Next year’s budget continues to be a topic for heated discussions. The government intends to increase tax incomes by 101 billion drams. Particularly, tax incomes will increase by 82.2 billion and mandatory social payments will increase by 18.6 billion. What this increase is accounted for? The prime-minister removed the parentheses a little bit and said that tax incomes will increase due to bureaucracy and economic growth. NA standing committee on financial and budget issues placed on the website the draft version of budget for the year 2012, where the parentheses are removed a bit more. “Tax incomes for 2012 are planned in the amount of 692.6 billion drams, based on the accumulations of previous years and macroeconomic developments. Due to legislative amendments and bureaucratic activities, it is anticipated to accumulate 39.7 billion drams in 2012”,- is mentioned in the document. According to our officials it will be possible to accumulate 42.6 billion drams as a result of economic growth and the rest 39.7 billion drams by means of bureaucracy and legislative amendments. There is no clarification concerning increase of social payments. However taking into account that economic growth is anticipated by 4.2% for the next year, and increase of social payments by 15%, it is easy to conclude that the government will define stricter bureaucratic measures and will increase rates. By the way, the information in the previous issue of our newspaper concerning the increase of certain rates anticipated by the government indirectly confirmed the RA Minister of Finance Vache Gabrielyan. He did not exclude the possibility of reviewing the excise tax rates, but he considered it not as a change, but as a more accurate definition.
Why to gather more?
This question has been addressed for a month now, but there is no exhaustive answer yet. Armenia hasn’t returned to its pre-crisis indices yet and in given circumstances increase of tax burden is considered unacceptable. The government attempts to substantiate it by increase pensions and benefits. That is to say they try to convince the population that the increase of taxes by 101 billion dram is first of all done to increase the pension…. by 2500 drams. Fortunately, IT technologies allow getting any information within 5 minutes and making comparisons independently. As it is mentioned in draft version of the budget placed on NA website, expenses of social sphere will increase by 35.3 billion in 2012 in comparison with 2011 and will constitute 303.7 billion. For example, in 2012 205.4 billion drams will be allocated by the article called “Old age”. It exceeds the index of 2011 only by 6.7 billion drams. Moreover, if 10 % increase is anticipated for pensions, there are no changes anticipated for unemployment or child care benefit. 4503.6 million will be allocated as defined by “Unemployment benefit” program, which is 375.2 million less than in 2011. No explanations are provided. Maybe they are sure that the number of unemployed will decrease. Whether it will be realized by means of migration or creation of work places is not essential. There are some doubtful previsions in the draft budget version. For example the following one: “Decrease in the amount of 113.1 million drams is anticipated in the child birth benefit.” This is interesting in two senses. First, along with bright visions for the future, the government confesses that decrease in birth rate is anticipated. Second, it was precisely foreseen (not approximately) in the government how many less children will be born next year and particularly how much the birth rate will decrease as regards to the third child and more. The impression is that the document was elaborated not in the government but in the family planning center. Whatever… The government will allocate 35.5 billion drams more to the social sector. It may be promising at first sight. But when we remember that we all, including pensioners will have to pay 3 times more-101 billion, all the reasons for happiness vanish. In this case it is unacceptable to state that tax increase is aimed at solving social issues.
Winners and Losers
Perhaps there are some people who hurry to say that 101 billion drams will not be collected from the vulnerable class, but from the business. Besides, the taxes will be collected from the big business and never from the small ones. However, in fact it is not essential who will bear the tax increase as all of us, that is the consumers will bear it. Let’s clarify. What is the impact of the excise tax increase or “clarification” (as it is called in the Ministry of Finance)? Excise tax is nothing more but the additional price for the product which directly goes to the budget. Such taxes (value-added tax for example) are called indirect taxes. In the end final consumers have to bear them. It means that all of us, including the pensioner who buys the cheapest cigarette have to bear this tax burden. Besides, the increase of the pension by 2500 drams will not be enough for the pensioner to buy the cheapest cigarette in case the cigarette tax increases. It doesn’t only refer to indirect taxes. For example, if the duty rate of social payment increases it will directly affect the price of goods and services (in terms of price rise). It doesn’t matter whether we speak about a large enterprise or a small kiosk. In case of stricter bureaucratic measures the impact will be the same. Thus, strengthening tax compliance and the so-called “shadow decrease” will create unfavorable conditions for business and will cause price increase. By the way, according to the draft version of the budget for the year 2012, Armenian government expects 4,1 % inflation by the end of 2012. Time will show how they will ensure this index. Nevertheless, why did they decide to collect 101 billion drams more tax when even the government indirectly confesses that it will be immensely difficult? To put it mildly, there is almost nothing to gain. There are many reasons. One reason is the fact that 103 million dollars are anticipated to be paid for external debt service of Armenia in 2011, and the amount will constitute 265.3 million dollars in 2012. The other reason is the fact that according to international institutions, our country has a great potential to increase collection of taxes and should use this potential. Of course, we cannot ignore their opinion. The issue is not that tax increase is undesirable or impossible. It is not the case. On the contrary, Armenia has a big shadow field and has a big potential to increase the taxes. 16/17% tax and GDP correlation is very small. This index concedes the ones of developed countries and our regional neighbors. The matter is that it has to be done reasonably without damaging the vulnerable class and the business. First of all it is necessary to gain the trust of the society. The taxpayer should know why he pays taxes, for what, where they go, and he should be sure that they are spent for state’s benefit. In a reverse case even the strictest activities of the government will not have any impact.