Time to change social relations
Problems of reforming the system of labor reallocation in Ukraine
Labor that is implemented through economy is the only funding source for any and all economic processes, including those that are financed by state through taxes. By means of taxes the government redistributes a certain part of labor itself. Even for the formation of profit, which is also one of tax sources, proper conditions for labor functioning are needed, because it does not only create products and services, but also determines solvency of the market. Other current funding sources do not exist, because only wage and profit constitute the new net product (added value). Therefore, reallocation of labor has the highest social and economic priority.
However, the wage in Ukraine is redistributed not only through taxes. There are "charges" on wages that are not recognized as taxes, but are part of the labor that is alienated from incomes of the employee.
The historical basis for "charges" on the payroll is the Soviet practice of creating public consumption funds. These funds are inherent only to socialist social system where private property "is not created." The theoretical justification for their creation, as it was believed in soviet times, gave Marx in the "Critique of the Gotha Program" (1875.). Functionally they were used to cover "free" education and health care, cultural needs and welfare of the population (including the construction of the "free" housing), physical education and recreation, social security and insurance, even (and to considerable extent) - the additional payments to wages.
Although these needs were funded by the state budget, the revenue side of the budget itself was provided by contributions from a planned profit of socialist enterprises, i. e. by reallocation of a part of employees’ wages for this purpose. Simply put - largely due to underpayment of wages to employees. This underpayment was designed as a form of "charges" on the payroll, which accounted for more than half of the wages earned by the company over the last month and were determined by its total sum.
Eventually, in the time of Independence the variety of functional purposes of social consumption funds became limited only by a function of financing social security funds, which are the type of a common pot: if the insured event does not happen, then the individual employee’s money are lost. In addition, they are "public" by definition, that is not owned by anyone specifically. Formally, they do not belong even to the state, because presumably it is people's money ... Filling these funds is obligatory for all and employers do this without the knowledge and consent of the employees.
Definition of obligations and their subsequent payment are made by the employer through charging a single social contribution (Single Contribution) as a percentage of salary payments and transferring money to the pension fund. Single Contribution rate depends on the class of professional risk. There are 67 such rates and they encompass professions from activities in the humanitarian field to coal mining. So the Single Contribution rate ranges from 36.76% for class 1 to 49.70% for the 67th class.
Pension Fund distributes these funds in four areas of social security. For example, the first class of professional risk allocation structure is as follows:
90.32% - contributions to the pension fund, 4.08% - unemployment insurance, 3.81% - insurance against temporary disability, 1,80% - insurance against accidents and occupational diseases.
In addition, there is the so-called personified part of a Single Contribution paid by the employee (or rather - his employer as a tax agent, charging the employee's salary and transferring the money in the same solidarity pension fund). Approximate size of the deduction is up to 5% of salary, of which 2% is pension fund.
As we can see, the bulk of the Single Contribution structure takes solidarity pension fund.
However, the employer has no inherent source for funding "charges" on the payroll. This source is a potential full amount that he should pay for the employee and would be happy to do this and the worker would have had to perform by himself all the obligations established by the state. "Charges" automatically separate part of a salary and make it a common part, i. e. socialize it. This violates the private nature of labor: the right of an employee to use his work according to priorities of his family is strictly limited, and if he did not live up to retirement then money for the family would be lost. The potential capitalization of these funds during the working life definitely will be lost since paying interest on these funds is not provided.
In addition, the amount of obligations to pay taxes and solidarity pension and social contributions exceeds by size the source of their coverage, which is the same salary.
Here is an example of a particular manufacturing plant: you have to pay 2767 UHA net wage per full-time employee for the month. How much money should you have on account?
Accrued salaries: 3377 UAH
Held Single Social Tax (Single Contribution): 3377 * 3.6% = 122 UAH
Personal income tax (PIT): (3377-122) * 15% = 488 UAH.
Charged single social contribution (Single Contribution): 3377 * 38.47% = 1299 UAH
Additional tax (VAT) of 20%: (3377 + 1299) * 0.2 = 935 UAH
Answer: The account must contain 3377 + 1299 + 935 = 5611 UAH
Here taxes included: 2844 UAH;
salary: 2767 UAH.
This example shows that the commitments are higher than wages. In addition, not in all sectors Single Social Tax is 38.47%. There are also much higher ones. On average in the economy, this ratio is 42%.
Market is a place for goods exchange – always with this plenty of liabilities as compared to salary. Salary is the only source of funding for this exchange. This means that the goods and services on the market can not be exchanged in compliance with the legislation of Ukraine. But we're not going to look at this closely here.
Imagine that somehow the goods are sold, the employer has paid all obligations and wages are paid to the employee. The result of the operation is that worker got in his pocket 2767 UAH.
But for this money he should buy goods and services and inevitably ... pay VAT, which is 1/6 of the amount of purchases. That is, for the consumption worker must pay from the resulting net wage additionally 461 UAH of VAT.
Therefore, we should recalculate labor-to-liability ratio:
Net realized labor / salary:
2767-461 = 2306 UAH.
2844 + 461 = 3305 UAH.
Thus, to play a full cycle of labor in the real economy the legislation of Ukraine sets this "proportion": 3305 UAH of liabilities to 2306 UAH of net effective labor (wages).
Deficit of financing sources:
2306-3305 = (999) UAH or -43.3%.
We can see that through taxes and social contributions all salary is removed in real time and also a big balance of uncovered liabilities remains. But maximum withdrawal limit under the Pareto law (optimum) is 32%. That is, from one thousand of net effective wage maximum 320 UAH can be extracted. And in this example, for 2306 UAH of wage amount of tax liability would make maximum 738 UAH.
This example illustrates a violation in state regulation of Ukraine for one of the key relationships in economy: extent of labor reallocation through taxes and contributions to the solidarity public consumption fund.
Also future value of money, alienated from employee for the formation of Pension Fund in the amount of 35% of the average monthly wage 3370 UAH during 35 years at an interest rate 6% per annum is estimated at 1.7 million per person. And family consists usually of two such persons.
This has a negative impact on the finances of the family and forming its private property. The whole Ukrainian society can not prosper by their own labor and is being destroyed by improper interaction between its major social institutions: family, community, labor, savings and private property.
It should be noted that the redistribution of enterprises profits as defined by given methodology is 50%. This, of course, is higher than 32% but not so disproportionately as in case of wages reallocation. That is, in the current situation there is a deep misbalance also in the sense of redistribution of two major economic categories: labor and income.
Displayed imbalance in reallocation of labor is the cause for big part of Ukrainian economy to operate underground, corrupt society, persistent non-payments and inflation, insecurity and instability of the national currency, the destruction of Ukrainian society in moral and physical sense.
Ukraine's economy "functions" without current legal source of funding social and economic development. Both the state and society can not make profit in the legal field.
Such a situation is the cause for conflict between society and government, which has found its expression in all Maidans since Independence, as well as for current events in the East of Ukraine. The more families are dependent on hired labor (it prevails in family budgets through industrial areas of the East), the worse situation they find themselves in. This is why Russian propaganda falls on a more fruitful soil than in Center and West of Ukraine, where the structure of employment makes society less responsive to pointed earlier economic misbalance.
Proposals on Reforming
In order to overcome these economic and social problems the Alternative Concept of Pension Reform was developed, that is the reform of labor redistribution in Ukraine. It is proposed to start the process of gradual and consistent replacement of sources for funding the pension needs of society from solidarity to private ones and to achieve a minimum level of residual solidarity pension need in society in a time span of 35 years. Implemented labor is the only source of financing for both the state needs and pension need of society. This is why the reforming of tax and pension systems of Ukraine is proposed by this concept in their unity and interdependency.
So the concept proposes:
- cancel Single Contribution and stop the formation of a new "solidarity" seniority;
- determine the rate of VAT at 12% or better replace it by sales tax (ST) with a rate of 3.6% (calculated as a difference between input and output obligations under invoicing; acts as VAT but without tax invoices and does not create contrived increase of realizable value);
- determine the rate of corporate income tax at 20%;
- set the rate of personal income tax at 15%;
- Leave unchanged "personalized" part of social funds as (aggregated) 5% of salary, excluding its pension contributions;
- set a target pension tax on sales in the form of ST to finance the balance of acquired "solidarity" pension seniority at the rate of 4.5% and decrease it annualy by 0.3% (due to replacement of VAT by ST aggregated rate in the first year of this reform will be 9% and would decrease by reducing the rate of target pension tax);
- set excises and customs duties according to a harmonized system required by WTO;
- establish an authorized financial institution (or several of them ...) to accumulate private pension savings of citizens, which are to be formed by their personal contributions at 10% of salary under NBU discount rate with monthly interest accrual.
Proposed system is very close to that introduced by Georgia in 2009: 18% VAT; Social tax (that replaced PIT) 20%; Corporate income tax of 15%. However, it also contains significant difference from the Georgian tax reform: Georgia refused to fully finance previously gained solidarity pension seniority and provided assistance to retirees on budget expense only in case of emergency. Those who had property to be sold or live in secured family were banned from this assistance.
The Alternative Concept of Pension Reform in Ukraine offers financing previously acquired pension seniority and simultaneously setting up an arrangement for private savings, which resembles the pension system in Chile: each employee is to receive his own retirement account, which can be inherited by his successors. This would help to speed up the creation of motivated private owners in Ukraine.
In the same time the state will get its own significant financial resources that are not borrowed from outside and designed for the needs of economy development.
Proposed system is to ensure the level of reallocation for implemented labor at 57% in the first year of the reform, and gradually decreases down to 32% in the future. Reducing of labor reallocation can only be due to the rate of special pension tax. It is not desirable to change other taxes because they redistribute relative but steady, invariant value that is both an economic resource and socializing factor in society.
This system provides a 20% surplus for funding needs of the consolidated budget, pension and other social insurance funds as compared to the combined needs of 2013 and leaves a substantial margin in funding sources for redistribution through customs duties and excise taxes.
But healing effect on the economy and society comes at once: social processes acquire economic content, financing sources become available for funding both state budget, public consumption funds and family budgets themselves. Gets more balanced interaction between basic social institutions: family, community, State; accumulation of labor savings and private property. Society acquire greater capabilities to interact through the labor exchange.
Concept of Pension Reform - Reform of labor Redistribution in Ukraine (in ukrainian): http://paket-reform.in.ua/t/topic/143