What a tax code should be like

Emzar Djgerenaia

In his time Plato raised the question that the word “my” was source for all misfortunes and if it were changed into the word “our”, misfortunes would be over, i.e. as Plato says, the reasons of all misfortunes lie in property, among them in the right to establish tax.

Incidentally, when speaking about the history of Ancient Greece, we should mention the example of Sparta where land and house was common property. As Spartan warriors were strong, Spartan method justified itself, but like Plato’s theory it also met with a failure, as there is no use in struggling inborn human traits.
Subsequently, there were views of his disciple, Aristotle, criticised by Plato – the greatest right is the right to property as well as the right to imposing tax. The first taxes appeared in the world as well as in our country at the time when Greece started to protect human property. The right to impose taxes was given to the Senate. Tax is purchase of right to production and consumption. Consumption is taxed or changed for the clan or political elite that rules the country. Once there is a king, people think that all property in the country belongs to him, i.e. the principle is that everything in the country belongs to me. If there is limited monarchy or ruling, then everything belongs to us – king and people. During democracy private property was declared a priority.
The most difficult thing was formation of the first tax reform system in Roman Empire with there being about 200 taxes, among them all principal taxes that are in force in our country, etc.
The world has always debated about who has the main right to establish taxes or in other words, the right to advantageous appropriation of wealth. Thus, tax is an excessive part of wealth appropriated by the ruling elite through voluntary or compulsive fooling of co-citizens. (How and for what purposes the ruling elite spends the wealth is a different topic for conversation). This shows the extent of country’s progressiveness or non-progressiveness. Therefore, the principal injustice between “my” and “your” has not yet been eradicated and regrettable as it might be, this will never happen.
Nowadays, scientists, philosophers and economists argue about the ways of restoring justice in the society so that we could transit to the principle of fair consumption of wealth. No studies have produced any results. There is no formula. The XIXth century is the most difficult due to a number of reasons. Formation of the present taxation style has begun in this very century, i.e. absolutely compulsory, non-equivalent style dictated by interests of strong countries that ignore local production (a tax-payer does not receive either repaired roads, safety, stable entrepreneurial environment or social system in return).
What kind of style is that? As far as we know, these are mainly direct and indirect taxes. The XIXth century was a century of reforms performed in such style. The reform was difficult. Sweden prepared tax reform for 5 years in the end of the 80s and Japan in – 1978 to 1988. The USA implemented reform in three phases, which was fully justified, as implementation of reform is not easy. It is undesirable that the reform should be implemented for two or three months here.
The following principal factors are characteristic of taxes: the first is an axiom – a country should determine which economic model would be suitable (In this sense, Georgia made a great mistake). Once the model is determined, fiscal law and property relations should become attached to it. Following the determination of model, one or two priorities are established. They will really be a priority and will play the role of dominant in regulating all kind of property and tax relations being finally introduced in tax system.
What are main functions of a tax?
The first main function of a tax is fiscal (mobilisation of budget funds). The second function is social; providing stimulus to economy, investments, regulation of property issues. The third function is political, the function of international integration.
Taxes should be based on the following principles: 1 – principle of generality and completeness; 2 – principle of firmness and implementation; 3 – principle of balance in social and entrepreneurial sphere; 4 – principle of integration in international system; 5 – principle of consent and partnership with tax-payers; 6 – principle of strategy; 7 – principle of being outside the policy; 8 – principle of non-corruption and transparency; 9 – principle of regional balancing.
What are functions and objectives of tax system? The first and principal function is a fiscal one, i.e. a tax should lead to mobilisation of budget funds in the public treasury. The second function is a social one, i.e. money can go to budget but this might damage citizens’ interests and even do harm to social sphere, healthcare, education, etc.
Otherwise this can be explained as follows: Georgia consumes about 700 thousand tons of grains yearly if we impose tax mistakenly, i.e. if interest rate proves to be too high, theoretically budget revenues will become greater, but this will damage social layer for which bread is main foodstuff.
Today we use the following way of evading high interest rates: by smuggling that has not decreased but rather increased for the last quarter, by increasing bread prices, decreasing its weight and growing humidity. Therefore, we balance bread price, i.e. protect its social side.
The same concerns fuel price. The price for oil products has been rangingfrom 25 dollars to 30 dollars per barrel, but it has not been changeable here. What happens? Petrol is not filled to the end in petrol stations, there is not sufficient octane in the petrol, it is a contraband product. In other words, the three factors serve to balance social side of tax.
The third issue is that of macroeconomic investment stimulation. Besides, a tax should be used for filling budget; its main function is to make economy work. Our taxes should increase production in the country. If a tax does not promote business development, it will bring nothing but problems.
The fourth issue is political. The greatest corruption element is the Tax Code itself. Suppose, I am a Parliament member or representative of a certain party, and I have my own business. I will ask not to tax this or that thing and tomorrow I will give my vote and support to something or somebody. Thus, a particular business liable to tax by above-listed criteria becomes tax exempt. Production, consumption, supplies of a certain commodity become tax exempt and the country suffers great losses. Instead, we turn out to be a winner.
There are also other examples – when a political party makes promises in its programme depending on which social group is most important. For instance, there are 900 thousand pensioners in Georgia now. It is a good number of votes. Thus taxes are established in such a way as to win sympathy of people and their votes. 70% of old Georgian people support leftists. If I am a politician and preach left ideas, call rich people robbers, hooligans and bandits, I do it because it is politically beneficial.
The fifth part is part of international integration. It is very important, as we can not establish taxes without agreeing with the rest world on the subject. There are certain obligations. If we create protectionist barriers, other countries will do the same and our business will stop development. Therefore, it is necessary to solve the issue of taxes in single frames. When creating a code, functions should be viewed in context. It is also necessary to take into consideration present trends of the world – the same demographic explosion that has already sharpened deficit of resources. Wars have always been caused by taxes and resources, but in the future wars will be caused by distribution of resources. Besides, there are also new technologies that generate demand in the market, make society more polar and cause inequality. 80% of technologies belong to 20% of the world countries and vice versa, 80% of the whole world do not possess even 20% of technologies.
It is very important that tax becomes integrated in the whole world and the role of indirect taxes, for instance, the same VAT and excise, increases. 70-60% of federal taxes in US are direct taxes from corporate or personal profit while 14-15% come from VAT. The situation has slightly changed in Europe with VAT now making up about 50%. In our case, when creating new tax code, we should take into consideration three main directions: first, Swedish model is very interesting with economy being socially oriented. This means that in Sweden most part of wealth goes to medical service, education of socially unprotected layers. This is undoubtedly good for those who need it, yet this hampers business development. and might negatively affect Swedish economy in the nearest future.
The second direction is corporate burden. Suppose, corporations have benefits. Moreover, less funds go to education, culture, etc. and corporations have the right to make investments.
The third part is balanced part when no losses are caused in either corporation or social side. The whole world works on the direction and there are great problems in it.
Such direction has become a subject of criticism. The reason of famous depression in the USA was accumulation of great capital by corporations, but capital did not become a market. The US government has provoked growth of workplaces thus creating market artificially.
In making Georgian fiscal model, generality and entirety are main principles to be taken into consideration in our situation. Tax should be general and entire. Today we wish that a firm should pay tax whereas a simple citizen should not. If we ask a simple taxi driver in a street why he does not pay tax, he will say that the car does not belong to him. Code should be characterised by firmness and implementation. A tax should be planned for long term. It took Sweden five years to prepare tax reform because it was planned for long term. Three thousand changes were made in the Tax Code of 1998, which is unacceptable.
There is a famous formula for determining optimal tax burden connected with population’s taxes, i.e. its purchasing ability, structure of consumer basket, profit level of our country and, certainly, business expenses in relation to total profit.
Investor is interested in great profits. Therefore, existence of market requires low risks, rich consumer basket and low tax burden. In accordance with the above-mentioned formula, tax burden makes up 67% in Georgia. If we create code without correct determination of tax rate, the tax will not be paid out and there will always be grounds for corruption, which will be as destructive for the country as the Tax Code of 1998.
Subsequently, there come balancing and social spectre. Tax should be viewed in context with other economic events, as social issues are concealed behind each tax.
In conclusion, we should say that it is necessary to make a code for many years. The code should contribute to business development and attraction of investments, it should be optimal and easy for perception and implementation. I agree, it is very difficult, yet it is possible.