Extra Regressive

After Saakashvili’s Rose Revolution began in 2003, Georgia’s tax system was reformed to be one of the simplest — and most regressive — tax systems in the world. There are only six types of taxes: a 20 percent flat income tax, a profit tax (which has now been abolished if the company reinvests, then they pay no taxes), an excise tax on a few selected goods, VAT at 18 percent, an import tax that ranges from 0 percent to 12 percent, and a property tax which is up to 1 percent. There is no progressive taxation, no inheritance tax, and there are no social security taxes.

In 2010, Georgia’s president, Mikheil Saakashvili, rushed through amendments to the constitution restricting the powers of the president and rebalancing power in favor of the cabinet of ministers. At the same time, Saakashvili included a paragraph and an accompanying organic law that would restrict tax-raising powers, the so-called Liberty Act, without much in the way of public or private consultation.

Even the IMF was against it, and international advisers forced a provision in the bill allowing the government to temporarily increase taxes for up to three years in emergencies. As Saakashvili and Kakha Bendukidze, the mastermind of Georgia’s free-market reforms, co-wrote in their article, “Georgia: The Most Radical Catch-Up Reforms“: “The idea was to design a straitjacket for the irreversibility of reforms carried out by the government during the previous period and to create the basis for the inviolability of the principles of economic freedom.”

Paragraph 94 thus caps government-expenditures-to-GDP ratio at 30 percent, the debt-to-GDP ratio at 60 percent, and the budget-deficit-to-GDP ratio at 3 percent. A referendum on this issue can only pose the question of raising flat taxes for all Georgian citizens — the organic law forbids a referendum on progressive taxation.

Elite Consensus

Last month, as part of the constitutional reform process started by Georgian Dream, the Social-Democrat parliamentary faction initiated a proposal to remove Paragraph 94.

They did so with virtually no support from other parliamentary groups. Instead, they co-signed a letter demanding its removal with twenty-four other public organizations, including the sizeable Georgian Trade Union Confederation. In turn, the Constitutional Reform Commission, which has focused on deliberating procedures of political party participation, safeguarding the Georgian language, and defining marriage as being between a man and a woman, overwhelmingly voted against removing the Liberty Act during the final vote on the draft amendments.

Over the past year, Georgia’s conservative groups have demanded a strict definition of marriage, with stalls in the streets and massive canvassing to promote a traditional and heterosexual definition of marriage. Not surprisingly, western media has largely concentrated on the “marriage question,” completely ignoring other detrimental aspects of the constitution amendments.

Indeed, the commission’s decision signals the high level of commitment to free-market ideology that is being reified in Georgia’s constitution. And since the commission has voted, they will now hold brief discussions over the new draft for the benefit of the public before parliament votes in the spring and again in the fall sessions.

A Permanent Attack

The Liberty Act is thoroughly undemocratic. It restricts taxation by the people’s representative body, the parliament, and ensures that the referendum necessary to increase taxes can only be initiated by the government (rather than two hundred thousand signatures, as is the case for any other referendum). It thus effectively removes one of the most important topics of debate from Georgia’s public and political sphere.

The Liberty Act is detrimental to building an inclusive, healthy and sustainable economy. It cripples the budget both in terms of income sources and its cap on expenditures. Indeed, Georgia’s current budget is mostly made up of VAT and income taxes supplied by Georgia’s poorest citizens (as statistics I obtained from Georgia’s Revenue Service show) — there is no significant middle class who can pay for the country to function.

As deteriorating labor rights have sparked protests across Georgia, new amendments, much like the original constitution, are a dream for liberal free-marketeers.

There are some forward-thinking, though mostly cosmetic, proposals too, such as enshrining the right to internet use. Still, given the growing needs of Georgia’s population, whether in terms of social services or better education for the job market, they require a proactive government which can provide assistance. Yet the act restricts the development of social-welfare provision — tax revenues to sustain long-term and robust social services are limited without changing existing tax scales. The Liberty Act thus permits the previous government’s libertarian ideology to remain in force, despite Georgia’s electorate voting the Saakashvili government out of power in 2012.

If this paragraph is not taken out of Georgia’s constitution now, there will be no other chance of removing it in the foreseeable future — obtaining a constitutional majority willing to agree on changes will be almost impossible given the current political polarization. This will doom the country to continuing economic policies that have impoverished and indebted Georgians, whose only hope of a better life is to leave the country.

Western states didn’t build democratic institutions and social welfare provision in a day — for decades, if not centuries, people fought for their rights and won. And in Georgia, there is a budding movement that focuses on economic and social rights. Indeed, the twenty-four organizations behind the open letter to the constitutional commission have formed a coalition, and will spend the next month raising this issue at the public consultations over the amendments across Georgia. Yet the time it will take to educate and mobilize the population against the Liberty Act will be long and tortuous — and if Paragraph 94 remains in place, it’ll be too late.

The article first appeared on the Open Democracy Russia.