development and Trade of Ukraine,
the Pension Fund of Ukraine and the National Bank of
Ukraine, large business entities in Ukraine, as well as took into account
Ukrainian tax legislation.
We paid significant attention to the salaries of the
top managers of large business entities as a possible basis for applying
progressive taxation of personal income. We assumed that the salaries of senior
management of large entities exceed the maximum limit of charging a unified social
contribution in Ukraine.
The number of top managers in a large company depends on
its organizational structure, the distribution of rights and responsibilities
among managers at different levels. The most typical positions of the top
managers of large companies include the following: Chief Executive Officer
(CEO); Chief Financial Officer (CFO); Chief Visionary Officer
(СVO);
Chief Operating
Officer (COO); Chief Information Officer (CIO); Chief Security Officer (CSO); Chief Marketing Officer
(CMO); Chief Information Security Officer
(CISO); Chief Accounting Officer
(CAO); Chief Technical Officer (CTO).
The list of positions is not limited
to the abovementioned and it can vary at different legal entities.
To determine the average number of
top managers per large business entity in Ukraine we applied a sampling method.
In particular, we have collected data on the number of top managers in 82
entities (15.7% of the entire population) that worked successfully in 2018 and
published the information about their management. The interpretation of the
data presented that, on average, a large Ukrainian business entity hires
approximately 10 top managers (exact value was 9.5). The standard deviation of
the sample was 2.9; dispersion – 8.3; limiting error – 0.6 (95.4% probability); relative error – 3.1%; coefficient of variation – 30.2%. These indicators make it possible to conclude
that the sample is representative, the population is homogeneous, and the
average is the typical characteristic of the population.
The top manager's average monthly salary (AMS) in 2012-2018 was calculated using
the following formula:
AMS=L+Pex :12:m:n
(1)
here L – the maximum Unified Social Contribution base in
Ukraine; Pex –
the annual payroll in the economy that exceeded the maximum base of the Unified Social Contribution; m – the number of top managers per large business entity (for
2012-2018 we used m=10,
calculated based on sampling); n – the number of large business entities.
When calculating tax revenue reserves from the
payroll, we took into account the actual Personal Income Tax and Unified Social
Contribution rates in 2012-2018, in particular, the actual annual tax revenues
to the tax base ratio. The reserves of the USC revenues take into account the
revenues from the payroll, which exceeded the maximum USC base in Ukraine, as well as the USC revenues from the possible amount
of the legalized payroll. The reserves of the PIT revenues were calculated at
the average rate of this tax from a possible legalized payroll and included top
managers' payroll taxes at the recommended rate of 32%. We have applied this
rate to a monthly salary of over 15 minimum wages.
3.
RESULTS AND DISCUSSIONS
3.1.
Payroll tax reforms and shadow
economy in Ukraine
During 2001–2010, economic entities paid four types of
social payroll taxes, and since January 1, 2011, they have been included in the
Unified Social Contribution (USC). The base for the USC for employers was capped
according to their occupational risk classes, taking into account their
economic activities, i.e. the contribution rate ranged from 36.76% for the
first class to 49.7% for the 67th occupational risk class. Employees of
enterprises paid a Unified Social Contribution of 3.6%.
From
1998 to 2005, the cap
of charging the Unified Social Contribution varied from 1000 to 4100 UAH. In 2006, it was
set at 10 times the subsistence minimum set for
the able-bodied individuals. During 2007–2010, the cap was set at 15, and from
2011 to 2015 it was set at 17 times the subsistence minimum set for the able-bodied persons. In 2016 the maximum base of charging the Unified
Social Contribution was raised
to 25 times the minimum wage of subsistence set for the able-bodied persons, and since January 1, 2018, it was
capped to 15 times the minimum wages.
Concerning the payroll taxation, from the beginning of
Independence and until 2004, the collection of Personal Income Tax in Ukraine was
progressive. The rates were 10, 15, 20, 30 and 40% with the existence of a
non-taxable limit. For the years 2004–2006, the Personal Income Tax rate was
13%. During 2007-2010, a total tax rate of 15% was set. With the adoption of
the Tax Code, on January 3, 2011, Personal Income Tax started to be deducted
from the payroll at the rates of 15 and 17%.
On
August 3, 2014, a military levy with a deduction rate of 1.5% from the payroll
was imposed and it is still valid.
On January 1, 2015, the increased Personal Income Tax
rate grew from 17 to 20%. Besides, the government started defining the rate of
the USC charges taking into consideration the lowering factor, but its
application has proved to be burdensome for most employers.
On
January 1, 2016, the government set the basic Personal Income Tax rate at 18%
for the entire tax base, regardless of its size. It also set a single USC rate
of 22% (except for the wages for disabled persons), abolished the USC deduction
from employees' wage and the determination of occupational
risk class for employers.
Table
1 summarizes information about the payroll tax rates in Ukraine.
Table 1: Payroll tax rates in Ukraine from 2007
to 2018, %
|
Indicator |
Years |
|||||||||||
|
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
|
|
Tax accruals |
|
|
|
|
|
|||||||
|
PFU |
4-42 |
4-42 |
4-42 |
4-42 |
– |
– |
– |
– |
– |
– |
– |
– |
|
DIF |
0.5-1.5 |
0.5-1.5 |
0.5-1.4 |
0.5-1.4 |
– |
– |
– |
– |
– |
– |
– |
– |
|
UIF |
0-1.3 |
0-1.3 |
0-2.2 |
0-2.2 |
– |
– |
– |
– |
– |
– |
– |
– |
|
AIF |
0.66-13.6 |
0.66-13.6 |
0.66-13.6 |
0.66-13.6 |
– |
– |
– |
– |
– |
– |
– |
– |
|
RUSC |
– |
– |
– |
– |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
22 |
22 |
22 |
|
TA |
5.16-58.4 |
5.16-58.4 |
5.16-59.2 |
5.16-59.2 |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
8.41-49.7 |
22 |
22 |
22 |
|
Tax deductions |
|
|
|
|
|
|||||||
|
PFU |
0.5-5 |
2-5 |
2-5 |
2-5 |
2.6-6.1 |
2.6-6.1 |
2.6-6.1 |
– |
– |
– |
– |
– |
|
DIF |
0.25-1 |
0.25-1 |
0.25-1 |
0.25-1 |
– |
– |
– |
– |
– |
– |
– |
– |
|
UIF |
0.5 |
0.5 |
0.6 |
0.6 |
– |
– |
– |
– |
– |
– |
– |
– |
|
RPIT |
15 |
15 |
15 |
15 |
15; 17 |
15; 17 |
15; 17 |
15; 17 |
15; 20 |
18 |
18 |
18 |
|
RML |
– |
– |
– |
– |
– |
– |
– |
1.5 |
1.5 |
1.5 |
1.5 |
1.5 |
|
TD |
16.25-21.5 |
17.75-21.5 |
17.85-20.6 |
17.85-20.6 |
17.6-20.1 |
17.6-21.1 |
17.6-21.1 |
16.5; 18.5 |
16.5; 21.5 |
19.5 |
19.5 |
19.5 |
|
TRPT |
21.41-79.9 |
22.91-79.9 |
23.01-79.8 |
23.01-79.8 |
26.01-69.8 |
26.01-70.8 |
26.01-70.8 |
24.91-68.2 |
24.91-71.2 |
41.5 |
41.5 |
41.5 |
Note: PFU – the rate of social
contribution to the Pension Fund of Ukraine; AIF – the rate of social contribution
to the Accident Insurance Fund of Ukraine; UIF – the
rate of social contribution to the Unemployment
Insurance Fund of Ukraine; DIF – the rate of social contribution to the Disability Insurance
Fund of Ukraine; RUSC – the rate of the Unified Social Contribution; TA – the total rate of tax accruals; RPIT – the rate of
Personal Income Tax; RML – the rate of the military levy; TD – the total rate
of tax deductions; TRPT – the total rate of payroll taxes.
Source: Authors' summarizing is based on Ukrainian tax
legislation.
The
Pension Fund of Ukraine was established in 1990, the Accident
Insurance Fund of Ukraine and the Unemployment
Insurance Fund of Ukraine were created in 2000, and the Disability Insurance Fund of Ukraine began its activity in 2001.
All of these social funds simultaneously started to receive social security
contributions starting from 2001.
Till January 1, 2011,
economic entities paid four different types of social taxes from payroll, and
each fund administered its social tax separately. Social taxes included pension
insurance contribution, disability insurance contribution, unemployment insurance contribution and accident insurance contribution.
From
January 1, 2011, social taxes were consolidated into the Unified Social
Contribution and the Pension Fund of Ukraine started its administration. At the
same time, the other three social funds continued to perform the rest of the
functions. From October 1, 2013, the administration of the Unified Social
Contribution was transferred to the Ministry of Income and Fees, and from May
21, 2014, the State Fiscal Service of Ukraine started to manage the mentioned
contribution.
In general, the deficit problem is especially urgent
for the Pension Fund, burdening the state budget year after year. Not only the
subsidies to cover the deficit and short-term loans are assigned to the Pension
Fund from the state budget, but it also funds the grants for pension payments,
allowances and raises to pensions that were appointed under different pension
programs, etc. The Pension Fund also receives some costs from other social
security funds. In 2007, expenditures of the Pension Fund exceeded its revenues
by UAH 24.4 billion, while in 2018, it grew to UAH 156.6 billion, which means
that the deficit rose 6 more times.
The importance of payroll tax reforms is predetermined
by the fact that payroll taxes dominate in the structure of tax revenues in
Ukraine (Figure 1).
Figure 1: The structure of tax revenues in Ukraine during
2007-2018
Source: Authors' calculations
based on the data from IMF, the State Treasury Service of Ukraine and the State
Fiscal Service of Ukraine.
In
particular, in 2010–2018, the share of payroll taxes varied from 46.8% to
31.9%. The decrease in the rates of the Unified Social Contribution and
Personal Income Tax from payroll caused a sharp downturn in 2016. However, then
payroll tax share began to grow, reaching 35.7% in 2018. Thus, payroll taxes
formed the largest part of tax revenues, compared to a value-added tax, a
corporate income tax and other taxes and levies. This demonstrates the highest
fiscal importance of the payroll as a tax base in the Ukrainian economy.
Due to the lack of tax revenues, the Ministry of
Economic Development and Trade regularly calculates the level of the shadow
economy in Ukraine. For this purpose, the Ministry applies such methods as
"population expenditures – retail turnover"; electricity method;
monetary method; loss-making enterprises method, and the analysis
of an integral indicator of the level of the shadow economy. The highest level
of the shadow economy is obtained through the method of "population
expenditures – retail turnover", but the Ministry notes that only an
integral indicator of the level of the shadow economy can serve a complex index
that fully characterizes such a phenomenon as the shadow economy (Figure 2).
Figure 2: The level of the shadow economy in Ukraine defined by
different methods in 2010–2018, the percentage of official GDP
Source: Data from F. Schneider and the Ministry of
Economic Development and Trade of Ukraine.
According to the mentioned data, in 2010–2018 the
highest level of the shadow economy was observed in 2014 and 2015, which was
accompanied by a worsening of the overall economic situation in the country due
to the start of military actions in the Eastern part of the country. Since
2016, the level of shadowing has begun to decline at one time with the
introduction of a reduced Unified Social Contribution rate of 22% and the
abolishment of the progressive taxation of personal income with imposing a
proportional rate of 18%. Also, in 2010–2018, Ukraine had a much higher level
of the shadow economy than the EU countries (2–3 times higher).
As for the recent planned changes in payroll taxation,
starting from January 2020, the Verkhovna Rada of Ukraine has been considering
a bill concerning the progressive taxation scale for the calculation of
Personal Income Tax. The following changes are suggested:
1) for the income up to 10 times a minimum wage the
current rate of 18% is proposed;
2) for the income more than 10 times a minimum wage,
but no more than 20 times, a minimum wage of 36% is proposed;
3) for the income over 20 times a minimum wage – 54%.
3.2.
Formation of wages in Ukraine
Suggestions to return to progressive
taxation of personal income are justified by the fact that in most EU countries
the rate of personal income differs and depends on the level of the income received.
Therefore, to determine the consequences of such an implementation, it is
necessary to investigate more thoroughly the size of wages in Ukraine and the
experience of the EU countries.
At
first, it is worth examining the average wage in Ukraine (Table 2). According
to the mentioned data, in 2007–2019, the nominal average and minimum wage,
denominated in the national currency (UAH), have increased.
Table 2: The average and the minimum wage in
Ukraine per month in 2007-2019
|
Years |
The average wage, UAH |
Minimum wage, UAH |
The average wage, USD |
Minimum wage, USD |
|
2007 |
1,351 |
430 |
268 |
85 |
|
2008 |
1,806 |
533 |
283 |
84 |
|
2009 |
1,906 |
643 |
238 |
80 |
|
2010 |
2,239 |
888 |
281 |
111 |
|
2011 |
2,633 |
963 |
330 |
121 |
|
2012 |
3,026 |
1,098 |
379 |
137 |
|
2013 |
3,265 |
1,153 |
409 |
144 |
|
2014 |
3,480 |
1,248 |
293 |
105 |
|
2015 |
4,195 |
1,271 |
211 |
64 |
|
2016 |
5,183 |
1,439 |
202 |
56 |
|
2017 |
7,104 |
3,200 |
257 |
116 |
|
2018 |
8,865 |
3,723 |
318 |
134 |
|
2019 |
10,497 |
4,173 |
399 |
159 |
Source: Authors'
calculations based on the data from the State Statistics Service of Ukraine, the
National Bank of Ukraine and Ukrainian tax legislation.
The average wage
exceeded 3.6 to 2.2 times the minimum wage. This was caused by the income
differentiation among the Ukrainian population, in particular, in 2018, 71% of
the population had incomes less than 5160 UAH (185 USD) per month, while 29%
had more than 5160 UAH or 185 USD per month. Taking into account the changes in
the exchange rate, the average wage was the highest in 2013 (409 USD), and then
it began to decline in 2014–2016. Growth resumed in 2017, and in 2019 the wage
reached 399 USD due to the revaluation of the hryvnia.
Employing
the analysis, it is worth investigating the business entities that form the
largest share of the payroll in Ukraine (Figure 3).
Figure 3: The share of enterprises in the formation of payroll
in Ukraine during 2012–2018
Source: Authors'
calculations based on the data from the State Statistics Service of Ukraine and
the State Fiscal Service of Ukraine.
The
structure of payroll by type of economic entity convinces that the share of
enterprises’ payroll remained dominant and formed more than 50% of the total
payroll in the economy.
In 2012, the share of enterprises’ payroll constituted
63.1% of the payroll tax base, while in 2018 it decreased to 58%. On average,
in 2012–2018, the payroll of enterprises was 60%, while payroll of banks,
budgetary institutions, individual entrepreneurs and legal entities engaged in
non-profit activities amounted to 40%.
Today, the Ukrainian
business sector is represented by large, medium-sized and small business
entities (including microenterprises) operating in various fields and sectors
of economic activity. The study of the enterprises’ payroll structure taking
into account the entity size showed that large and medium-sized
enterprises had the biggest payroll share. This seems
natural as they have a much greater financial capacity and economic activity
than other entities. During 2012–2018, the share of the payroll of large
enterprises decreased from 45.4 to 38.6%. At the same time, the share of
medium-sized enterprises increased from 38.9 to 44.3% and the small ones – from
15.7 to 17.1% (Figure 4).
Figure 4: Structure of
the enterprises’ payroll by entity size in Ukraine
during 2012–2018
Source: Authors' calculations based on the data from the State
Statistics Service of Ukraine.
Large
and medium-sized businesses together formed the biggest share of the payroll of
Ukrainian enterprises, which made 82.9% in 2018. At the same time, large
enterprises paid the highest wages, while employees of medium-sized and small
enterprises were paid less than the average wage (Figure 5).
Thus, the progressive taxation of personal income can
be applied only to the payroll of large business entities in Ukraine. However,
it is worth determining how much tax revenue can increase after the imposing of
progressive taxation.
In our opinion, in Ukraine, the payroll of top
managers of large business
entities is the main base to apply progressive
taxation to. Official statistics about the salaries of this employee category
is absent in Ukraine. At the same time, there are expert reviews of domestic
media and research of international headhunting companies. As a result, the
ranking of the highest-paid managers in Ukraine is published annually, which
includes a survey based on the sampling of the existing companies and deals
only with the salaries of CEOs (Presidents).
Figure 5: Average monthly wage at enterprises and in the economy
of Ukraine in 2012-2018, UAH.
Source: Data from the State Statistics Service of
Ukraine.
In our
survey, we have calculated the average salary of all of the top managers of
large business entities and compared it with the minimum wage in Ukraine (Table
3).
Table 3: Average monthly salary of a top
manager in a large business entity in Ukraine during 2012-2018
|
Indicator |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
|
Total payroll, UAH billion |
457.2 |
487.4 |
471.7 |
512.4 |
627.9 |
864.2 |
1067.9 |
|
Payroll exceeding maximum USC base, UAH billion |
21.8 |
22.9 |
26.6 |
39.7 |
43.6 |
35.1 |
30.8 |
|
Number of large business entities, units |
874 |
839 |
660 |
540 |
479 |
481 |
523 |
|
Maximum USC base, UAH thousand |
18.7 |
19.6 |
21.2 |
21.6 |
36.0 |
41.6 |
55.8 |
|
Top manager's
monthly salary, UAH thousand |
226.5 |
247.1 |
357.1 |
634.3 |
794.5 |
649.7 |
546.6 |
|
Top manager's
monthly salary, USD thousand |
28.4 |
30.9 |
30.1 |
31.9 |
31.0 |
23.5 |
19.6 |
|
Top manager’s salary to minimum wage ratio |
206.3 |
214.3 |
286.1 |
499.0 |
552.1 |
203.0 |
146.8 |
|
Top manager’s salary to average wage ratio |
74.9 |
75.7 |
102.6 |
151.2 |
153.3 |
91.5 |
61.7 |
Source: Authors' calculations
based on the data from the State Statistics Service of Ukraine, the State
Fiscal Service of Ukraine, the National Bank of Ukraine and the websites of
large business entities (enterprises and banks) in Ukraine
According to the calculations, in 2012–2018, the monthly
salary of a top manager ranged from UAH 226.5 to UAH 794.5 thousand (USD 20–32 thousand). The salary of a top manager was from 552 to 147
times above the minimum wage and from 153 to 62 times above the average wage in
Ukraine. Increase of the 2 times the minimum wage, which happened in 2017,
caused the reduction in the discrepancy.
Thus, the salaries of Ukraine's top managers meet the criteria of
applying the progressive taxation of personal income and imposing the highest
personal income tax rate and are currently proposed in the draft law for
approval.
3.3.
Estimation of payroll tax revenue
reserves in Ukraine
A study of the EU countries experience showed that in
early 2019, high progressive rates of personal income tax from payroll were
inherent in Austria (55%), Belgium (50%), the Netherlands (52%) and Slovenia
(50%). However, these rates were applied to a higher income than the one
offered in the draft law of Ukraine. Besides, the maximum Personal Income Tax
rate among most EU countries was below 50%. Among the post-socialist new EU
member states, the majority applied progressive taxation, while the smaller
part had proportional taxation. In particular, the following rates of personal
income tax were observed: Slovenia (16%; 27%; 34%; 39%; 50%), Latvia (20%; 23%;
31.4%), Poland (18%; 32%), Lithuania (20%; 27%), Slovakia (19%; 25%), Croatia
(24%; 36%), Czech Republic (15%), Estonia (20%), Hungary (15%), Romania (10%),
Bulgaria (10%). In Ukraine, this rate was 18% for payroll. Also, over the last
7 years, the Czech Republic, Estonia, Hungary and Romania have reduced the
personal income tax rates.
We suggest that while setting the maximum progressive
rate of the Personal Income Tax, Ukraine should focus primarily on the experience
of the post-socialist new EU member states, as they are the closest to Ukraine
when considering the historical aspect of their development. Thus, we can see
that the maximum Personal Income Tax rate is not 54% in these countries. Taking
into account the discrepancy between the salaries of top managers and the
minimum and the average wages in Ukraine, we consider returning to progressive
taxation as advisable. Also, the current Personal Income Tax rate in Ukraine
(18%) coincides with the basic rate of the same tax in Poland. Therefore, we
recommend using Polish experience when reforming payroll taxation in Ukraine,
in particular setting the second progressive rate at 32%. Considering the
amount of income when applying progressive taxation in Poland, we propose to
apply the following tax rates of the Personal Income Tax from payroll in
Ukraine:
a)
for
the monthly wage up to 15 times the minimum wage the current rate of 18% is
proposed;
b)
for
the monthly wage over 15 minimum wages – 32% respectively.
The highest tax rate will provide tax
revenues primarily from the salaries of top managers in Ukraine. We consider
the proposed reform, which implies the application of three Personal Income Tax
rates of 18, 36 and 54%, too burdensome for Ukraine, given the significant
level of the shadow economy.
However, in the context of the need for tax revenues
in Ukraine, it is also necessary to abolish the maximum base for calculating the Unified Social
Contribution, which is
necessary for supplying the state social security funds at the expenses of the
salary of the top managers of large business entities.
The
next step of the study is to determine the
reserves of increasing payroll
tax revenues in Ukraine due to the introduction of the second progressive Personal
Income Tax rate of 32%, to abolish the maximum USC base from the payroll and
reducing the shadow economy of Ukraine to the level of the EU countries (Table
4).
Table 4: Reserves of increasing payroll tax revenues
in Ukraine during 2012–2018
|
Indicator |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
|
Total payroll, UAH billion |
457.2 |
487.4 |
471.7 |
512.4 |
627.9 |
864.2 |
1067.9 |
|
The level of the shadow economy in Ukraine, % |
34.0 |
35.0 |
43.0 |
40.0 |
35.0 |
32.0 |
30.0 |
|
Shadow payroll, UAH
billion |
155.5 |
170.6 |
202.8 |
205.0 |
219.8 |
276.5 |
320.4 |
|
The level of the shadow economy in the EU
countries,% |
19.3 |
18.8 |
18.6 |
18.3 |
17.9 |
17.3 |
16.8 |
|
Reduction in the shadow payroll, UAH billion |
67.2 |
79.0 |
115.1 |
111.2 |
107.4 |
127.0 |
141.0 |
|
Average USC rate, % |
36.6 |
36.2 |
36.4 |
35.1 |
21.6 |
21.6 |
21.2 |
|
Average PIT rate, % |
13.8 |
13.6 |
13.7 |
14.3 |
16.9 |
17.3 |
17.5 |
|
Reserves of USC revenues, UAH billion |
32.5 |
36.9 |
51.5 |
52.9 |
32.6 |
35.0 |
36.4 |
|
Reserves of PIT revenues, UAH billion |
13.3 |
15.0 |
20.6 |
23.0 |
24.9 |
27.1 |
29.1 |
|
Total reserves of payroll tax revenues, UAH billion
|
45.8 |
51.9 |
72.1 |
75.9 |
57.4 |
62.0 |
65.6 |
|
The deficit of the
Pension Fund of Ukraine, UAH billion |
75.7 |
83.4 |
77.6 |
95.8 |
141.7 |
132.6 |
156.6 |
|
Deficit coverage of
the Pension Fund of Ukraine, % |
60.5 |
62.2 |
93.0 |
79.2 |
40.5 |
46.8 |
41.9 |
Source: Authors' calculations
based on the data from the State Statistics Service of Ukraine, the State
Fiscal Service of Ukraine, the European Commission and the Ministry of Economic
Development and Trade of Ukraine.
As the calculations showed, there are some reserves
for the partial overcoming of the Pension Fund deficit in Ukraine. In
particular, in 2014, they were at a maximum of 93%, whereas since 2016 they
have decreased, reaching 42% of the deficit in 2018. The reason was a
significant reduction in the unified social
contribution rate to 22% in 2016.
However,
an important factor in the calculation of reserves is the reduction of the
Ukrainian shadow economy, which is quite a difficult task, since economic
entities do not fully trust the government policy and the accuracy of its
managerial decisions. Therefore, if the level of shadowing does not decrease,
it will be practically impossible to overcome the deficit of the Pension Fund
of Ukraine. Even with the best option of reducing the shadowing, it is possible
to cover deficit only partially. This proves that in Ukraine it is necessary to
ensure economic growth and increase in wages.
4.
CONCLUSIONS
The measures to increase payroll tax revenues and
reduce the deficit of the Pension Fund of Ukraine should include:
·
imposing
the second progressive PIT rate of 32% for a monthly income over 15 minimum
wages and abolishment of the maximum USC base;
·
reducing
the level of the shadow economy by forming public confidence in government
ability to conduct correct policy and use of accumulated tax funds
appropriately;
·
stimulating
economic growth to increase wages, stabilization of the tax legislation and
counteracting excessive cyclical fluctuations in the economic environment.
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