Pridnestrovie tax reform brings 3½-fold increase in revenue

Along with increased economic activity and tax reform, new construction also benefits from the lower, simpler tax rates

TIRASPOL (Tiraspol Times) - Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie says the parliamentary press service.

Modernizing Pridnestrovie’s tax legislation has been on the legislative agenda for the past year and a half in the unrecognized country's parliament. The interdepartmental work group for harmonization of legislation of the Pridnestrovian Moldavian Republic was set up to coordinate the efforts, aiming to reform the tax system and bring it up to date by simplifying the system and making it easier for as many new taxpayers as possible to file their returns.

Along with a series of other innovations in the economic sphere, tax reform first began in Pridnestrovie in 2001. At that time, the PMR parliament faced a challenge to shape a tax system that would facilitate adaptation of companies and private traders to new requirements and their survival in a competitive economy. Legislators tried to reduce the tax burden on companies and encourage production and new jobs, according to the parliamentary press service.

The reform program which was started by PMR's 3rd elected Parliament and continued by its current 4th elected Parliament is bearing fruit: Reforms in the tax system aimed at a more favorable tax environment for businesses has resulted in a 3,5-fold increase in budget revenue.

Tax reform produces 3.5 increase in income

Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available. They would have been higher if it hasn't been for a Moldovan-instigated clampdown on exports which began in March of 2006. The measure, which was deemed a blockade by Pridnestrovie, cost an estimated $500 million in lost exports earnings for 2006 alone, and lower export earnings in turn affected tax revenue.

Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief.

Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

Before the reforms, three out of every four companies suffered losses. With the overhaul of taxes, most now make a profit and income for the state budget has gone up significantly as a result.

" - Tax reforms facilitated overcoming the crisis and progress in the industrial complex of the republic. It led to the recovery of the Pridnestrovian economy," reports the press service of PMR's parliament. "Regulating the tax burden the state encouraged investments of economic actors and the state’s economic potential had been updated and increased."

The "Laffer curve" at work

Pridnestrovie's parliament hasn't reinvented the wheel, but is learning from Arthur B. Laffer, and American economist who is best known for the Laffer curve.

The Laffer curve illustrates tax elasticity which asserts that in certain situations, a decrease in tax rates could result in an increase in tax revenues. The gist of the theory is that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue. Laffer stated that the tax rate that maximizes revenue was at a much lower level than previously believed: so low that current tax rates were above the level where revenue is maximized. Before Laffer's work, it was universally assumed that the revenue-maximizing tax rate would be only slightly below 100% - however, Laffer himself has pointed to Russia and the Baltic states who, just like Pridnestrovie, instituted a flat tax with rates lower than 35%, and whose economies started growing soon after implementation.

Ireland, one of the fastest-growing European economies, has also been used by Arthur Laffer as an proof that tax cuts work:
" - The highest marginal tax rate on personal income went from about 65 per cent in 1984 to 42 per cent today," said Arthur Laffer in his analysis on Ireland. "The highest corporate rate went from 50 per cent to 20 per cent. [...] the tax cuts in Ireland worked just as well as they had worked in the US. Employment soared, government spending fell, government revenues rose, the budget moved into surplus, and the public debt declined. It doesn't get any better."

With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie's tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times - proof, says an MP, that the Laffer curve is alive and well in Tiraspol.

See also:
» Tax freedom for large investors in Transdniestria
» New, lower income tax: 10% flat tax approved by PMR Parliament
» Tax law thrown out; Court considers it an encroachment on private property