Scenarios of personal income tax reform in the context of reducing income inequality in Ukraine

Abstract

Introduction. The aggravation of the problem of inequality and poverty in the conditions of Russia’s full-scale war against Ukraine determines giving priority to its mitigation in the period of post-war reconstruction. At the same time, ensuring the reduction of income inequality in the period after the termination or abolition of martial law is expected to be achieved by using the redistributive role of taxes, primarily personal income tax. Problem Statement. Although a progressive income tax is considered to be one of the main tools for reducing inequality, a proportional personal income tax can also increase the progressivity of taxation through a well-designed mechanism of tax-exempt amount. The purpose of the article is to analyze the state of fulfillment of the function of reducing income inequality by the personal income tax in Ukraine and ways to increase its redistributive properties. Methods. The redistributive properties of personal income tax were studied by determining the impact of the tax social benefit before and after its reform on the tax burden at different levels of income, which was calculated on the basis of effective personal income tax rates. The assessment of the fiscal consequences of the proposed reforms was carried out using information from the Pension Fund of Ukraine on the number of people receiving wages in a certain income range. Results. It was established that the flat personal income tax in Ukraine does not fulfill the function of reducing income inequality due to existing restrictions on the right to apply the tax social benefit, which cannot be used even by the recipients of the minimum wage. This creates the problem of a high tax burden on people with low incomes. In order to increase the impact of the tax on income redistribution, the feasibility of introducing in Ukraine a differentiated tax social benefit for the taxpayer, as well as a tax social benefit for dependents (wife/husband and children) is substantiated. Another option for increasing the progression in personal income taxation was considered – the introduction of a low-progressive/progressive tax model in combination with the existing and differentiated tax social benefit. Conclusions. An assessment of the impact of the proposed personal income tax reforms on the tax burden at different levels of income, as well as their fiscal consequences, was carried out. Possible risks, as well as the procedure for reforming the tax, are substantiated.