by Damir Miljevic
The media campaign has become increasingly reckless and has resorted to increasingly defamatory language. Thus, recently we could read in the daily newspapers that a lower taxation rate would actually benefit wealthy given that caviar would be cheap (Mladen Ivanic at a campaign rally in Bijeljina), that several taxation rates favor criminals (Renzo Davidi - European Commission in Sarajevo), that he (Kemal Causevic - director of the Indirect Taxation Directorate) would never live in a country with more than one VAT rate, that the Indirect Taxation Directorate is the main pillar of the economy in Bosnia-Hercegovina (Paddy Ashdown at the opening of the Indirect Taxation Directorate building in Banja Luka). (Pity the country in which the taxation directorate is the pillar of the economy, rather than its entrepreneurs and companies). Besides, Adnan Terzic [head of the Council of Ministers] purportedly demanded to be dismissed if the law with more than one VAT rate were adopted, although he was well aware that he could not be legally dismissed in that manner.
A different angle: The culmination was the letter of the Governing Board of the Indirect Taxation Directorate sent to the Parliamentary Assembly in which they threatened that they would refuse to implement a VAT Act envisaging more than one VAT rate. I think that this is an unprecedented case, probably unheard of in history, in which executive authorities refuse to implement laws adopted by the legislative branch of government!
In the meantime, daily newspapers are overflowing with paid advertisements submitted by the Indirect Taxation Directorate and the Council of Ministers, which are trying to convince the populace, by resorting to lies and distortions of facts, that one VAT rate, and specifically the 17 percent VAT rate is the only correct solution for Bosnia-Hercegovina. Certain members of the Governing Board of the Indirect Taxation Directorate have jumped in the fray, so that last week you could read a column contributed by Mr. Kudic, under the headline "The Other Angle Of VAT".
Although I do not intend to provide a detailed analysis of Mr. Kudic's arguments, I would like to draw the attention of respected readers to some distortions from that article, which are probably the best illustration of the manner in which the media battle for a single VAT rate is being waged.
Mr. Kudic writes: "Today it is believed that the VAT should cover as wide a range of products and services as possible..., as few VAT rates as possible, ideally one, should be used, and exceptions should be reduced to the absolute minimum and the zero VAT rate should be avoided (except for exported goods)". After reading this sentence a reader would most likely conclude that whatever is "believed" (and Mr. Kudic did not say who believes) has been widely accepted and implemented in the taxation systems of the countries using the VAT. Fortunately, that is not true. Out of 25 countries of the European Union, 23 have two or more VAT rates (Ireland and Italy as many as four), while as many as 13 countries in the European Union use the zero VAT rate (see report of the European Commission number DOC/2008/2004 "VAT Rates Applied in the Member States of the European Community", published in September 2004). On the other hand, Mr. Kudic confidently asserts that "most countries do not apply the zero VAT rate on domestically traded goods...". News that the Bulgarian Parliament on October 20, 2004 decided to introduce three VAT rates, instead of one, is another indication of what is "believed".
Mr. Kudic continues: "It has been established that the wealthy spend twice as much on food as the poor, even though the poor use a larger proportion of their income on food. Therefore, a reduced VAT rate applying only on food would benefit the wealthy much more than the poor". What nonsense! Let me translate: according to Mr. Kudic, given that today bread and milk are not subject to the sales tax, if in the future they become subject to a 17 percent Value Added Tax that would obviously benefit the poor! The "dastardly" countries of the European Union that according to Mr Kudic and not only him use VAT to line the pockets of the wealthy include: Ireland, Cyprus, Malta and Great Britain, all with a zero VAT rate on all food, and Belgium, Germany, Greece, Estonia, France, Italy, Luxemburg, the Netherlands, Austria, Portugal, Lithuania, Finland, the Czech Republic, Poland, Slovakia and Sweden, all with reduced VAT rates for food.
Kudic than says the following: "Demand for books, newspapers and magazines is subject to quite a lot if income elasticity and these products are consumed more by wealthy individuals who, therefore, benefit more from lower taxation rates than the poor, which definitely was not the goal of the reduced VAT rate". Again, let me draw your attention that currently books, newspapers and news magazines are not taxed, so that I fail to understand, and I hope you share my disbelief, how wealthy individuals would benefit if they remain untaxed. However, we would not be the only parties with skewed understanding of this problem. The goal of the zero VAT rate on books, newspapers and magazines is probably somewhat better understood by tax administrations in Belgium, Denmark, Ireland, Poland, Finland, Great Britain (zero VAT rate), and Estonia, Italy, Luxemburg, France, Hungary, the Czech Republic, Latvia, Lithuania, Poland... and all other countries that have a reduced VAT rate for all printed media.
Mr. Kudic and all other advocates and promoters of the single VAT rate idea, (17 percent), are probably dumbfounded by the behavior of their colleagues in the European Union countries who chose to ignore "research" and "beliefs" and use in their taxation systems more than one VAT rate also keeping in mind social effects of taxation policy. However, Mr. Kudic clearly demonstrates that all of them are terribly mistaken: "The goal of the introduction of the VAT is too collect revenue by taxing the consumption. The VAT has nothing to do with social policies". Here, Mr. Kudic has already forgotten basic relations between categories in the fiscal system. Thus, I would like to use this occasion to remind him that every taxation system, including the VAT, must be and is primarily used to further taxation policies. And taxation policies were defined long ago. For example, according to the "Encyclopedia of Economics" "taxation policy implies the use of taxes to further and accomplish various financial, economic, social and other goals of a society".
Those who survive...: And here we reach the essence of the problem, the true goal of the introduction of the VAT in Bosnia-Hercegovina. This project has been portrayed as a formal, technical replacement of one form of taxation (sales tax) with another (VAT). All discussions are focusing on a much less important issue - whether there will be one of several VAT rates - while the essence of the taxation reform has not been addressed. And the essence of this taxation reform is that, by stealth, under the guise of struggle about the number of VAT rates, there is an attempt to do something very important - to change the taxation policy of the whole country with the goal of forcing the inefficient and insolvent economy and impoverished population to spit out additional 2 billion of Convertible Marks [roughly $1 billion] in order to finance new bureaucracy at the level of Bosnia-Hercegovina.
That explains why the media campaign is so fierce and reckless and why all stops have been pulled in an attempt to reach the desired goal. That explains why the Council of Ministers and the Indirect Taxation Directorate have not revealed how they came up with the single VAT rate of 17 percent. The 17 percent VAT rate actually corresponds to an increase of more than 30 percent with respect to current taxes, which means that every household in Bosnia-Hercegovina will have to pay additional KM500 [about $300] annually to the government!
In all of that the authorities in Bosnia-Hercegovina and their mentors from abroad do not give a hoot whether that additional taxation burden can be withstood by the impoverished economy and taxpayers and how and with what measures they will rein in the inflation, sort out problems and expenses that will arise if VAT is implemented in the manner they envisage. President of the Governing Council of the Indirect Taxation Directorate, leaving the Parliamentary Assembly after the House of Representatives adopted a VAT Act with two VAT rates only stated that with that law state budget was denied $125 million. It remains to be seen how much money we, the taxpayers will be denied in the future. Those who survive will live to tell...