Friday, January 13 2023 16:29
Emmanuil Mkrtchyan

Declaration of income: We have not achieved tax egalitarianism -  Expert

Declaration of income: We have not achieved tax egalitarianism -  Expert

ArmInfo.The past couple of years in t Armenia's economic policy were marked by the adoption of a number of important, one might say, key legislative acts aimed at  increasing investment attractiveness and stimulating economic  activity in the country.

Among them are those that caused controversy  in society and the expert community and were often criticized in the  media and social networks, such as the reform on property tax, income  tax, social benefits, as well as the law on declaring the income of  individuals adopted at the end of last year.  The universal income  declaration system itself seems to be quite a progressive thing, the  need to introduce which has been discussed for a long time. Tigran  Jrbashyan, a well-known economist in Armenia, Director of Management  Advisory at Ameria Advisory , does not dispute the certain  progressiveness of this initiative of the government. However, he has  something to say about the shortcomings and possible risks that need  to be taken into account in the implementation process.

- Mr. Jrbashyan, after the adoption of the most important economic  laws, our government and the economic parliamentary bloc admit from  time to time that they are somewhat incomplete and need further  improvements, promising to make the necessary adjustments as needed.  In this regard, could you please tell us whether there is a need for  a system of universal declaration of income adopted in the country in  December?

- Well, I would say that the issue related to the mandatory  declaration of income is not new, it was discussed several years ago,  when work was underway on the new Tax Code. We are talking about  2016, 2017. I then took an active part in this process at the level  of the Advisory Council under the Ministry of Finance. And then we  were closely engaged in this issue. However, while we did not  consider it as a separate issue, a more comprehensive approach to  reforms was proposed. The system of universal declaration of income  was discussed in line with my proposal at the time to introduce a  system of horizontal (flat/proportional) taxation. Then this  proposal, unfortunately, was not accepted. However, already 3 years  later, the new government nevertheless came to the realization of the  need to introduce a horizontal income tax scale, and it is in this  context, the issue of the universal income declaration system began  to be discussed again. And the context itself was quite broad and  interconnected in terms of economic logic. This is not only a  proposal related to a flat income tax, but also related initiatives  such as changing the property tax and introducing a mandatory income  declaration system.

- In fact, the first two reforms were carried out, although I'll tell  you, from my point of view, with big flaws and the absence of the  most important component of economic policy, the element of  stimulating growth. But that's another conversation. Now the third  reform is underway, and what is your opinion?

- Basically, I agree with you. There are lots of flaws. There are  also many of them third reform, in the law on declaration of income  of individuals. However, it is important to start reforms, therefore,  I consider the very fact of the adoption of all three reforms to be a  rather positive development. At the same time, it can be said that,  to a certain extent, the latest draft law is somewhat pulled out of  the general reformist outline.  How's that you may ask, I'll explain.  Let's get back to income tax in this context. Its horizontal scale is  still debated. There are very serious economists in Armenia who speak  in favor of a transition to progressive taxation. But I was a  supporter of a flat scale, because: and here a direct connection  between the type of income tax and the system of mandatory  declaration of income of individuals is revealed. The whole point is  that, our income tax is not really an income tax, it is a payroll  tax. Accordingly, when you,  "provide" the state with the opportunity  to record only income that is associated with wages and payments  equated to it out of all income received from various sources and  forms, then, accordingly, the whole essence of income tax, as such,  is distorted. After all, in fact, and basically, income from wages,  rather than income from any other sources, fits under the scale. And  if so, and it is exactly so, then it turns out the following: the  state thus puts various recipients of income in non-competitive  conditions. As a result, some incomes (salaries) are subject to  income tax, while others are not.

- What other income are we talking about?

These are, as a rule, the so-called passive income, that is, income  from real estate, from unfixed employment. They were in a completely  preferential regime, since most of the citizens of our country do not  pay the established taxes from them. Accordingly, there was a  definite and serious problem related to the fair distribution of the  tax burden. That is why I was a supporter of the adoption of a  horizontal / flat taxation scale in the country in order to minimize  the motivation of employers to hide the high salaries of their  employees. And this led to good results. Today we have a more  complete treasury in terms of income tax, because the salaries of  many people have moved out of the gray zone. In general, all these  envelopes with " money under the table", have somewhat (not  completely) lost their meaning under the horizontal scale of  taxation. However, here another acute problem arises - what to do  with fixing other, passive incomes? And accordingly, the income  declaration system, first of all, should find the answer to this very  question and pursue the goal of providing a more complete tax burden.  Therefore, I believe that the adoption of the law is the right step  in the right direction, and it is connected with these three  components that we have noted above - income tax, property tax and  mandatory declaration of income. In general, there are still several  types of taxes and activities that will need to be dealt with, but  these are issues that need to be returned to after the full  implementation of all three reforms.

And yet, why is everything not going so smoothly?

The problem is how it will be implemented. Here I have a lot of  questions about the adopted law, because, in general, it was very  important that its implementation take place in such a form and in  such a way as to correspond as much as possible to the spirit and  context that we are talking about. This is what I don't see.  And  this is where I start to run into problems. - I'll tell you that, as  it seems to me, the authors of the bill were not inclined to go into  in-depth analytics. For them, everything is as simple as shelling  pears: the system itself is anti-corruption and is part of the  overall fight against corruption, and they say that this is how it  should be implemented. I completely disagree with the anti-corruption  essence of this law, as it seemed before the adoption of the law.  After all, everything related to the anti-corruption fight has  already been done in the framework of previous bills. In particular,  this issue has already been resolved with the adoption of mandatory  declaration of income and property of civil servants, moreover not  exclusively the declaration of income, but also of property! That is,  this issue had already been resolved by the time the law was adopted.  But one of the biggest shortcomings turned out to be the fact that  the government has not been able to clearly explain to either the  expert community or the population of the country what is the purpose  of introducing a universal declaration system. Do you know why?  Because, in general, when it is announced that we want to establish a  system for accounting and controlling income in the form of a large  and heavy database, then this should be done according to an  efficient and rational scheme, and so that the costs do not exceed  the benefits. And what our officials have prescribed in the law in  terms of its universality, it can be stated with confidence that the  costs of the functioning of the system will in no way be compensated  for by the income that the society will be "taxed".

- Well, maybe we are so rich that we are ready to be guided by  principles?

- The point here is not in principles, but rather in economic, fiscal  justice. Despite the fact that we formally have a proportional scale  of taxation in law, in practice, given the absence of a system for  fixing non-wage income, a regressive income tax scale actually works.  Wealthy people generally don't get their income from paychecks, and  it turns out that whoever earns the most as an individual pays the  least in income tax. Thus, the main goal of the reform is not the  fight against corruption, but the equalization of the income tax  system, if you like, the establishment of tax egalitarianism.  -There  was a lot of discussion in the press about how he would fill out his  declaration, for example, an old woman  r selling herbs in the  market, or a peasant who had long mastered a tractor or mower, but  still had problems with the Internet? Other terribly funny examples  were cited,  even though it's not really that funny.

-Because the problem is that there is no "universal" income  declaration system anywhere in the world. This is nonsense! Believe  me. Because there is a certain level of income, below which the  system does not justify itself either morally or technically, that  is, it does not justify itself transactionally. Each state, based on  the state of development of its public institutions, society, and its  level of modernization, has a lower limit beyond which it makes no  sense to go beyond. The analytical data processing system, its  artificial intelligence will not be able to cope with such  "universality" that our legislators have envisaged. Its fiasco is  inevitable.

- Probably, it is impossible to give the entire population of the  country to the "care" of artificial intelligence, completely  ignoring, figuratively speaking, the level of emotional intelligence.  It is not clear what makes the economic bloc of the government so  zealously run ahead of the locomotive? Certainly there is no fear of  getting under the wheels. Maybe there are reasons we don't know  about? Maybe you just need to put them all on the hook? And taxes  have nothing to do with it?

- I have no answers to your rhetorical questions. I can only give  examples of much more developed countries where there is a "cut-off  line". So in the US, the system takes into account your sources of  income, social status, age, and begins to analyze with an income of $  12,950. This is the minimum level set for 2022 and is reviewed  annually. Also in the UK, the minimum income requirement is 12,570  pounds. If the income is lower, no tax returns are submitted. Because  the base becomes so heavy, so complicated, and its administration  will cost so much more, that there is no need to talk about the  benefits. But we, as always, follow our own unique path, the meaning  of which is not entirely clear to me, and most importantly, this  meaning is not visible anywhere. I suspect that it is not fully  understood by the authors of the law either.  But there is another  very important point not taken into account in the law. It refers to  the fact that there is no concept of "declaration of income" as such.

There is the concept of "declaring income and property". We must not  overlook the  issue of property. Why this is done, I don't know.  After all, everyone knows that people receive income and carry out  expenses.  The idea is that the difference between current income and  expenses leads to a certain accumulation of assets in their various  forms, in any form. And this applies not only to real estate, but  also to movable property, deposits, securities, jewelry, works of  art, intellectual rights, etc.. This is the basic, main idea of  universal declaration. When the size of the property grows noticeably  disproportionately to the income received, then the "red light"  lights up. And in our draft law, this logic is not visible. There is  no clear idea that the system starts working only when you include  income, expenses and asset size in this chain. But if you do not have  one important link - property / assets - then the system does not  give anything new, no new information load, it only increases the  degree of responsibility of taxpayers, and at the same time creates a  great temptation for the state system to use this degree of  responsibility in a selective form. And this is very dangerous.  Another very important and unfinished detail in the law is that  expenses of a certain type and size involve certain tax deductions.  That is, let's say spending on health care, on education, on cultural  events, on the maintenance of parents - pensioners, underage  children, expenses on certain registered forms of charity, etc. may  be deducted from your total taxable income.

This is the set of deductions by which the state tries to connect  citizens to the system of creating public goods, this is a tool that  allows stimulating citizens to actively participate and form this or  that social environment. For example, through deductions for the  maintenance of children, the state sends a signal to society that it  stimulates the birth rate. Through this kind of deductions, the state  can support culture, health care, respectively, increasing or  decreasing the amount of deductions, somewhere more, somewhere less.   This system is only provided for in the law, it is also necessary to  develop appropriate mechanisms that should work. Another issue is  that it is unfinished. In world practice, the tax return also takes  into account all types of taxes that have already been paid before.  Suppose you had property and paid property tax - this amount should  be deducted from the calculated tax. Or you had a bank deposit and  paid income tax on it - the amount must also be deducted. Thus, at  the end of the year, the state may have to return the overpaid tax to  the citizen, rather than the other way round.

- It seems there are too many shortcomings. Didn't anyone consult the  economic bloc of the government? In the end, the law could have been  rewritten based on the experience of some other country and not made  so many gross mistakes...

- I can't say how it happened, but the important thing is that, in my opinion, the authors of the law did not achieve the goal of raising  the level of real effective taxation, both for the wealthy and for  the poor segments equally.  In its accepted form, this system will  be more focused on the not quite wealthy segments of the population.  How it will work with people who have large incomes and, to put it  mildly, are not constrained by the size of their assets, is not  entirely clear.

- Nevertheless, today they try to reassure us that we will have time  to prepare for everything, and the system will be introduced  gradually and improved at the same time. Can we count on it?

- In determining the populations that fall under the law at each  stage, the authors, in my opinion, did not take into account the  three main factors that should underlie the definition of stages.  Namely, the objective characteristics of the taxpayer, the amount of  income received, as well as the capabilities of the automated system  for processing basic information. To this end, it was necessary at  the first stage to determine the obligation to submit a declaration  by those who own expensive real estate, for example, in the amount of  more than 250 million drams, who have bank accounts also for this  amount or more, who own shares or are significant shareholders in  commercial resident companies who drive super-expensive cars, own  expensive unique pieces of art, jewelry, etc.

It is also important to include those persons who received income  during the year for which the declaration was submitted, which in  total before tax exceeds a certain amount (for example, more than 50  million drams). Moreover, this amount includes both income in the  form of wages and income from the disposal of real estate (rent,  sale, etc.), interest on deposits, dividends and interest on  securities, funds from ownership of property in legal entities,  income from art sales, royalties, etc. It is also important to  resolve the issue of inherited property.

The abovementioned criteria must act according to the <or> principle,  that is, at least one criterion must <work>. But even if there are no  obligations under any single criterion, the total amount is above a  certain amount (for example, 500 million drams). None of these are in  the bill. There, the stages are determined by the occupied municipal  or state position, the presence of a share in a commercial  organization, loans received, the beneficiary of government mortgage  programs, there are no clear quantitative criteria.  As the  analytical system developed, it was possible to change these levels,  thereby increasing the number of taxpayers submitting declarations,  gradually reaching a level where further reduction of these levels  becomes unjustified, based on economic efficiency. This is exactly  what will be at the moment the limit of the minimum income that  requires declaring. Moreover, naturally, it will be fixed at every  moment of time, and I don't think that it will ever drop to 1 dram. 

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