The draft reform was available to the public on the Ministry of Finance’s website, and it was expected that a broad public discussion would ensue regarding the content of the document. Of particular interest were the views of those who drafted the document and, of course, those whom it was intended to directly affect.
Naturally, the opinion of the average citizen was unlikely to be heard amid this flood—or, to put it more metaphorically, this whirlwind of differing opinions and assessments. Although the draft addresses other issues as well, the public debate focused primarily on VAT and the tax burden on the wage fund.
Why focus specifically on VAT?
It is obvious that the goal of any tax system is to fill the state budget and, as a result, to increase the well-being of ordinary citizens. However, the public debate surrounding the reform has largely boiled down to VAT and the tax burden on the wage bill. This raises the question: to what extent can these specific changes actually improve the life of the average person?
In reality, VAT is a tax that ordinary people pay out of their own pockets on a regular basis. They don’t really care how businesses and the government handle deductions, offsets, accruals, and so on. People go to a store and, by default, pay this tax on virtually every transaction at the register.
The only thing that could potentially please a shopper is a reduction in this very VAT, but it’s such a “sacred cow” that it can only grow—it can never shrink.
Consequently, for the average person, at best things will remain the same, and at worst, prices will rise if this tax is increased in certain sectors.
As for payroll deductions, unfortunately, we still tend to think of wages in terms of “take-home pay”—the net amount—without considering what taxes the employer withholds from it. Even with the emergence of new ways to structure employer-employee relationships, employees are only interested in what actually ends up in their wallets. It turns out that, here too, things aren’t quite working out in the best interests of the average person.
But, are there really no other areas in Moldova’s tax system worth at least analyzing to understand the extent to which certain provisions remain relevant and effective for replenishing the state budget on the one hand, and improving the standard of living for ordinary citizens on the other?
A progressive tax has long been “overdue”
But the problem with the tax system isn’t limited to accounting calculations. Its consequences can be seen even without economic statistics.
Let’s take a walk through downtown Chisinau. What do we see? Expensive stores, boutiques of global brands, and salons where the affluent class and well-to-do tourists come to spend their money?
No, in Chisinau, of the expensive stores that—with certain reservations—could be called boutiques, only those selling jewelry remain. This is not surprising, since the merchandise is expensive, and the rent per square meter—which is very high by the capital’s standards—can be afforded by the owner of such a business, where the high cost of goods is combined with an almost microscopic footprint. Fashion stores, however, can no longer withstand such rent prices. The so-called “old-timers” still remember Hugo Boss, but even that store has moved.
Who else is present in the center of our capital? Bank branches, cell phone stores—where the former sell services and the latter sell services and compact goods with good profit margins—and… pharmacies, where high profit margins go hand in hand with a compact footprint not much different from that of gold jewelry stores.
While city residents may have grown accustomed to this kind of retail “diversity” in the city center, the growing stream of tourists never ceases to be surprised by it. Just as the number of expensive cars and houses in a country said to be the poorest in Europe never ceases to amaze.
This juxtaposition—of empty storefronts, banks, pharmacies, and expensive cars—is hard to explain without acknowledging the obvious: the wealth gap in Moldova is becoming increasingly apparent.
This fact leads to an obvious question: perhaps it is time to consider a progressive income tax for both corporations and individuals?
To replenish the budget and restore social justice
If we look back, we’ll see that the introduction of a low flat income tax rate for individuals, as well as a flat income tax for corporations—and even the option of a zero rate in the event of reinvestment— introduced back in the 2000s by a government that was “left-wing” on paper but in fact carried out liberal reforms—stimulated a large inflow of domestic capital into the economy and contributed to active development. And above all, small businesses, which are the engine of economic growth worldwide.
At the same time, it is becoming clear today that, in the current situation, this approach is not sufficiently socially just. Large businesses are building networks, driving out small private entrepreneurs, while paying taxes at the same rate.
It is telling that none of the so-called “people’s parties”—which are tied to big business—choose to acknowledge this obvious fact. All those in power try to emphasize that we have a very favorable income tax system, while glossing over the social justice implications of how it works today.
It is surprising how such things—which at first glance seem obvious and lie right on the surface—have escaped the attention of those who were supposed to, and continue to, deal with fiscal policy and tax reform, particularly in the Republic of Moldova.
Perhaps the problem lies in the fact that, as one of the “leftist” classics wrote, they are “terribly far removed from the people”?
Perhaps a progressive income tax isn’t the perfect solution. But if society truly wants to discuss tax reform from the perspective of the interests of the majority of citizens, there’s no way to avoid this conversation anymore.
