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The anti-oligarchic Draft Law includes many norms that affect many of us. As a rule, accepted in society title of Draft Law No. 5600 does not correspond to reality. And it is not even about the fact that the oligarchs will get themselves out again with taxes on our ore, but that this Draft Law includes everything that directly affects ordinary citizens, from those who have land shares, sell their own vegetables on the market, or consume excisable products.

The other day the Parliamentary Committee on Finance, Tax and Customs Policy has celebrated another “victory”. The Committee has rejected a proposal by the leader of the largest faction, David Arahamia, to postpone an additional increase in the excise tax on heated tobacco product (HTP) for four years. Notably, in early 2021, the rates of excise tax on tobacco for heating in one day increased by 320%, i.e. four times, completely equalling to the rates of excise duty on regular cigarettes.

To understand the rationality of this step it should be noted that in no EU country, where we are so eager to integrate, HTPs and cigarettes (completely different products with different effects on the body) are regulated and taxed in a different way. This is due to the fact that the level of impact of HTPs on the health of smokers is significantly lower compared to cigarettes.

However, international practice, scientific achievements, common sense, the reputation of the country and its economic prospects, the investment climate are not for Ukraine. We, or rather not we, but the state budget needs everything here and now, we want “compensators”, and after us the deluge, that is to say the economy and health of Ukrainians! This approach resembles the practice of some kind of masochism, because we constantly create problems for ourselves, and then try to solve them unsuccessfully.

If we look at the problem narrowly, closely, listen to the arguments of public activists – bad habits fighters, we may get the impression that everything is true. Indeed, we can hear everything or almost everything as arguments pro: betrayal, global conspiracy, the struggle for justice, etc. In other words, the whole set of arguments that increase the level of serotonin and testosterone in the blood simultaneously and causes a desire to fight the “sharks of capitalism”.

However, looking at the problem more broadly from the macro level, from the standpoint not of today, but of the prospects for at least three or four years ahead, we can see that not everything is as clear as it appears in the information environment. Therefore, I will try to add to the discussion some, in my personal opinion, important counter-arguments. Why can’t this be done!

In a market economy, innovation, creation of new products and markets should be encouraged by the governments of the vast majority of countries.

Heating tobacco was created as a substitute for regular cigarettes, which are much more harmful to health, to provide an alternative to smokers. Even without touching on the topic of health, one can say that in a market economy, innovation, creation of new products and markets should be encouraged by the governments of the vast majority of countries around the world, which is the main focus of their efforts. The Ukrainian authorities, proclaiming the development of a free and competitive market everywhere, is behaving at least strangely, by not providing tax preferences, but on the contrary increasing the tax burden on such innovators. Where is the logic here? It is not clear.

 There is a consensus among experts in health care on the implementation of differential tax rates on cigarettes and their smokeless alternatives.

The nature of the excise tax aims to limit the level of consumption of, first of all, unhealthy goods (alcohol, tobacco, sugar, etc.) by influencing the purchasing power of an individual. Consumption of such products generates the so-called negative spillovers in the form of increased mortality, additional diseases caused by their consumption. The excise tax is designed to “smooth out” such negative, in the language of professional slang, externalities, by taking into account the corresponding costs (e.g., additional financing for health care, treatment) in the price of the goods. 

On the other hand, scientific research has proved that the impact of HTPs on the health of their consumers in terms of harmfulness is significantly less than regular cigarettes. Therefore, there is a consensus among experts in health care on the implementation of differential tax rates on cigarettes and their smokeless alternatives. In particular, the global practice based on the scientific research and the resulting recommendations shows us that, for example, in the EU on average the difference between cigarettes and HTP is 72% in favor of a lower rate for the latter. Why are we reinventing the wheel and looking for our own particular way? The question remains open.

Do we need an industry that generates 7% of tax revenue, with an investment of USD 2 billion and 50,000 jobs?

By raising taxes where they are already well paid, the state discriminates against honest taxpayers instead of dealing with those who evade paying them. According to the ranking of the TOP 200 largest taxpayers last year, four tobacco companies paid UAH 57.3 billion in taxes to the state budget, which is about 7% of all revenues. To make these tax payments possible in the tobacco industry 50,000 jobs have been created by investing more than USD 2 billion. A further increase in the tax burden will certainly discourage companies from expanding production, in particular by introducing new products. 

Surprisingly, the tax policy of our state is becoming eclectic. Statesmen of all ranks and grades are reciting theses on the stability and predictability of tax policy as a mantra. And in real life we see that investment nannies, industrial parks are combined with… tax ghettos! Of course, the latter do not help create partnerships between the state and large, honest taxpayers who planned to invest and create new jobs not in words but in deeds, in particular, by modernizing Ukrainian production to localize the production of HTPs.

The budget will suffer losses by the end of the year

Big words on the overfulfillment of the planned indicators of revenues from HTPs to the state budget for the first half of this year continue. Indeed, excise revenues from HTPs have increased by UAH 5.2 billion over this period compared to 2020. However, this effect can be seen only in the short term. Under the current high tax burden, the HTPs market, which in previous years showed good dynamics (growth of about 80% in 2020) due to the transition of smokers to less harmful alternatives, will stop growing and begin to fall. As changes in the taxation of HTPs provoke higher prices, this causes a drop in demand. Price-sensitive consumers return to a cheaper product – cigarettes. Tobacco companies are already reducing the purchase of excise stamps for HTPs for October, and in November and December they may stop doing it at all. Therefore, revenues from excise tax on this item are projected to decline.

Therefore, we can impose a tax on the air we breathe or on time which is the most destructive force in the world

Therefore, we can impose a tax on the air we breathe or on time which is the most destructive force in the world. If you have lived for a month, pay a lump sum tax. Such taxes, by the way, are the least harmful to economic growth, but for some reason they were abandoned in Europe three centuries ago because it was realized that free people, unlike serfs, could create more benefits for themselves and income for the treasury on their own initiative and with free choice driven by individual consumption preferences.

In view of all this, there is a great offer to all policymakers and implementers of state tax policy: to turn attention to something else, for example, to the main bad habit in our society, namely, corruption, which is often abused by certain categories of our compatriots, or the effectiveness of the state anti-corruption infrastructure. Indeed, taxpayers have spent USD 500 million on the maintenance of anti-corruption bodies of various kinds for seven and a half years and the budget has received as much as USD 30 thousand during this period. The efficiency is equal to six (!) ppm.

It seems a good illustration of the argument about the need for “budgetary compensators”, the directions of their distribution and use. All this “fight against bad habits”, the paternalism of the authorities in relation to people, the distortion of their right to free choice look very similar to the practice of self-abuse, which can cause self-destruction of the economy. After this you won’t be “canonized”, as some might hope. There is little hope that afterward all the “defenders” of a healthy lifestyle and fighters against the “predators of capitalism” will be spoken softly about.

Expert of the Growford Institute, Professor, Doctor of Economics Kostiantyn Shvabii for Lb.ua.