Ukraine Should Flourish
|February 23, 2014||Posted by Fred Foldvary under Editorials|
The violence in Ukraine demonstrates once again the failure of centralized democracy. Whenever we see masses of people protesting and rallying in the city streets and squares, it shows that the structure of government has failed. The prime purpose of democracy is social peace. The mass demonstrations show that the people cannot express their views and make policy decisions through the formal channels of government, so they take to the streets.
When government fails, there is another path towards political change: civil disobedience. Rather than massing in the city square or taking control of government buildings, the protestors can stop obeying the government. They can stop paying taxes and stop obeying unjust rules. Civil disobedience is how India won independence and the US civil rights movement ended segregation. Today, protestors use social media to spread the message. Some activists will be put in prison, but there is not enough room to put half the population in jail.
The conflict in Ukraine originated in the 2010 election for president, in which the opposition accused the winner of fraud. The protests began in November 2013, when the president switched from making a trade agreement with the European Union in favor of a pact with Russia, which provided aid to the government of Ukraine.
The protests in Ukraine were intended to be peaceful, but mass protests often become an attractive nuisance for provocateurs. When a small minority of protesters start throwing rocks or fire bombs at the police, that becomes the signal for the police to use lethal force, and then the protestors return fire, and the result is violence and death. Peaceful civil disobedience is decentralized and does not provide such a venue for the chaos makers.
Ukraine is the largest country that is entirely in Europe. It was in the Russian Empire until the Bolshevik revolution of 1917, when it became an independent state. It soon became a republic within the USSR. The Soviet structure of councils and republics served to preserve the identity of Ukraine, which even had its own membership in the United Nations, and achieved independence with the break-up of the USSR in 1991.
Now, in February 2014, following the failure of government repression, the Ukrainian parliament has dismissed the president, restored the 2004 constitution, freed the previous prime minister, and appointed an acting president. The agreement between the government and the opposition was facilitated by the foreign ministers of France, Germany, Poland and a representative of the president of Russia.
The national anthem of the country is “Ukraine has not yet perished.” Millions of Ukrainians died during the years of forced collectivization under the Soviet Union, and more millions, including many Jews, were slaughtered during World War II, but the Ukrainian identity has persevered. Ukrainians now have a unique opportunity to reshape their future.
Some of the conflict in Ukraine comes from its ethnic mix. The westernmost part of the country was part of Poland prior to World War II, although that territory along other neighboring areas had been Ukrainian previously. In 1954, the Crimea was transferred from the Russian Republic to Ukraine. The eastern half of Ukraine is culturally Russian; the main religion is Eastern Orthodox. The western part is ethnically Ukrainian and Catholic, and the people of western cities such as Lviv identify with Europe. Ukraine needs to restructure its governance as well as its economy in order to achieve social peace and prosperity.
Ukraine has a centralized government, but also has 24 provinces, plus the nominally autonomous republic of the Crimea, and two city districts, Kiev and Sevastopol. The democracy of Ukraine can become more authentic by decentralizing the governance into a federation of its subdivisions. An association agreement with the European Union should reduce trade barriers, while the Ukraine should also pursue free trade with Russia and its other neighbors.
The economy of Ukraine suffers from its oppressive tax system. The new tax code adopted in 2011 has 18 national and 5 local taxes. The major taxes include corporate and personal income taxes, a value added tax, and excise taxes. But there is also an economy-friendly, though small, land tax, and royalty taxes on the extraction of natural resources. The current tax rate on corporate gross income is 16 percent. The value-added tax rate of 17 percent is imposed on the sale of goods, including imports. There is also a high social security tax of up to 49.7 percent.
Ukraine’s land tax is paid by the owners and users of land. The tax rates depend on the use of the land. For pastures, the rate is one-tenth percent of the land value, and for farms the rate is three-hundredths of a percent. There are also local real estate taxes per square meter of dwelling space with the tax rate from 1% to 2.7% of the monthly minimum wage.
The Ukranian tax system has been criticized for its complexity, its disincentives to labor and enterprise. and its inducement for tax evasion. Ukraine has the potential to become a great agricultural and industrial economy, but its tax and regulatory policies have been holding it back. The Fraser Institute’s index of economic freedom calculates Ukraine’s level at 6.16 on a range from zero to pure freedom at 10. Out of 152 economies, Ukraine ranks 126 in economic freedom, near the bottom among the countries of the world. The Heritage Foundation index also ranks Ukraine as “repressed,” especially low on investment freedom and freedom from corruption.
If Ukranians seek prosperity, they would be wise to eliminate all their taxes other than the land tax and also enact national and local pollution taxes. The land value tax should be uniform for all land, based on its current market price or rent when put to its best use, regardless of its current use. The elimination of the other taxes would stop tax evasion and liberate the underground economy.
Ukrainians should stop blindly copying the dysfunctional tax system of the European Union and adopt a modern 21st century public finance system suitable to the global economy and Ukraine’s position between Russia and the EU. They can avoid either joining the EU or a Russian-led Eurasian Union by legislating free trade with both regions. They should enact domestic free trade by avoiding the taxation of labor, enterprise, and produced wealth. With rising public revenue from land value, and with rising wages, Ukraine could reduce its social security taxes until the government either funds pensions from land rent or replace government pensions with private retirement accounts.
Land-value taxation would also promote a decentralization of governance and a reduction of corruption. The land of Ukraine is rich and can well support its public finance, and let Ukraine to not just avoid perishing, but to flourish.