Government Distorts Tax Reduction Idea
07 June, 2012
Government Distorts Tax Reduction Idea

Instead of long-expected reduction of 20% income tax, scheduled to drop to 15% by 2013, the government plans to cut down the rate to 18% and send the saved 2% in the so called voluntary individual saving system. The sector pundits accuse the government of distortion of tax reduction idea.   

Save 2% in the new individual saving system or leave the money in the state budget – this is the choice Georgian government suggests to the employees by its bill

on Voluntary Individual Savings, that already passed the second parliamentary hearing.
According to the bill amending the tax code, income tax will be cut down from 20% to 18% starting 2013. It will be based on the following scheme: 18% will go to the state budget as usually, and the absolved 2% will be sent as a saving to the Assets Management Company, the to created a fund, if an employee is willing. Those who seem reluctant to pay to funds, will not be exempted from this 2% payment and be taxed by 20% as usual.
The sum will be at the Fund’s disposal for 15 years and only after expiration of this deadline, the depositors may withraw the saving.
National Bank of Georgia (NBG) will control the upcoming Funds. Neither the funds’ license terms, nor interest rates and service conditions are defined as of yet by bills or any other paper.
According to Gia Khuroshvili, Parliamentary Secretary of Georgian government, potential customers will be able to get aware with the economic schemes suggested by the fund beforehand so as to make a proper choice. Everyday internet access to the projects implemented by funds will be also available to observe what’s to what.
Economic analysts hail government in distortion of tax reduction concept by forcing people to save money in funds and remind the promise to cut down income tax to 15%.
Government has been playing with the income tax rate starting 2007 when under the presidential initiative it found apt to integrate the 12% income tax with the social 20% and made a “preference” by fixing 25% as the final rate instead of the cumulated 32%. In 2008 Georgian Prime Minister Nika Gulauri promised to cut down this 20% gradually to 15% by 2013. Eventually the rate was cut to 20% in 2009 and was supposed to reduce to 18% in 2013. But very likely government changed its mind to reduce it furthermore as makes 2% preference only to those willing to pay in hypothetical funds with unclear licensing and service terms.  
“This is a step backward,” Paata Sheshelidze, President of Free Economic School, said. “This is a refusal of all the promises given by government before and counters to the spirit of Liberty Act scheduled to enter into effect staring 2014 and envisaging reduction of tax rates; that’s no reduction when18% is paid in the state budget and 2% either in hypothetic funds or remain in the state budget.” 
Khuroshvili insists that the income tax does reduce and in a very logical way.
“It reduces to those who want to pay the saved 2% to the funds, if a person refuses to save money it is logical that the money will remain in the state budget, but income tax reduces,” he said in the interview with Georgian Journal assuring that this is a true voluntary action as it’s an employee who decides to save or not. 
According to him, the suggested saving of the pardoned 2% is the best way for employees to enjoy profit of the tax reduction otherwise palpable to employers alone.
“When we reduced income tax from 25% to 20% we expected salaries to grow but it did not happen. Although an employee is taxed by income tax it is an employer who pays this tax in fact and business used this saved money then. Now we want to give a chance to employees to have a profit of income tax reduction and save money in the funds,” Khuroshvili elaborated.
“It is a terrific lie,” Sheshelidze counters. “It is questionable whether or not the money saved at Funds will bring a profit. And why the state makes decisions for me how I should dispose with my money? Let it keep its promise and cut down the income tax rate and people will decide whether or not they will save the exempted percents. Income tax should be a zero to me; this is a state hand in my pocket. Ron Paul, one of the two republican candidacies running for the US presidency, bases his campaign on promise to zero the income tax and why should not we take into account the approach that exists in the country of the freedom?”
Davit Narmania, Head of Economic Department of Georgian Development Research Institute, also questions the touted profits due to unclear essential details in the bill.
“The bill should already clarify what interest rates will be fixed for savings and whether or not the inflation factor will be foreseen, or whether or not the state assumes obligations to pay off savings if the assets management company goes bankrupt, but the bill lacks all these details at the moment,” he said. “The yield a person can get by saving 2% is the interest rate fixed on it. If a person gets a profit less than an annual inflation rate the saved money will devaluate. For example if inflation during 15 years will be 8% and the saving equals GEL 1000 the real value of this sum will figure only GEL 286.3 ultimately.”  
What integrates all the experts interviewed by GJ is that  they think the saving initiative cannot compensate the profit employees might get through reduction of income tax from 20% to 18% and that the initiative means removal of money from the state budget where it was under control to non-transparent funds.
“Very likely people who are close to the powers will be standing behind these funds since they get a 100% guarantee that 2%  of the income tax will be moved from the state budget to funds,” Demur Giorkhelidze, an economic analyst, said.
He believes government distorts not tax reduction concept alone but a very good idea of individual saving system that brings so called “long money” in the country through pension funds, share funds etc. that do not exist in Georgia for they demand trust in long term stability and fair business climate.
“Creation of funds oriented on “long-money” is a good idea but it should not be tied with the forceful saving of the allegedly exempted 2%, it’s none of the state business to decide where people will take this 2%. It’s no volunteer action. This 2% will be removed from the state budget where it was at least under control and put on the accounts of some uncertain people who will be investing it in uncertain projects and nobody can say for sure who will pocket this money ultimately.”
Narmania thinks by creation of this individual saving system government tries to improve its position at Global Competitive Index (GCI) in savings.  GCI ranked Georgia 129 out of 142 countries and low amount of deposits was one of the key defects.

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