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We are Against the Flat Tax Regime

Around 100 signatories have issued a petition regarding the tax reforms of the temporary government. The petition is open for joining by the following link.

In November 2018, the temporary Government published a draft law on “Amendments in the Tax Code of the Republic of Armenia”, which will, according to preliminary information, be delivered to the newly formed National Parliament in January-February of 2019.

One of the more remarkable points of the new draft tax system is the planned change in the current income tax rates.

The current tax regime is a three-tier system with the tax rates of 23% (for an income up to 150.000 AMD), 28% (for an income between 150.000 and 2 mln) and 36% (for an income above 2 mln AMD). The new tax law amendments suggest flattening all the rates to a unified 23%, which is expected to drop to 20% by 2023.

Apparently, in 2019 the tax rate for medium and high income-receivers will drop by 5% and 13% respectively and by 8% and 16% by the year of 2023, whereas for low-income earners it will remain unchanged at the beginning and later will drop only by 3%.

In addition to the expert criticism already expressed so far, we are stating our political disagreement with the above-mentioned draft law, given the following reasons:

·         These amendments imply relocation of the tax burden from the wealthy minority onto the poor majority. As a result of significant reduction of the profit tax and income tax of middle and high wage-earners, there will be budget losses which will be recovered through raising other indirect taxes (consumption and specifically excise taxes)․ There are also discussions of raising other indirect taxes, more specifically, state fees for certain services provided to citizens. In other words, the taxes of the middle and notably wealthy class will be discounted to the detriment of the poor majority.

·         Flattening the tax rates will widen income inequality and contribute to social injustice. While costs to meet basic needs make up the entire or at least significant part of the income of middle income earners, for high wage earners their income is way above meeting basic livelihood needs. It is absolutely evident that for a person earning 150.000 AMD per month, paying 34.500 AMD (23%) as tax is qualitatively impacting their livelihood more than paying 720.000 AMD (current 36%) for a person earning 2mln AMD per month. Any tax regime, in the end, is based on certain principles of redistribution: while a progressive tax regime aims to mitigate inequality and injustice often driven by structural reasons, a flat tax regime only exacerbates injustice.

·         The unacceptably wide social polarization in Armenia will further widen as a result of adopting these amendments. Those receiving high income and profits will be able to accumulate more than they would have been able to do under the current system. We will continue having a minority that dominates economically and is continuously getting more powerful taking hold of incomparably larger economic resources, including capital, than the majority of the people. Economic power and influence are always political, which make these legislative draft amendments unacceptable for precisely political reasons.

Therefore, not denying the need for tax reforms, revision of current tax rates and thresholds, we find it imperative that any tax reform initiative follow exclusively the principle of progressiveness. We find that the proposed amendments directly oppose values of justice, equality and solidarity. We call on the newly elected National Assembly’s parliamentarians and political governors of the country to revert this process and draft a new tax legislation that is based on principles of justice and progressiveness and derives from the interests of wide circles of the people.