Taxing “parasites” in Belarus

Introduction

Allegedly fighting tax evasion, the Belarussian Government is compelling people to work, like in the Soviet Union, though the relevant legislation is full of loopholes. The new tax parallels other inefficient quasi-socialist policies in the country.

The “tax on parasites”

On February 17, 2,000 people in various Belarussian cities protested a tax on those not full-time employed, as well as on people working abroad, known as “the tax on parasites.” The law had been passed on April 2, 2015. Those, officially working less than 183 days per year, must pay $250 dollars to compensate for foregone taxes. An exception is made for the officially unemployed, who perform community service tasks for $10 per month, so most do not register.The alleged purpose of the tax was to increase collections from the self-employed. Critics, however, argue that the Government forces people to work, like in the Soviet Union.

On March 9, President Lukashenka announced that the decree will not be cancelled, but those, who had not paid the tax for this year, will not be penalized until next year. Furthermore, those who had paid already, may receive a refund after finding an official job.

Effects of the tax

The tax did not increase government revenues. About 470,000 people should have paid, but less than 10% did, so only $6 million was collected, reports Andrei Machovsky, of Reuters.

Economists recognize various motives for tax evasion. Tax compliance depends on the probability of getting caught and the penalties that the non-payer may incur. Also, some taxpayers may rationalize evasion, viewing the tax as unfair or not trusting the government to spend their money.

There are many incentives for evading taxes in Belarus. Many entrepreneurs do not register their businesses, to avoid inspections, reports Yevgeniy Kirillov, of Zautra.by. If the husband in the family owns a firm, he can “hire” his wife and “provide” her a nominal minimum wage, though she may not really work, reports Elena Daneiko, of Thinktanks.by.

The penalty for evading the “tax on parasites” is insignificant. A caught non-payer faces an administrative liability of a fine of 2-4 basic units (42-46 new Belarussian roubles, or $22.58-$24.70), or compulsory labor of up to 15 days, reports Olga Yerokhina, of the Komsomolskaya Pravda newspaper. The fine is only 5.82-6.38% of the official average wage of 720.70 Belarussian roubles ($387.47), as of January 2017, according to the National Statistical Committee of the Republic of Belarus, so it does not stop evaders. Yet increasing the penalty would only anger many taxpayers, who view the tax as unfair.

The Belarussian “tax on parasites” is inequitable. The lower the income, the higher the portion of the “tax on parasites” to be paid, making the tax regressive. Payers have to pay a fixed portion, regardless of income, but the tax is not lump-sum: whether the person must pay, depends on the payer’s behavior. The tax distorts the taxpayers’ behavior, increasing labor supply and lowering wages: to avoid paying the tax, part-time workers must work more, while individual entrepreneurs, facing the tax, are discouraged from hiring new workers.


Proposed alternatives: excluding non-payers from welfare

To discourage tax evasion among the self-employed, some have proposed to exclude evaders from extensive welfare benefits. For example, Lithuania mandates most citizens to pay 9% of the minimum wage to buy a health insurance card. However, the Belarussian Constitution guarantees free treatment, so this measure is not feasible without an amendment. The Government may also exclude tax evaders from discounts on utility services. Nevertheless, in the long run, government subsidies on utility services will be abolished, so the Government will need new measures to exclude non-payers from receiving the benefits, reports Tut.by. By 2020, Belarusian utility bills will be triple the 2015 level, with users bearing the entire costs of utility services, reports Belarus Digest.

The welfare benefits themselves are inequitable. Since the rich consume more electricity and other utilities than the poor, they benefit more from the subsidies. Excluding tax evaders, many of whom are poor, would exacerbate the inequality.

The welfare benefits are also inefficient. Belarussian enterprises pay for the difference between the market price of electricity and the price that individuals pay for utilities. This difference is passed on to consumers of goods that enterprises produce, so they pay more than would have, if utilities were not subsidized. The World Bank estimates that Belarus spends about 2% of GDP on heating alone, about half of the country’s expenditures on health care and one-third of expenditures on education, reports Tatyana Manenok, then of Belarussians and Market, a weekly business newspaper.

Like any in-kind benefits, the Belarussian utility subsidies are more expensive than cash benefits for the same amount would be. If an individual consumed less than the Government paid for, his or her increase in purchasing power could be achieved with lower government expenditures. Rather excluding non-payers from these benefits, the Government should eliminate them, and substitute cash benefits, oriented towards those who really need them.


Conclusion

Both the Belarussian “tax on parasites” and the proposed measures of excluding non-payers from Belarussian welfare benefits are partial methods of plugging the holes in the country’s economy. Belarus needs a more radical optimization of its welfare system.


References

Alachnovich, A. Are housing utilities about to become market-based? Belarus Digest. http://belarusdigest.com/story/are-housing-utilities-about-become-market-based-23204. 2015.

Daneiko, E. How did the “parasite tax” affect Belarus? https://thinktanks.by/publication/2016/11/08/chto-prines-belarusi-nalog-na-tuneyadstvo.html. 2016.

Makhovsky, A. Thousands of Belarussians take to the streets to protest “parasite law.” Reuters. http://www.reuters.com/article/us-belarus-protests-idUSKBN15W1Y0.

Manenok, T. Having played too much with utility fees. Belarussians and Market. http://belmarket.by/ru/285/65/23125. 2014.

Tut.by. To leave parasites without free medicine and utility privileges. Experts on alternatives to Directive # 3. https://finance.tut.by/news540975.html. 2017.

Yerokhina, O. Non-payers of the “Tax on parasites” will be forced to sweep the streets. http://www.kp.by/daily/26363.5/3245005/. 2015.

Zautra.by. The calm before the storm: a rebellion of parasites may occur in Belarus. http://zautra.by/art.php?sn_nid=22861. 2016.