AYF Protesting Armenian Government’s Plan to Install a Flat Tax

Flat Tax: A Broken Solution for a Broken System

Scenes from Wednesday’s sit-in outside the National Assembly (Photo: @ahazangir)

The National Assembly of Armenia (NA) met Wednesday to discuss the proposed changes to the country’s tax system. Members of the Armenian Youth Federation (AYF) in Armenia have gathered in front of the NA, braving the sun and heat for hours now to oppose these changes which they feel will be ineffective in reforming the livelihood of Armenian society. They have organized a sit-in protest to make their voices heard in a discussion they have been left out of.

“At the moment, our sit-in protest is still underway,” said Arshak Mesropyan, a member of the “Alarm” initiative’s coordinating group. “Today the supporters of our initiative will spend the night in front of the National Assembly (NA) building. This sit-in will serve as our contribution to the ongoing discussion in the National Assembly. We are ready to sit as long as it takes our deputies to realize the inequality a vote in favor of this tax code will create. The rich are bound to get richer and the poor poorer. The initiative will continue until this tax code is rejected. We demand a comprehensive reform of the tax system that will first serve the most vulnerable of the society and not widen the growing abyss between economic classes.”

The country’s ruling My Step Alliance has put forth a proposal that would change Armenia’s taxation laws from a progressive one to flat taxation. Previously, if you earned more, you paid more. With these new tax laws, all personal income will be taxed at the same rate. Proponents of the changes argue the flat tax is more fair and more in line with the goals of the post-revolution state. The current regime is hailing these changes as revolutionary, as they will stimulate the economy, lead to GDP growth and create a simpler, more equitable system for the future. Opponents of such changes argue the flat tax is a temporary solution to a wider societal issue that in reality will only benefit the society’s most affluent members.

The flat tax is a phenomenon that has gained popularity in recent decades among many post-Soviet and struggling economies around the world. There are a variety of countries that have adopted the flat tax system and have seen considerable economic growth; however, the benefactor of that growth remains the same: the top tax tier. Russia, being one of the early adopters of such a system, has seen some success in the arena. Their economy having recovered the pitfalls of the wider global economic crises of recent years, is now seeing a growth in GDP and a significant increase in tax revenue. Although ostensibly this seems promising for countries looking to reform their tax systems and are considering the flat tax, it’s worth taking a deeper look at how such a system would affect the average citizen.

Armenia is a small economy. The majority of the workforce, more than 65 percent, receive a monthly salary of 150,000 AMD (approximately $315 a month or less). Currently, the highest tier tax bracket pays 13 percent more than the lowest. The proposed changes would give a considerable tax break to the top tax tier as the proposed new tax percentage will adopt the lowest current tax for all citizens at 23 percent. This means the lowest tax tier will receive no benefit from the new law. This proves problematic when considering the overall outlook of the new government toward the average worker. By prioritizing tax deductions for the wealthiest in the society, the ruling regime believes these benefits will somehow boost economic growth and spending among citizens as those with the most money will now have more of it to reinvest in the economy.

This trickle-down approach may prove crippling for small countries with a large lower-class workforce like Armenia. The money saved by the wealthiest in society rarely gets directly invested in the local economy, and often ends up elsewhere. Although there is research to support a correlation between GDP growth and flat taxes, that growth often only benefits those who are already established, with almost no guarantees that they will use the tax money they saved to create new jobs or stimulus programs as the new regime argues. A flat tax may help to stabilize a struggling economy, but it’s important to look at who that economy will serve.

The adoption of the new tax laws will also see a significant deficit in the state budget. A problem the government plans to rectify by simultaneously implementing an increase in sales tax. In addition to not receiving any benefit from the new tax system, the average Armenian worker will now be faced with the issue of increasing expenses. Taking this into consideration, the government’s previous promises to work for the average and most vulnerable people of the society seem like empty words. The ruling alliance has been successful in convincing the average Armenian that they have their best interests in mind in implementing the changes promised during last year’s revolution. As events unfold, the image becomes more disheartening. Armenia’s economy under the new tax system will be stimulated at the expense of its most vulnerable contributors: those concerned with mere survival, people living paycheck to paycheck, workers contributing more than 12 working hours only to see their cost of living increase.

Scenes from the protest outside the National Assembly, June 19, 2019 (Photo: @ahazangir)

It is for these reasons the ARF in Armenia has taken a staunch opposition approach to these proposed changes. They warn that the new law would be unconstitutional as it ignores the needs of the poor and relies heavily on the good will and word of the most financially stable of the society. They believe there is no guarantee those benefiting from the new laws will actually be motivated to direct their funds toward the betterment of society. A legitimate concern when taking into account Armenia’s volatile history with its political and economic elite: a class previously so disliked that they were overthrown in last year’s revolution. The new regime is essentially asking the working people who have entrusted them to secure their interests and well-being in the New Armenia to now put their faith in yesterday’s oligarchs to do the right thing. The mere suggestion brings into question the legitimacy of Armenia’s current regime whose rule was established under the guise of freedom for the disenfranchised, who now is attempting to convince society the same people who had been robbing them for nearly 30 years deserve the greatest financial benefit.

The AYF of Armenia has mobilized their membership to combat not only these proposed changes, but the growing misinformation in the country. They have put forth a proposal for the future that will serve those whom our new Prime Minister promised to help. They are calling for not only an increase in the minimum wage by at least 50 percent, a promise yet to be delivered by Pashinyan, but also securing a minimum cost of non-taxable income to ensure the average worker can prosper themselves without handouts or outside aid. In addition they are suggesting to keep, yet reform the current progressive system with four tax brackets, targeting tax breaks for multi-member families and working class citizens.

As a direct action against the vote of these proposed tax changes the AYF Armenia has organized a sit-in protest in front of the National Assembly starting Wednesday, June 19 when the discussion on this issue will take place, until the scheduled vote on the next day. We encourage you to follow their initiative online via social media through their program entitled “Ahazank,” meaning alarm. They are determined to see our country succeed and create a fair and free society where all will prosper, and refuse to allow the New Armenia to be built on the backs of those it promised to relieve. The youth of Armenia are sounding the alarm against what may be the most detrimental policy change in post-revolution Armenia. Hear their call, and respond with action.

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Founded in 1933, The Armenian Youth Federation is an international, non-profit, youth organization of the Armenian Revolutionary Federation (ARF). The AYF-YOARF Eastern United States stands on five pillars that guide its central activities and initiatives: Educational, Hai Tahd, Social, Athletic and Cultural. The AYF also promotes a fraternal attitude of respect for ideas and individuals amongst its membership. Unity and cooperation are essential traits that allow members of the organization to work together to realize the AYF’s objectives.

16 Comments

  1. Not only do these people not understand how tax codes work, but they also don’t even pay taxes in Armenia – they’re tourists from Canada.

    • Fine, you seem to be a highly motivated and intellectually capable person.
      Why don’t you explain to us, in a layman’s term, what a “flat tax” means?
      And how do you know if these protestors are citizens of Canada? I talked to a few of them, and they are Armenia citizens.
      Stop your anti-AYF nonsense, and stick to the subject matter.

  2. The ARF youth in Armenia understand taxes very well.
    The new income tax law in Armenia is extremely unfair. The tax rates of the higher income families is going down, while the low-income families will continue to pay 23% with no deductions. In other words, in Armenia, a family that earns $100 a month will pay $23 income tax, which implies that they have to reduce their expenditures on food and basic necessities, while a family that earns $2,000, after paying $430 income tax, they will have $1,570 to spend and satisfy their basic needs. Basically the 23% income tax is a greater burden on the lower income family than on the higher income families. For a tax system to be fair, the burden of the tax should be equal and not the tax rate.
    There is no developed economy in the world that doesn’t have deductions in their income tax. In the U.S. the 2019 standard deduction for a family is $24,400. We don’t pay income tax on the first $24,400 income, while in Armenia they pay 23% on their first $1 or $10 of income. This is incredibly unfair.

    • My guess is that since the legislators do pay taxes in Armenia “these people” refers to a number of the protesters,

  3. Once I read “trickle-down” I understood that the protesters and supporters of these protesters don’t understand anything about basic economics.

    You guys don’t side with the poor, you just hate the rich. Those are two very different mentalities.

    The wealthier individuals are the ones that create jobs. They have money to invest. The solution isn’t to punish them, it’s to reduce the gap between opportunities for everyone. It’s to make the pathway to people being successful and rich plausible and removing as many obstacles as possible.

  4. If you think you understand better how it works, please enlighten us.
    Obiously flat tax system push the tax burden from upper classes to middle – low income taxpayers. Working poor class will be paying the same rate than capital income generated by oligarchs. For sure the fragile middle class will be the first victim.

    As for the protesters, to my knowledge they were all or almost all locals.

    • “if rich pay proportionately less, it means the poor pay proportionally more”.

      That kind of flawed logic is built on the notion that taxation is a zero-sum game. The purpose of a flat tax is to simplify revenue collection for the government, (along with other regulatory overhauls) this will, in turn, encourage the growth of economic activity in the country, therefore generate more revenue in taxes for the government as a total share of GDP than with a progressive tax system. So in the long run: the middle class doesn’t get punished, the rich don’t get punishes and the government has a larger budget.

  5. Why are we advocating for minimum wage? From where will employers get the money to pay an increased wage? By raising prices. “The average Armenian worker will now be faced with the problem of increasing expenses.”

    This is a problematic approach.

  6. Flat tax is a great idea as the harder you work the more you earn and keep your own money One should not be penalised by the government simply for working longer hours to earn more money! I feel that the opposition to the tax is based on envy and jealousy and nothing more! A flat tax will not only stimulate the economy but also lead to GDP growth! The government should take a strong stand and support the introduction of a flat tax in order to help to stabilize the Armenian struggling economy! Good luck to all concerned.

  7. If you are supporting flat tax, then please name one economically developed country that has flat tax or name one developed country that became developed because of flat tax. There is no such a country!!!

    • Ara jan..

      Pretty much every developed country you can think of became developed before the invention of the progressive tax system. The US didn’t even have an income tax for the first 140 years of its history (including during its periods of highest economic growth). When Congress finally did pass income tax in 1913, the highest rate was only 7%

  8. Many pundits and tax experts have extensively discussed the pros and cons of a flat tax system vs a progressive one. Both sides make valid arguments.
    The most critical issue for any tax system is fairness. Neither penalize the rich for their success nor impose a heavy burden on the poor. Level of taxation and exemptions are different for individual countries and economies.
    I believe that the Government of Armenia is serious in introducing a flat tax system.
    Hopefully the legislators will be wise and prudent; by protecting the poor and stimulating the economy.
    There is no harm in trying. If not successful, it can be modified.
    Vart Adjemian

  9. Hrant jan,

    You are making a good point. I should have been more careful with my second question. I was trying to avoid complicated arguments in favor of progressive income tax, through simple observations. Let me try again.

    –There is no economically developed and democratic country that has flat income tax.
    — When developed countries adopted income tax, they made it progressive.

    In the U.S. even the first income tax of 1913 that you mentioned, had 6 tax brackets after deductions and exemptions: 1%, 2%, 3%, 4% 5% and 6%. As you mentioned, for 140 years we didn’t have income tax. But when we decided to have an income tax, we didn’t start with flat or one tax bracket with no deductions and exemptions. We didn’t start with two or three tax brackets. We started with six and with deductions and exemptions, because one bracket income tax is unfair and one bracket income tax without deductions and exemptions, the new income tax in Armenia, is extremely unfair.

    • Hi Ara,

      I appreciate the clarification, however, your two statements (in bullet points) are mutually contradictory:

      “–There is no economically **developed** and democratic country that has a flat income tax.
      — When **developed** countries adopted income tax, they made it progressive. ”

      It looks like you presuppose that the countries in question are **ALREADY developed** before implementing a Progressive Income Tax (PIT) scheme.

      Armenia, however, is not yet a developed country. So the question we **should** be asking is whether or not a flat tax scheme can help developing countries reach developed status.

      In my view, the answer is YES, and there is substantial evidence for it.

      Fellow-post-soviet Estonia instituted a simple flat tax (along with other crucial market reforms) with tremendous success: reaching “developed high-income economy” status in 2006. Notably (and contrary to the AYF statement), this growth didn’t come “at the expense of the poor”. The country ranks at n.30 on the Human Development Index scale without compromising on individual rights or economic freedom. (Estonia actually has a lower GINI coefficient score than Armenia)

      So to contradict your first statement, Estonia is one of at least 5 economically developed and democratic countries with a flat income tax.

      There are also many more examples of countries which successfully implemented flat tax policies to join the ranks of “developed high-income economies”, and only after added a second tax bracket. (Iceland, Czechia, Poland are a few examples) – but even which countries which abandoned ‘pure’ flat tax systems are still much simpler the insanely complicated PIT policies of countries like say – France.

      But, if we put aside any moral reasoning for PIT (“rich must pay their fair share” etc) for a moment, and focus on the practical considerations – PIT’s primary purpose is to raise government revenue.

      However, historical data suggests that raising or lowering top marginal income tax rates has had a negligible effect on government revenue as a share of GDP.

      This is because economic growth, NOT taxation, makes countries rich.

      Armenia cannot tax wealth before it creates it. therefore it’s better to stimulate economic development and THEN collect a smaller share of the revenue from much larger economic output.

      Armenia’s real budgetary problem is actually its flawed tax collection method. It really doesn’t matter how high you set your marginal income tax rate if taxpayers don’t honestly declare income (or stash it offshore). The Armenian Revenue Service could probably collect MORE in tax revenue with a single, simple and reasonable tax rate than by being encumbered by endless tax brackets, deductibles, exemptions, entitlements and so on (which they have neither the experience nor the resources to deal with).

      So, will a flat tax work for Armenia in the long term? I don’t know – but in the short-to-medium term, the best thing Armenia can do for the poor is to generate economic growth. The flat tax is probably the best tool at our disposal to achieve this. Armenia could always follow Iceland or Slovakia by adding a second tax bracket later down the road if the need arises.

      I feel like the best way to end this is with the famous Churchill quote: “for a nation to try to tax itself into prosperity is like a man trying to lift himself out of a bucket by the handle.”

      – Hrant

  10. If the armenians want change all they have to do is over throw there government again like they did last time.

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