An Unpopular Post

2023 will undoubtedly be a very important year for the country, because a new Tax Code will be drafted this year. Despite all the theories about the merits of low rates, the tax base in our non-oil sector is not growing much, and none of the programs to develop the non-resource sector has delivered the expected results. As a result, we cannot live without oil, and transfers from the National Fund are now the single largest item of budget revenue. To bring the budget deficit down to an acceptable level and still save money in the National Fund, we will have to raise taxes, and that is the crux of the matter. Who should pay more, how much more, and above all how, will be the main question in drafting the Tax Code.

To calculate how much taxes need to rise, the whole deficit should be adjusted for the increase in tax revenue that will come from the projected real GDP growth. The remainder should then be divided in a certain proportion among all taxes, and from that one can work out how much each tax must be raised.

The drafting of the Tax Code should also rest on a handful of principles. There are not many of them, but a Tax Code cannot be built without them. The main principles of any tax system are equality and fairness, efficiency, and reasonableness (economy).

The most contentious principle, and the most important, is fairness in taxation. For example, the vehicle tax is paid for owning a car, although it would be fairer to pay according to how much the car is used. That is possible, for instance, by building the vehicle tax into the excise duty on fuel: the more fuel you use, the more you pay.

Progressive taxation is also a fairer system, although it depends on one's point of view.

Fairness is also highly relevant to the taxation of subsoil users. The subsoil belongs to the people, so taxation of this sector is the most sensitive. Here, the rate of return matters, depending on the stage of exploration and the type of extraction. At present the system of taxing subsoil users is badly unbalanced, even though this sector should be our main source of budget revenue.

The efficiency of a tax system is determined by its ability to stimulate economic development, and low rates do not always achieve this. For example, progressive taxation is one of the main tools of stimulus. If individuals are allowed to deduct from their income the expenses that stimulate domestic demand (spending on housing, education, healthcare and tourism), this boosts domestic consumption, and the person pays no tax on those amounts. Since he is consuming a domestic product, the tax will be paid by the seller, in the form of CIT and payroll taxes. A progressive scale would encourage him to do so. The same works for corporate income, through accelerated depreciation of fixed assets and intangible assets, the taxation of dividends, and so on.

Returning to subsoil users, we also need to encourage them to carry out more processing stages inside the country. To do this, the rate should fall as the processing stage rises, thereby encouraging the creation of production facilities. Unfortunately, our depth of processing leaves much to be desired, especially in mining and metals.

For reference: with republican budget expenditure of KZT 18.5 trillion, tax revenue provides only KZT 10 trillion. The rest is covered by transfers from the National Fund and borrowing by the Ministry of Finance. KZT 8.5 trillion is an enormous sum, and closing that gap without raising tax rates will be extremely difficult. Otherwise, we have to accept that we will not be able to accumulate money in the National Fund from the oil sector.