By Anna Gorbatyuk
With the dawn of decolonization in Europe from 1950 to 1970, the concept of sovereignty gained a superior position. It has led to a division of states between the ‘rich’ and the ‘poor,’ and has furthered developmental disparities that occur from differences in economic policies due to the will of prospering states, which use less advanced countries as grounds for experimentation. While developing as a “social state” (Piketty, 2014, p. 491) ‘rich’ countries have imposed a higher level of national income consumed by taxes; hence, developing countries were in an inferior position and became an experimenting tool. They were forced to decrease their public sector and evade a developing tax system.
The idea of the social state proposes a vast variety of expenses in the form of taxes for education, medical treatment, and military purposes. With the constant progress of a state, the need to advance social aspects was paramount: increase spending on education, medical technologies, etc. To keep up with economic innovations, stable proportional tax [1] may be insufficient, so governments can impose a progressive income tax [2]. This is the main tool of governments to ensure the constant development of the social state, which justifies ongoing tax increases and facilitates further development and modernization. This article aims to examine constellations between taxes and investments in the Ukraine – a highly corrupt country – in the framework of this tax system (Kuzio, 1999, p. 50).
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[1]Proportional tax: the rate is the same for everyone (“flat tax”) [2]Progressive income tax: the rate is higher for some than for others (depending on income)
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In the provided example, one can assume that ‘poor’ countries are dependent on either a capital inflow from the ‘rich’ or on the investments from a private elite sector. Such interrelated dependency creates a vicious cycle of capital stagnation as the influx of incoming funds is highly dependent on the investments made, which in turn relies on benefit-incentives of the elite. To examine this issue, we will take a closer look on the social construction of developing countries, namely Ukraine with relation to investment incentives.
A Ukrainian businessman and philanthropist, who would like to remain anonymous, experienced Ukraine’s corrupt and insufficient tax system after donating €30,000 to a rural-area orphanage in central Ukraine. During our interview we discussed charity investments and their relation to political incentives. Namely, the donator provided the orphanage with direct capital as well as domestic and medical facilities. Though ultimately the donation was considered direct income and the orphanage was made to pay a 20 percent tax by the Ukrainian government. As the orphanage started using new appliances like irons and washing machines the rates of electricity expenses increased, causing a greater need for funds, which could not be attained by the orphanage.
"How could a country prosper and experience a constant inflow of investments if the conditions and consequences of those investments would ward off all of the incentives to contribute?” (Anonymous, 2020). This case illustrates not only the issues of taxation and investment outcomes on charity, but also the taxation pitfalls that act as incentive–killers, blocking further development.
The phenomenon of an incentive-killer tax occurs out of the corrupt and self-interested motivation of political elites, who want to benefit from each and every investment, even those for charity. This is not a social tax that supports the ongoing development of the country, but rather a profit-driven decision of policy-makers. The imposed tax is a proportional tax on capital (as there are no progressive taxes in the vast majority of developing countries), which stand on the principle of flat percentage of payment, despite the type of investment. Construction of the taxation system leads to a vicious cycle of discouragement, which is a threat to developing countries, as investment inflows are one of the more crucial principles of prosperous discourse of a country.
“Currently, the private sector does not have any incentives to contribute to the poor, the sick, orphans or the disabled. The day you open a capital – you are under pressure.”
The need to reestablish a tax system and further the conditions of its implementation in a vast majority of developing countries has been articulated by a Ukrainian dissident and political prisoner, Semen Hlusman. “Only when the economy will be grounded on legal principles, businessmen will be able to pursue their social policies, be involved in charity and simultaneously feel that they will benefit. The answer relies not in concise and moral dogmas; we need a new tax policy,” said Hlusman. “Currently, the private sector does not have any incentives to contribute to the poor, the sick, orphans or the disabled. The day you open a capital – you are under pressure” (Semen Hlusman, 2007). According to Thomas Piketty, the author of “Capital in the Twenty-First Century,” there is only one solution for the reconstruction of the corrupt tax system – “a progressive global tax on capital, coupled with a very high level of international financial transparency” (Piketty, 2014, p. 515).
Taxes are determinant tools of the successful duration of the overall economy in a country. A legitimate economy will ensure smooth inflow procedures of capital and create conducive conditions for investors to make donations. Conversely, a state tax policy, which is based on self-interested governmental intentions will obstruct the inflow of investments to the country. Thus, capital tax based on illegal policy-making procedure and inflows of investments would be mutually exclusive, whereas unambiguous tax institutions and transparent economy would facilitate a tributary of investments.
References:
1. Andrushenko, N. (2007, August 3): I am happy that I didn’t enter the major political field. ZN, UA. https://zn.ua/SOCIETY/semen_gluzman_ya_rad,_chto_ne_poshel_v_bolshuyu_politiku_eto_daet_mne_vozmozhnost_delat_malye_shagi.html
2. Anonymous, A. (2020, January). Personal conversation.
3. Piketty, T. (2014). Capital in the twenty-first century. Cambridge, MA: Harvard University Press.
Kuzio, T. (1999). Contemporary Ukraine: dynamics of post-Soviet transformation. Boulder, CO: NetLibrary, Inc.
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Anna Gorbatyuk
Contributing Writer
Anna is an undergraduate International Relations student at Webster University with minors in Economics and Philosophy. Originally from Ukraine, she came to Vienna to continue her academic studies and professional development in the public policy field. Anna has a wide array of interests ranging from humanitarian aid affairs to global economic disparities. Currently she is developing an online platform with a global perspective for Webster students to facilitate academic exchange.
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