The details of the tax reform are currently unknown, but it has already been announced that it consists in increasing the value added tax and the military levy.
In the near future, Ukraine will soon receive a coordinated decision by the authorities to increase taxes in order to attract additional financial resources to the budget. We are talking about additional fees in the amount of 300-400 billion UAH, or up to 10 billion dollars in equivalent.
What will the funds be used for?
Let's count. The approximate annual budget of the Armed Forces of Ukraine, included in the state budget (expenses of the Ministry of Defense of Ukraine), for 2024 is 1 trillion 164 billion 49 million UAH.
Of them:
- UAH 862 billion (74%) — for maintenance of servicemen of the Armed Forces of Ukraine: payment of financial support and wages, food, purchase of uniforms, ammunition and means of personal protection;
- UAH 265 billion (23%) — for the purchase of weapons, equipment, unmanned aerial vehicles (UAVs) and ammunition, as well as repair of equipment;
- UAH 36 billion (3%) — for operational costs and infrastructure restoration of the Armed Forces of Ukraine;
- UAH 663.7 million (less than 1%) — for maintenance of the apparatus of the members of the Ministry of Defence of Ukraine.
If we take the number of the Armed Forces of Ukraine of one million people, it turns out that one fighter accounts for an average of about 862 thousand UAH per year, or the equivalent of 22 thousand dollars.
Let's take UAH 400 billion of additional revenues (the maximum figure) as a result of raising taxes and pass them through the basic spending matrix.
Thus, 75%, or UAH 300 billion, will be spent on staff maintenance. This will make it possible to maintain up to 350,000 soldiers. This is approximately 100 new brigades, but apparently the mobilized military personnel are planned to be used to replenish existing units and only a part to form new units.
From open sources it is known about the intentions of the General Staff of the Armed Forces of Ukraine to form ten new brigades as part of the Ground Forces of the Armed Forces of Ukraine.
And 25%, or UAH 100 billion, of the increased amount of taxes will go to technical support (not individual). This is the equivalent of 2.5 billion dollars. If we assume that all these funds will go to equip new brigades, it turns out that one brigade will cost 250 million dollars.
An average of 31 tanks, more than 100 infantry fighting vehicles (IFVs), fifty units of other armored vehicles (MT-LB, armored personnel carriers), 36 units of large-caliber artillery (self-propelled guns and towed guns) need to be purchased for one separate mechanized brigade. In addition, it is necessary to purchase 18 short-range air defense systems, 18 anti-tank weapons, engineering, reconnaissance, sanitary, and repair units of equipment, as well as man-portable air-defense systems (MANPADS), mortars, unmanned aerial vehicles (UAVs), and up to 1,000 various vehicles.
Tanks cost up to 100 million dollars, infantry fighting vehicles (IFVs) cost another hundred, and other vehicles cost up to 30 million. In general, taking into account that not everything will have to be bought, the estimate is 250 million dollars. it may be enough for one new brigade.
Thus, additional taxes in the amount of UAH 400 billion will enable:
- finance the involvement of 300,000 people in the existing brigades (replenishment);
- to form ten new brigades (more than 30,000 people with full-time equipment and weapons).
At the expense of what income will expenses be formed?
The Ministry of Finance of Ukraine is working on a draft law, according to which it is planned to increase value-added tax (VAT) (to 22-23% from the current 20%, i.e. by 2-3%) and the military levy. As for the latter, the increase is larger: from the current 1.5 to 5%, that is, in absolute terms, taxpayers' expenses will more than triple.
As an additional option, the spread of the 5% military levy on the income of individual entrepreneurs is being considered (individual-entrepreneurs currently pay a maximum single tax of 5% of the revenue and 1.5% of the military levy when paying wages to employees or from the minimum wage,if there are no such employees).
The Minister of Finance of Ukraine, Serhii Marchenko, estimates an additional budget deficit of $5 billion, or UAH 200 billion.
However, the government plans to collect twice as much money, in any case, such predictions are heard.
The dynamics of execution of the consolidated and state budgets of Ukraine for January-December 2022-2023 (according to the monthly report of the State Treasury Service of Ukraine dated January 25, 2024) shows that, in general, the budget increases fees during the war (see table).
This is explained by the faster dynamics of expenses compared to the dynamics of income growth: 146 vs. 141%, a difference of 5%, which went into additional deficit.
On the one hand, this indicates high mobilization by the government of all available sources of funds, including international grant support (which is part of the budget revenue structure).
On the other hand, there is an extremely low indicator of the specific weight of tax revenues, which in the structure of the total volume of revenues to the consolidated budget amounted to 53%, which is an absolute historical anti-record.
At the same time, 33% are non-tax revenues (of which 27% are own revenues of budget institutions), as well as official cash transfers from the European Union, the United States of America, and other countries – 14%.
By the way, budget institutions' own revenues (medicine, education) should also be considered withdrawals from the economy – these funds, in addition to taxes, are paid by businesses and the population.
It can be said that out of 10 UAH of revenues to the consolidated state budget, 5-6 UAH are paid by the population and businesses in the form of taxes and another 3 UAH in the form of payment for the services of budget organizations. This is up to UAH 9 in total. Only about one and a half UAH goes to the budget of Ukraine due to grants from donor countries.
Value-added tax (VAT) brings to the treasury of our country about UAH 580 billion per year, mostly these funds are made up of value-added tax (VAT) charged on imported goods. A 3% rate increase will increase this indicator by UAH 30 billion (taking into account the dynamics of the economy and inflation in 2024).
The unified tax of 2023 brought UAH 56 billion to local budgets, i.e., taking into account inflation, introduction of a special 5% military levy for individual entrepreneurs (taking into account the dynamics and inflation of 2024 and various types of collection of the unified tax) will lead to additional revenues in the amount of 60– UAH 70 billion per year.
More than UAH 100 billion annually can bring an increase in the military levy.
In total, this gives approximately the same UAH 200 billion that Serhii Marchenko spoke about, but taking into account the need to attract UAH 400 billion, the sources for approximately the same amount remain unclear.
In terms of the fiscal burden, 50% will fall on employees, 35% on entrepreneurs, and 15% on end consumers, i.e. also on the population.
Is this plan realistic?
The above indicators are calculated purely theoretically and do not take into account one key factor – the economy's reaction to tax increases.
Such a reaction will naturally be reluctance to provide accurate data, especially in the labor market, where the specified processes are strengthened by the mobilization of personnel. That is, in the case of a multiple increase in taxes, the business can multiply the official indicators, and in reality the representatives of the business will pay the same amount of taxes as before the "reform" (or maybe even less).
In addition, tax immobilization resources of the economy are used to fill the budget already at the maximum – it is impossible to increase them in the main areas of taxation (taxes on labor, entrepreneurship, consumption).
All this is reminiscent of the fiscal model of the 19th century, when wars were fought "for taxes" and the prolongation of the war led to the tightening of belts and increased taxation of ordinary people.
In the 21st century, the key driver of economic growth is consumption, and Ukraine is no exception in this sense.
Therefore, during a crisis (pandemic, war), the state should stimulate an increase in consumption due to an increase in the solvency of the population and investment activity of businesses.
Stimulating the process of consumption and solvent demand of the population (end consumer) leads to a natural, not a mechanical increase in tax revenues to the budget.
In this model, taxes on labor must, on the contrary, be reduced, especially for the population with a minimum level of income (in part, this task is performed by the introduction of a progressive rate "for large incomes").
That is, instead of increasing the military tax rate, it was possible to introduce a progressive rate for incomes over UAH 100,000 per month. This would make it possible to collect an additional 20–30 billion UAH per year.
It is also necessary to stimulate consumption by lowering value-added tax (VAT) rate on social goods (final consumption): bread, milk, eggs, vegetables, etc. And also by canceling value-added tax (VAT) on utility services. The preferential value-added tax (VAT) rate for such social goods and services could range from 0 to 10% at the base rate of 20%.
At the same time, an increased value-added tax (VAT) rate of 25–35% could be introduced on luxury goods, new cars, the purchase of expensive real estate, and expensive jewelry.
In addition, Ukraine almost does not use such a tool of budget formation and national reserve fund (which we do not have at all) as export duties (although Ukraine is a raw material country).
This type of tax brings to the budget an insignificant 500 million UAH per year (mainly duties on scrap metal and residual duties on sunflower seeds).
Although the introduction of the rate of export duties in the amount of 5-10% could bring up to 50 billion UAH of additional revenues to the budget (now these funds are deposited in the accounts of grain traders in the form of surplus profits).
Another direction is the increase of the rent for the extraction of natural resources and the gradual cancellation of the zero value-added tax (VAT) rate for the export of raw materials (it is worth leaving the zero value-added tax (VAT) rate only for the export of goods with a high level of added value). Currently, the state reimburses approximately UAH 130 billion of value-added tax (VAT) per year, mainly to businesses exporting raw materials. The introduction of a non-zero value-added tax (VAT) rate for raw material transactions during export will provide an opportunity to save up to UAH 100 billion per year in the budget.
That is, up to UAH 170 billion can be found by introducing taxation of raw materials business that works for export, as well as through an additional tax on the purchase of valuable assets and on large incomes.
Conventionally speaking, it can be done that raw materials business and elites will pay for the formation of ten new brigades, especially since ordinary people will have to serve in them.
The remaining UAH 200 billion can be found at the expense of the National Bank’s of Ukraine purchase of military bonds in the amount of UAH 50 billion per quarter. This would increase inflation from the current 4-5% to 10-15%, but avoid extremely high taxes on labor and business.
So it's not the worst price.