Armenians still feel the euphoria of the Velvet Revolution, but the time for hard work has begun. The restructuring of the tax code is crucial for economic fairness and growth. High income individuals, large corporations, monopolies and oligopolies have to pay their fair share. As such, a flat tax is not the answer.
Simply put, a flat tax system benefits large companies and the rich. These entities are well-positioned to pay their fair share of taxes, but they argue that because they are the “engines of economic growth,” they should be exempt from paying higher or graduated (progressive) tax rates.
This argument is faulty. Small businesses are the backbone of a robust economy, and small business formation creates the most new jobs. Since independence, the Armenian economy has been dominated by large monopolies and extractive businesses. Both of these types of economic activity are bad, not just for the economy, but for the local communities that make those economies possible. Monopolies destroy competition and keep prices for necessities high, and extractive industry benefits handful of people, who usually live far away from the site of extraction (largely because the remaining environment is degraded and/or uninhabitable—and what wealthy individual would do that to their own hometown?). These dominant corporations perpetuate a small number of elite and leave a significant percentage of the population in residual poverty.
Secondly, the working poor spend the greatest percentage of their wages. Their spending, and not the savings of the rich, drive the economy in a country like Armenia. The working poor should therefore be given tax breaks so that they can spend more money on basic necessities which will keep the economy afloat and basic needs met.
In order to incentivize small business formation, taxes in the first few years of operation should be kept low, and then increased gradually as the business becomes more profitable. A special incentive can be given to small businesses that add new employees.
High income individuals and large corporations have the greatest means to pay taxes, yet because they have the most clout to put pressure on the government, they are able to keep tax rates low. The voices of the rich should not overpower the voices of the average worker. The wealthy argue that if taxes are too high, they will have to reduce the number of employees. These types of arguments are often not borne out by facts.
Not only should a higher tax rate be implemented, but the system could be structured in such a way that the slope of the graduated tax rate increases over time. In other words, the tax rates for the higher income earners could be increased in a step process over a period of five years.
In Armenia, the largest corporations and the rich have been the greatest beneficiaries of the country’s, up-till-now, oligarchic economic structure. Higher tax rates may come as a shock to many corporations and individuals who paid next to nothing in taxes these past few decades since Armenia’s independence, but from the point of view of fairness, a progressive tax system is the right choice for Armenia. It just makes economic sense.