Reva’s bad idea

4 min readDec 21, 2018

The consequences of raising Unified Social Tax effective rate for monthly salaries exceeding UAH 55,000 do not justify the means

Government initiative: Ukraine’s Social Policy has proposed to eliminate the upper tier of the Unified Social Tax (UAH 12,500) and introduce a regressive UST rate ranging from 22% (to 25 monthly minimum wages) to 5% (from 270 monthly minimum wages).

This proposal will affect only employees with a monthly income of more than 15 minimum wages (UAH 55,800+). Based on statistics from Ukraine’s Pension Fund and the State Statistics Committee, as of 2018, the proposed change would affect 93,400 employees accounting for less than 7.8% of the total salary fund.

The regulatory UST rate proposed by the Social Policy Ministry for monthly wages on salaries exceeding UAH 55,800, depending on total wages, would alter effective UST rates across the board. Determining the distribution structure of salaries for the specified 0.92% (or 93,000 employees) requires a detailed calculation of additional Pension Fund receipts.

Taking into account the fact that up to half of the country’s salary fund (especially low-skilled labor) is off the books (unreported), the top 6% of the employed population, which accounts for 25% of the salary fund, would exhibit the least distortion in the overall salary distribution structure. We are talking here mainly about top employees in the information sphere, financial and managerial executives of industrial enterprises.

Assuming that income is distributed and the top 0.92% receiving monthly wages of UAH 55,800+ (according to the same principle as the top 6%), we calculate the following structure: 70,7000 thousand Ukrainian employees earn a monthly salary ranging from UAH 50,000 to UAH 100,000, with 3,700 monthly salaries exceeding UAH 500,000.

According to our calculations, the peak increase in the tax burden will have on wages in the range from UAH 200 to UAH 150,000 (from 12.3% to 16.7% of the work force). By multiplying salaries in each of the ranges by the effective UST rates under the new system, we can calculate the amount of additional Pension Fund revenue (with no envelope extras). It is UAH 16.1 billion, 61% more than the Social Policy Ministry’s baseline estimate based on higher wage growth rates (+25%) in 2018, compared with the administrative increase in minimum salaries (+16.3%).

If the proposed increase in UST rates above UAH 55,800 from the current 1.4% to 21.8% of the workforce is adopted, we consider it likely that wages for first tier employees (UAH 50,000 to UAH 100,000) and second tier employees (UAH 100 to UAH 500,000) will move “into the shadow.” The exception will be employees of the third range (UAH 500,000+), which are mainly civil service or top executives in Western companies which cannot bear the global reputational risks tax optimization schemes. As a result, we assume that up to 30% of the salary fund of the first and second ranges will be paid “in envelopes.” This will result in a loss of UAH 19.6 billion. GDP and net growth in revenues to the Pension Fund is only UAH 9.8 billion. It should be noted that adopting the proposed UST proposal would increase Ukraine’s fiscal percent of GDP by approximately 0.9%.

The political aspect of the decision

The seemingly insignificant electoral weight of 93,000 employees is deceiving. The proposed UST change could trigger a wave of indignation by right- and left-oriented segments of Ukraine’s electorate, from full-time staff, who work for these highly-paid employees. It is precisely these top paid executives who are figures of authority, not only for their employees, but the larger population. If we take into account that in the past three years top managers with high incomes have been particularly popular as lecturers and mass media commentators, the electoral risk of implementing the Social Policy Ministry’s UST proposal becomes even greater and could possibly affecting from five to six million prospective voters. .

IMF Group Ukraine




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