Taxation in Turkmenistan: removing the masks
Introduction
All that glitters is not gold. For example, corruption distorts the apparently liberal, yet inequitable, tax system of Turkmenistan. Making the rich pay a higher personal income tax rate than the poor would not necessarily make the tax progressive in practice.
Rates and penalties
At first glance, taxation in Turkmenistan appears liberal. Individuals currently pay a flat 10% income tax rate, low by world standards. (In comparison, China, a recognized example of successful gradual transition to a market economy, has a top personal income tax rate of 45% and a top corporate tax rate of 25%, reports Heritage Foundation.) Resident legal entities, except hydrocarbon resource operations contractors, pay an 8% business tax rate; non-residents pay a 20% business tax rate. They must also pay a property tax of 1% of the balance sheet value of the property and a value-added tax of 15%. Importers are exempt from excise taxes on goods, subject to these taxes.
Yet the tax authorities have substantial room for abuse. Suspecting actual or future evasion, they may demand premature payment. The tax service may also sue for collateral, amounting to the volume of the payment. Furthermore, according to Article 71 of the Tax Code, the state pays only half of the salaries of tax officials. The rest consists of 50% of the fines and penalties that the tax official had charged. Thus, it is dangerous for the taxpayer to comply fully: the tax collector may lose his or her salary, so false charges and property seizures occur, reports SoyuzPravoInform, a law firm, operating a database on the legislature of CIS countries.
Are Turkmenistani taxes equitable?
Economists identify two concepts of equity: horizontal equity and vertical equity. A tax system is horizontally equitable, if it equally treats individuals, similar in all relevant aspects. This is hard to objectively define. For example, many systems tax similar products differently, treating individuals with different tastes differently.
Marital status affects one’s ability to pay, but not all tax systems account for it. Studies in the United States have shown that in households with two workers, the one making less money (usually the woman), called the secondary worker, is usually more sensitive to the wage rate, and income taxes affect labor supply of secondary workers more than they do of primary workers. A government, concerned with the inefficiencies of taxation would impose a lower tax rate on the secondary worker, but many would call this system unfair.
Taxation in Turkmenistan is not horizontally equitable. There are no attempts to account for marital status differences. Furthermore, due to corruption, two individuals of the same social group may pay different amounts.
Vertical equity means that people, in a position to pay higher taxes than others, should do so. There are three criteria for determining this: a greater ability to pay, a higher level of economic well-being, and receiving more benefits from general government expenditures.
Controversies may arise, as to who has a greater ability to pay and who has a higher level of economic well-being. For example, an ill and a healthy person may earn the same income, and would be taxed equally. Questions arise, whether actual income or the hourly wage rate should be used to determine, how much should be taxed.
Under Turkmenistan’s flat rate tax system, all social groups pay the same rate of personal income. The business and property tax rates are low by world standards, so large entrepreneurs, most able to pay, and other beneficiaries of subsidies, could pay a higher share. Even on paper, the system is vertically inequitable by all three criteria, in comparison with most developed countries.
All that glitters is not gold. For example, corruption distorts the apparently liberal, yet inequitable, tax system of Turkmenistan. Making the rich pay a higher personal income tax rate than the poor would not necessarily make the tax progressive in practice.
Rates and penalties
At first glance, taxation in Turkmenistan appears liberal. Individuals currently pay a flat 10% income tax rate, low by world standards. (In comparison, China, a recognized example of successful gradual transition to a market economy, has a top personal income tax rate of 45% and a top corporate tax rate of 25%, reports Heritage Foundation.) Resident legal entities, except hydrocarbon resource operations contractors, pay an 8% business tax rate; non-residents pay a 20% business tax rate. They must also pay a property tax of 1% of the balance sheet value of the property and a value-added tax of 15%. Importers are exempt from excise taxes on goods, subject to these taxes.
Yet the tax authorities have substantial room for abuse. Suspecting actual or future evasion, they may demand premature payment. The tax service may also sue for collateral, amounting to the volume of the payment. Furthermore, according to Article 71 of the Tax Code, the state pays only half of the salaries of tax officials. The rest consists of 50% of the fines and penalties that the tax official had charged. Thus, it is dangerous for the taxpayer to comply fully: the tax collector may lose his or her salary, so false charges and property seizures occur, reports SoyuzPravoInform, a law firm, operating a database on the legislature of CIS countries.
Are Turkmenistani taxes equitable?
Economists identify two concepts of equity: horizontal equity and vertical equity. A tax system is horizontally equitable, if it equally treats individuals, similar in all relevant aspects. This is hard to objectively define. For example, many systems tax similar products differently, treating individuals with different tastes differently.
Marital status affects one’s ability to pay, but not all tax systems account for it. Studies in the United States have shown that in households with two workers, the one making less money (usually the woman), called the secondary worker, is usually more sensitive to the wage rate, and income taxes affect labor supply of secondary workers more than they do of primary workers. A government, concerned with the inefficiencies of taxation would impose a lower tax rate on the secondary worker, but many would call this system unfair.
Taxation in Turkmenistan is not horizontally equitable. There are no attempts to account for marital status differences. Furthermore, due to corruption, two individuals of the same social group may pay different amounts.
Vertical equity means that people, in a position to pay higher taxes than others, should do so. There are three criteria for determining this: a greater ability to pay, a higher level of economic well-being, and receiving more benefits from general government expenditures.
Controversies may arise, as to who has a greater ability to pay and who has a higher level of economic well-being. For example, an ill and a healthy person may earn the same income, and would be taxed equally. Questions arise, whether actual income or the hourly wage rate should be used to determine, how much should be taxed.
Under Turkmenistan’s flat rate tax system, all social groups pay the same rate of personal income. The business and property tax rates are low by world standards, so large entrepreneurs, most able to pay, and other beneficiaries of subsidies, could pay a higher share. Even on paper, the system is vertically inequitable by all three criteria, in comparison with most developed countries.
Taxes, productivity and wages
In this primarily Muslim (currently 89% of the population of Turkmenistan, according to the CIA World Factbook), patriarchal society, healthy adult males have traditionally been the primary workers. According to the World Bank, less than half (46% as of 1990, 47% as of 2014) of females age above 15 participated in the labor force, compared with 75% as of 1990 and 77% as of 2014 for males of the same age category. When a typical healthy male leaves the workforce, his family loses most or all of its income. Thus, male labor supply in Turkmenistan must be inelastic - it changes little, due to wage changes. Since most workers continue to work anyway, the few private firms pay their employees substantially less than they would have, if they were tax-exempt - taxes are shifted backward. (Rigid labor regulations prevent the wage from falling below the minimum wage, but discourage hiring new workers, so unemployment remains at 10% as of 2017, according to Heritage Foundation.)
Gender roles changed after the USSR’s demise. Many Turkmen men became involved in shipping imports, but customs officials would resort to search and seizure. Cross-border trade was safer for women, since the mentality of officers then precluded violence against them. Furthermore, thousands of men dropped out of the workforce, due to abuse of addictive substances, so many women became breadwinners, reports the Turkmenistan Chronicle, the website of the Turkmen Initiative on Human Rights, a non-governmental human rights organization.
Would imposing higher personal income tax rates on richer taxpayers and lower rates on poorer taxpayers, instead of the existing flat rate, make the system more equitable, and how would it affect productivity? In many industries, such as trade, female labor supply may also be inelastic, implying that this change would not significantly affect productivity. However, because business owners would pay more in personal income taxes, the backward shift would partially or fully offset the progressive effect of this change. Without legislative amendments to penalties and compensation of tax officials, corruption and evasion would make fair collection impossible. The proposed system would be progressive on paper, but not necessarily so in practice.
Conclusion
Do not judge a book by its cover. Corruption distorts the nominally liberal tax system of Turkmenistan and exacerbates its inequity. Legal amendments are vital to fair tax collection in Turkmenistan.
In this primarily Muslim (currently 89% of the population of Turkmenistan, according to the CIA World Factbook), patriarchal society, healthy adult males have traditionally been the primary workers. According to the World Bank, less than half (46% as of 1990, 47% as of 2014) of females age above 15 participated in the labor force, compared with 75% as of 1990 and 77% as of 2014 for males of the same age category. When a typical healthy male leaves the workforce, his family loses most or all of its income. Thus, male labor supply in Turkmenistan must be inelastic - it changes little, due to wage changes. Since most workers continue to work anyway, the few private firms pay their employees substantially less than they would have, if they were tax-exempt - taxes are shifted backward. (Rigid labor regulations prevent the wage from falling below the minimum wage, but discourage hiring new workers, so unemployment remains at 10% as of 2017, according to Heritage Foundation.)
Gender roles changed after the USSR’s demise. Many Turkmen men became involved in shipping imports, but customs officials would resort to search and seizure. Cross-border trade was safer for women, since the mentality of officers then precluded violence against them. Furthermore, thousands of men dropped out of the workforce, due to abuse of addictive substances, so many women became breadwinners, reports the Turkmenistan Chronicle, the website of the Turkmen Initiative on Human Rights, a non-governmental human rights organization.
Would imposing higher personal income tax rates on richer taxpayers and lower rates on poorer taxpayers, instead of the existing flat rate, make the system more equitable, and how would it affect productivity? In many industries, such as trade, female labor supply may also be inelastic, implying that this change would not significantly affect productivity. However, because business owners would pay more in personal income taxes, the backward shift would partially or fully offset the progressive effect of this change. Without legislative amendments to penalties and compensation of tax officials, corruption and evasion would make fair collection impossible. The proposed system would be progressive on paper, but not necessarily so in practice.
Conclusion
Do not judge a book by its cover. Corruption distorts the nominally liberal tax system of Turkmenistan and exacerbates its inequity. Legal amendments are vital to fair tax collection in Turkmenistan.
References
CIA World Factbook. Turkmenistan. https://www.cia.gov/library/publications/the-world-factbook/geos/tx.html. 2017.
Heritage Foundation. 2016 Index of economic freedom: China. http://www.heritage.org/index/country/china. 2016.
SoyuzPravoInform. Turkmenistan’s tax legislation. http://tm.spinform.ru/nalogovaya_systema.html. 2005.
Turkmen Initiative on Human Rights. Women in Turkmenistan. Turkmenistan Chronicle. http://www.chrono-tm.org/2012/09/zhenshhinyi-v-turkmenistane/. 2012.
The World Bank. Labor force participation rate, male (% of male population ages 15+). http://data.worldbank.org/indicator/SL.TLF.CACT.MA.ZS. 2014.
The World Bank. Labor force participation rate, female (% of female population ages 15+). http://data.worldbank.org/indicator/SL.TLF.CACT.FE.ZS. 2014.
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