The Greatest Gains from a Tax System Come When you Eliminate Taxes. I Recommend That to Ukraine

I don't know of any economy in the world that needs more help and more support from the productive factors than Ukraine does today, given the trials and tribulations going on.

Now, taxes have consequences. You know, when you look at taxes, taxes can change the volume of income. Taxes can change the composition of income. Taxes can change the timing of income. And most of all, taxes can change the location of income.

And then there's the unique feature of Ukraine, which is corruption. Tax rates can change the volume of corruption and the incentives to corrupt in the country.

What you want to have in a tax system is you want the largest possible tax base for the system. The smaller the base, the easier it is for people to get around paying the taxes, the greater the incentive it will be.

High tax rates on a small base make no sense whatsoever. Large tax rates also make no sense. The higher the rate, the greater proportionally there is for the incentive to evade, avoid, or otherwise not report taxable income.

And lastly, time. When you put in a good tax system, it must support the time frame of that system. You know, if you make a tax system that works for the next six weeks, that tax system will erode and decline.

Low rates provide a building of capital stock. If you raise tax rates too high, you'll have a decimation of the capital stock of the country.

The greatest gains from a tax system come when you eliminate the tax altogether so that people don't even have to file. I would strongly recommend that in Ukraine you consider not having any tariffs, not having any quotas, not having any restrictions on trade, because from my experience in Ukraine, having been there and seeing what happens on the border, it is almost impossible to control the movements across borders of products and to tax those products. I would not put on any tariffs, any quotas, any restrictions on trade, except perhaps for some very strategic materials in the system.

The key element for a tax system is that you want the lowest possible tax rate on the broadest possible tax base. So you provide people with the least incentives to evade, avoid, or otherwise not report taxable income, and you want the broadest tax base to give them the least number of places where they can put their income in order to avoid taxes.

The North Star, the thing we should all be shooting for, is the lowest possible tax rate on the broadest possible tax base and the least number of sources of income taxed. You want to have an income tax or a value-added tax or a trade tax, but you don't want all of them. You want a very select few taxes in the system.

And do remember that taxes sit within a context of all sorts of other policies. Taxes really do matter, but so does government spending. Make sure you put in the most stringent controls you can on excessive government spending.

Not only is government spending important, as important as taxes, but also monetary policy. Make sure you make sure that Ukraine has a stable currency, whether you do that by fixing it to other currencies or whatever, but make sure that your monetary policy is a stable value over a long period of time. Nothing can bring an economy to its knees quicker than hyperinflation that just destroys the whole credibility of an economic system.

Regulations. You know, we all know we need regulations, but we want to make sure that we do not overregulate. Make sure regulations do not go beyond the specific purposes at hand and create a lot of collateral damage in the system. That can destroy it.

And of course, as I said, trade. Trade is essential to an economy. And trade, by the way, should be as free as possible. Ukraine needs to be getting the highest quality products at the lowest possible cost, no matter where they're produced. They should be produced anywhere in the world and Ukraine should take advantage of the gains from trade, of comparative advantage, per David Ricardo, really critical to Ukraine.

Also, just so I can mention it here, and it's really important in Ukraine as well, privatization of government-run companies and businesses. You know, that is truly important. In Turkey, a long while back, they privatized all of it and they made it through the Great Recession very well because they privatized all sorts of industries. You must privatize everything you possibly can in there.

Now, the last thing I would recommend to this commission and all the delegates is do not do tax policies by committee. Because committees compromise, you're guaranteed to have an awful system if you have a compromise plan. What you should do is have one group do a comprehensive, correct plan and then have the committees criticize it, add additions, addendums, but do not let it be a committee because whenever politicians and economists agree, it always inures to the detriment of the citizens of the country.

And when I look at this, all I can say following this is God bless you. You have a huge task at hand. Remember, it's not about you; it's about Ukraine. And may the force be with you.

Arthur Laffer is an American economist and founder of the supply-side economics theory.