Thursday, April 28, 2005

Some thoughts on economic changes

The changes in the simplified tax regime have caught many businesses off guard. A great many organizations were using a loop-hole in the tax regulations to “hired” employees as individual contractors. This allowed the employees to pay a much reduced social and income tax amount. It also allowed the organizations to avoid paying social taxes for the employees. Many organizations, including many who supported Yushchenko, used the loop-hole to lower their tax bite. While the changes in the tax regulations can be debated, the appropriateness of using a loop-hole to avoid paying taxes that directly pay for pensions, teacher salaries, and other social needs is not debatable. The simplified tax regime was designed to protect small businesses from over-enthusiastic tax inspectors, the new version will continue to offer this protection. The reform will strip away the ability to shield regular employees from taxes. The ‘Orange Revolution’ promised changes, this is an over-due one. The complaint that the tax regulatory changes were sudden has some justice, but they were required never-the-less.

The re-valuation of the Hryvnya has caught many people off guard. The Hryvnya has been roughly pegged to the US Dollar and the Dollar has been falling against major currencies for the past year. The pegged Hryvnya has also fallen. It is about time that the Hryvnya rose in value. The economic growth in Ukraine certainly did not support a lower Hryvnya. Certainly, any reasonable viewer of the Ukrainian economy saw this revaluation coming for a few months. I do not see this as caused by Yushchenko presidency; the general economic growth caused it.

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