Tax Amnesty Fails. Surprise?

The tax amnesty has ended in Ukraine. But should it have ever started? The mountain gave birth to a mouse. Of 8.8 billion hryvnias declared over 18 months, only 547.5 million is to be paid. This was the completely predictable outcome of the tax amnesty. It was destined to fail from the very beginning, both in terms of its macroeconomic effect and because of the expectation that billions of dollars would be saved under the mattresses of Ukrainians. The fact that this supposedly exists somewhere is constantly discussed by officials who are unable to explain why foreign investment is not so important to us.

Why was this predictable? In terms of the macroeconomic effect our Western partners, the IMF and the World Bank opposed a tax amnesty from the very first day. Why? Because, in their extensive experience, they saw that tax amnesties in other countries did not lead to an improvement in the economic situation. Such amnesties varied greatly in terms of the amounts legalized – from thousands to billions of dollars. Some countries periodically repeat tax amnesties even when they never lead to a positive impact on the economy, do not change the rules of the game, and do not improve the impact of the shadow economy. Such amnesties simply do not become an energy for accelerated growth. Similarly, the potential introduction of tax on withdrawn capital leads to reductions in budget revenues but does not result in any accelerated economic growth.

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Why then should it have been otherwise in Ukraine? The decision to carry out a tax amnesty, came at the moment when we "passed the watershed," when we changed the rules of the game. If you say that from a fixed date in the future everyone will start to pay taxes, the tax service will change, etc. people will exploit the intervening period. Even if an individual declares large sums, this would only be an attempt to legalize their previous income and make it easier for them to use it but would not encourage them to come out of the shadows. On the contrary, it would encourage them to continue to work in the shadows, because they could spend these legalized funds without fear of being asked where they came from. It also gives rise to the expectation that if the state has forgiven once, it will forgive in the future as well.

So why didn't anyone legalize the money? Because no matter how paradoxical it may sound, the disadvantages for the state were on a par with the disadvantages for the individual. The key issue is the low level of trust in the state on the part of potential declarants because every potential legalizer of funds was not certain that the situation would not be replayed after legalization, that one day the state would change its mind. The general problem in the economy, the unpredictability of the rules of the game, which very often change during the game itself, is a restraining factor for investments in Ukraine. As a result, the tax amnesty did not attract the hoped for significant levels of declaration. Additionally, in contradiction of the principle of a tax amnesty the state demanded explanation concerning the origin of funds being declared.

Of course, the war did further complicate the implementation of the amnesty. In times of great uncertainty, people thought less about how to legalize their wealth and more about how to save it. Furthermore, during the war, businesses traditionally try to reduce their costs, which very often leads to an increase in the shadow economy because taxes are also expenses.

However, can the war be blamed for the failure of the tax amnesty? No. The failure would have happened even without the war. In the current conditions, this idea is not relevant for Ukraine. At least until the time when reforms are carried out that guarantee the rule of law. One day, in the future, it will be possible to reach a watershed where we say: "Tomorrow we will already live honestly."