Y. I. Medvinskaya, O. N. Aliseienko

Dnepropetrovsk National University named after O. Honchar

Company Income Tax in the Period of Economic Recession

There exists a certain connection between economic growth and the use of specific leverages applied to it. It is understandable that more or less anticipated results of decisions made are possible only in a country where supremacy of law is inherent. This is also applicable to taxes. J. M. Keynes thought that general costs depend on taxes paid by companies or natural persons. Thus, the level of costs varies as taxes are increased or decreased. It had long been known that economy develops cyclically and different methods of restoration or maintenance are used at each stage of its development. When speaking of market economy, enterprises tend to sell only those products that will be bought, which is possible under condition that the level of total costs is high.

In the article given we endeavor to study company income tax as economic leverage in the recession period. In the past 12 years (from 1996 to 2008), the above-mentioned tax comprised on average 24.6% of all total tax receipts. These are considerable amounts in terms of money (UAH 47,856.8m in 2008) which can and should be returned with a view to financing economic activity. According to the Ministry of Finance of Ukraine, the report titled “On Fulfillment of the State Budget of Ukraine for the year 2009 regarding the economic classification of costs” shows that the receipts from company income tax in 2009 comprised 76.6% of the planned, i.e. the budget was short of UAH 9.3 billion and as compared with 2008, the receipts were reduced by 33.8% or UAH 15.5 billion. Curiously enough but the index of actual GDP decreased by approximately the same comparative figure, namely 15%. Non-functional banking system is mentioned as one of the causes of economy crush. In any case, the real and financial sectors are interconnected, and problems in the links create the domino principle.

Let us start by defining which tax policy, countercyclical or pro-cyclical, is applied to Ukraine. The above-stated predetermines whether taxes are used as automatic stabilizers and, consequently, whether the tax system operates efficiently. Let us begin by saying that strict taxation rules have not been established yet. The dynamics of variations in the tax legislation is represented in the Table 1.

Table 1 – Basic Taxes Variations in the Tax Legislation

Tax	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008
income tax	1	3	5	9	15	22	12	9	14	9	9	4	3	4
value-added tax	–	–	10	9	23	23	12	7	11	14	8	7	3	4
natural persons income tax	–	2	–	3	2	6	4	4	2	8	9	3	1	4
excise duty	1	1	–	–	3	5	2	1	1	–	1	–	–	1

Source: Data of the Internet-source of Verhovna Rada of Ukraine: http://zakon1.rada.gov.ua/

Variability is connected with the transformational period of country’s formation, that, in its turn, results in the lack of practical performed actions, the latter testifies inefficient regulation. Acceptance or contestation of this conclusion requires the determination of the effect of taxes as automatic stabilizers. Foreign authors came to the conclusion that developed countries have countercyclical fiscal policy, while countries with transition economy apply pro-cyclical fiscal policy. Thus, the economy of Ukraine can be considered pro-cyclical, i.e. at the time of economic growth national costs increase (taxes decrease) but at the time of recession taxes grow and costs are reduced. For the developed countries, including OECD, a countercyclical policy (or adherence to “Keynesian traditions”) is in force, i.e. taxes go up under boom conditions for the purpose of avoiding economy “overheat” and inflationary processes, and they decrease at the time of recession for the purpose of stimulating the activities of economic entities.

Pro-cyclical nature of Ukrainian fiscal policy can be explained by the factors similar to other countries with transition economy. Among them are low level of infrastructures of financial markets, loan restrictions in the period of recession, low efficiency of monetary policy, poor inflation manageability, and imperfect level of tax administration, corruption and inefficient use of budgetary funds. The above-mentioned provides grounds to conclude that company income tax also does not function as it should. Firstly, the tax rate is one of the highest among countries of the Eastern Europe which obstructs the inflow of foreign investments and restricts the stimulating effect on Ukrainian industry. Secondly, other countries use benefits to a lesser extent. Thirdly, the percentage of income tax in GDP and in budget receipts is higher than in other countries (in Ukraine these figures are 5% and 16.1 respectively, in 2008; in Poland, by comparison, they comprised 2.38 and 7.05 respectively). It means that the regulatory influence is considerably smaller than the fiscal one. One of the steps to be taken to improve such a situation (let us draw on the neighbors’ experience again) is to reduce the tax rate gradually within five-year term to the level of 20% (e.g. the rate in Czech Republic was changed from 20% to 19% within 2009-2010). Temporary decrease of budgetary receipts will be eliminated on the account of tax basis expansion (which will grow because a part of an enterprise will be de-shadowed, the quantity of loss-making enterprises will be decreased, and the unjustified preferences for some entities will be abolished).

In conclusion, Ukraine is a country with transition economy and a pro-cyclical tax policy. Although taxes are the only ones of the existing leverages, they should be used depending on the business cycle the country is in. Company income tax is not an exception. Its indices decreased along with the GDP from 2009, which testifies the recession stage and the advisable use of the neighboring countries experience with the aim of overcoming this period.