The Principle of Flat Income Tax is Controversial: Statement

The governing council of the Anti-Corruption Coalition of NGOs in Armenia has issued a statement regarding the amendments being made to the Tax Code.

The statement specifically mentions: “The proposed amendments to the Tax Code submitted to the National Assembly of Armenia are aimed at redistributing the tax burden to enhance investment attractiveness, as well as the continuous simplification of the privileged taxation system for micro-enterprises. Indeed, significant steps are being taken to promote the development of micro-enterprises, which is reflected in the exemption of businesses with a turnover of up to 24 million drams from taxes, as well as in the unification and simplification of various taxation systems. Alongside this, the turnover tax threshold is being raised to 115 million drams.

Along with this, proposed changes regarding the rates of direct taxes, in our view, are not professionally justified and contradict both international experience and the provisions enshrined in the Constitution of the Republic of Armenia. Such a lenient policy on the application of direct tax rates naturally leads to increased expenditure on the state budget, clearly reducing its revenue.

To cover this expenditure, the proposed amendments suggest expedited changes in excise tax rates, significantly increasing them. In this case, the principle of flat income tax is questionable from the perspective of social rights and social justice.

These changes will primarily have a positive effect on members of parliament, government officials, heads of other executive bodies, employees of the financial-credit and banking systems, as well as around 1700 individuals employed in the information technology sector, increasing the amount of income they control. However, these changes, in our estimation, will lead to serious inflationary pressure of approximately 4-5 percent per year, which will reduce the purchasing power of lower-income earners, pensioners, and beneficiaries, which in turn, will decrease the level of gross consumption.

The governing council of the Anti-Corruption Coalition of NGOs in Armenia believes that the proposed flat income tax system will lead to a direct decrease in the income controlled by low-income earners and a direct increase in the income controlled by high earners. Socially, this will cement a high Gini coefficient by law, which will contribute to the deepening of poverty. It will also lead to the emergence of a class of legal accumulators who will not be required to pay higher taxes; at the macro level, this will reduce effective demand and, consequently, gross consumption, and also lead to an increase in gross accumulation, which, as experience shows, has not and cannot be a source of domestic investment and will lead to capital flight from Armenia, thus causing a negative fiscal effect with a significant decrease in state budget revenues, increasing emigration rates, reducing economic activity, and posing serious risks for the country's defensive capability, sovereignty, and independence.

In light of the above, the governing council of the Anti-Corruption Coalition of NGOs in Armenia suggests the following: revise the flat income tax option and set an internationally accepted progressive income taxation; unconditionally apply the provisions of the law on the Minimum Subsistence Basket and Minimum Subsistence Budget in Armenia, dated March 16, 2004, and establish a non-taxable threshold based on the annual amount calculated according to that law; expand the list of goods subject to excise tax to include items that imply harmful consumption and luxury; increase the property tax rate on immovable property exceeding 40 million drams, establishing rates in accordance with luxury tax; raise the rates of natural resource usage tax and environmental charges; halt the practice of repeatedly and continuously amending the Tax Code; and establish the objectives of tax policy in the new situation created after the Velvet Revolution and develop a new tax code accordingly.