The topic of tax reforms announced by Minister Fatmir Besimi preoccupied citizens during the annual holidays. They were not shaken as much as the enormous increase in the price of bread, fuel and electricity, but enough to spill the beans. Not so much from a financial, but from a psychological point of view.

The tax reform, from what I see in the media, boils down to 4 measures, namely a tax on interest from time deposits (which is incorrectly defined in the public as a tax on savings deposits), a progressive tax, a tax on reinvested profits and a tax and contributions for freelancers. What immediately surprised me is that an already adopted legal solution is being sold as a reform and offered for public discussion. What disappointed me is that the "expert public" joined the discussion as if talking about new solutions. This applies to tax on interest on savings deposits and progressive taxation.

Namely, with the Personal Income Law of 2018, progressive taxation was introduced. Then it was discussed and probably as a result of a political assessment it received a delayed application from 1.1.2023. In Art. 24 of the Law on Amendments and Supplements to the Law on Personal Income Tax (Official Gazette number: 275/2019) provides that the provisions of Article 11, where the progressive tax rate is provided for, will not be applied from January 1, 2020 to 31 December 2022. From January 1, 2023, the provisions introducing a progressive tax will enter into force, according to which the tax rate for an annual tax base up to MKD 1.080.000 will remain the same and will amount to 10%, and for income over MKD 1.080.000, a progressive tax will be paid tax rate of 18% on the part of the income that exceeds MKD 1.080.000. This same article, in addition to the deferral of progressive taxation, also refers to the deferral of the tax on interest from time deposits. Also, Article 116 of the Law on Personal Income Tax (Official Gazette number: 241/2018; 84/2019; 275/2019; 290/2020; 85/2021;) provides that the provisions relating to the taxation of interest from term deposits, they will apply from January 1, 2023.

Who read what?

Is it possible that the Ministry of Finance does not know that this law has already been passed and does not know the basic regulations that it is obliged to apply! Or, he knows, and it's done on "Tosho". But what about the "expert public" and the deputies who voted "for" or "against" the delayed application of these provisions from January 1, 2023? And they don't know what they voted for? And the experts have not read the law?

This is devastating and only confirms that everything is politicized, superficial and amateurish in our country! It is clear that the debate about the progressive tax and the capital gains tax is completely misplaced, because this legislative solution has already been passed and will come into force after the New Year.

I would also like to comment on the approach to the "tax reform" discussion. The goal, reportedly, is to collect 54 million euros per year and reduce the shadow economy.

First and foremost, I didn't hear what those 54 million euros are needed for. It would be much more convincing if the discussion about the so-called the tax reform started as follows: We plan in the next four, five or ten years, the state to invest in this and that, and for that we need an additional 54 million euros per year, which we plan to provide through this tax reform. Instead, the discussion on tax reform is based on the fact that the state does not have enough money to carry out its basic functions, so it resorts to new taxes.

Second, it is not time for new charges, especially not from a psychological point of view.

The price of electricity, fuel and gas has skyrocketed. They are literally killing businesses. The companies are left on their own and forced to purchase electricity on the free market. I don't know if there is a company whose profit margin can bear this electricity and fuel burden in the medium and long term.

Money under the pillow again

The cancellation of the VMRO tax reform for zero tax on reinvested profits will negatively affect investments, which means that companies will develop and expand at a reduced pace. No investments, no new jobs. If they are already paying income tax, then they will probably find a way to get the money out of the company. They will not deposit them in the banks, why is a tax introduced here as of January 1, 2023. So, either the money will go under the pillow again, or, even worse, they will find a way to transfer it to foreign banks.

Money loses its value. A thousand denars in a store or in the market is nothing anymore, but for the citizens it is still a lot. Additionally, the price of bread skyrocketed. The bread is the so-called an inferior good because an increase in consumer income, instead of an increase, leads to a decrease in demand for these goods. And vice versa. A decrease in consumer income will lead to an increase in the demand for bread. In conditions where income remains the same, inflation is growing, and the prices of other basic products and energy have risen dramatically, it is logical that citizens have less money left for food. This means that citizens will consume more bread than before.

Here I will also mention the so-called Giffin's paradox (as a deviation from the law of demand) according to which an increase in the price of some products (in the case of bread) will not lead to a decrease in its consumption, but on the contrary will lead to an increase in its consumption. In conditions of growing poverty, the possibility of substituting bread with other more expensive products will be absent, so this will mean that the demand for those goods (meat, fish, fruit, healthy food) will further decrease. This will mean a decline in these sectors, layoffs of workers and/or reductions in their wages, which will further reduce consumption. Not to mention the negative health effects that will result from the substitution of a healthy diet with a less healthy diet or an unhealthy diet, which will lead to increased health costs for the state and the population.

It is not time for new taxes, but it is time for rational spending and increasing revenues by reducing the shadow economy and corruption.

Here is the same proposal for the hundredth time: Moratorium on employment in the public administration. If we reduce the public sector by 1.500 employees every year with a hiring moratorium (less than the total annual number of retirements in the administration), we will save a total of 15 billion euros in 1,7 years. With the announced "tax reform" for the same period, the state will have an additional 810 million euros to spend, that is, less than half of the funds that could be provided with a moratorium on employment in the public administration.

A famous thought about tax reform says: Don't tax yourself, don't tax me, tax the one behind the tree. Tax those who are hiding first, then target those who are already paying. Because anything else is not tax reform but tax pro forma, especially for those who are hiding behind the tree.

The author is a former Minister of Health

Text taken from Deutsche Welle.