The Purpose of the Reform

The purpose of a pro-liberal tax reform is to replace the tax system so as to minimise its destructive effects on market processes and agents, to cut down the cost of tax administration, and to ease and level the tax burden.

Reform Steps

Stage I. Urgent Tasks

The first stage of the reform is designed to address the most pressing problems confronting the current tax system and to lay the foundations for the removal of income tax and other taxes that fall short of the principles on which a pro-liberal tax system should build. The most imperative tasks are:

1. To replace the functioning tax laws by establishing accurate, explicit rules of tax compliance and introducing uniform tax rates.

2. To repeal tax breaks and to outlaw the granting of tax relief by all tiers of government.

3. To revise the functioning laws so as:

to ensure that corporate income tax is not charged on profits artificially fuelled by laws or regulations and to cut the corporate income tax rate;

to cut the personal income tax rate and to set the upper earnings limit on social security contributions;

to unify the collection mechanisms of social security contributions and income tax, and to lay the foundations for fully-funded private pension insurance;

to provide conditions for "buying out" the right to run a business with a lump-sum income tax and without incorporating a firm;

to replace the procedure for the computation, payment and accounting of value added tax, minimising its destructive effect on tax payers;

to repeal real estate and land taxes as well as inheritance and gift taxes;

to abolish the functioning principles of levying road tax, which is now based on companies' turnover, and to charge annual fees on vehicle registration instead;

to levy excise duties only on three categories of commodities-alcohol, tobacco, and petrol;

to replace the procedure for appraising the customs value of goods and to cut customs duties with a view to phasing them out;

to set the level of stamp duties based on the cost of services rendered.

Stage II. Long-Term Tasks

1. With a budget reform and the changes stipulated above in place, direct (corporate, personal, and lump-sum) income taxes and other taxes that run counter to the principles of a pro-liberal tax system should be removed.

2. To enact regular cutbacks in the level of social security contributions.

3. To finance all government expenditures, including social outlays, from a unified state budget.

4. To charge earmarked, or trust-fund, taxes on government services (functions) that continue to await privatisation.

5. To enact regular cutbacks in the VAT rate when approving annual budgets.

There are two ways of eliminating direct taxes. One of them involves the removal of corporate income tax as the first step, with a subsequent abolition of the tax on personal income. The other approach consists of phasing out both taxes by steady and equal cutbacks in the tax rates until their complete abolition.

The first option is more acceptable in the current circumstances. The recently enacted exemption of reinvested profits can be viewed as the first step towards removing corporate income tax. Yet, this approach involves serious pitfalls, such as the likelihood that the reform will be halted halfway. The outstanding tax burden on labour will stimulate artificial capital flows and underreporting of incomes, a prospect likely to spawn imprudent attempts to resort to other forms of taxation or to revert to the current arcane and unwieldy mess of taxes.

The other alternative requires profound understanding of and commitment to steady reductions in the tax burden. Its coherency and anticipated results would gain broad-based public support, reducing the risk of the reform being terminated upon the replacement of government.

(From LFMI's tax and budget reform proposal)