Stubbornness in a false experiment...

Abstract

This article proves that since 2019 the replacement of both the equalization transfer and the income tax for municipalities with the value added tax of 19 per cent has been a mistake. The announcement of the so-called transition period for Value Added Tax (VAT) (2019-2023) and the experiment carried out within this framework, which factually destroyed the important results of almost 30 years of self-government reform: the institution of equalization transfer and the process of transferring income tax from the common state tax into the category of local taxes. The critical situation created by the COVID-19 pandemic has revealed systemic deficiencies of the experiment that already existed before the pandemic. The VAT reduction has created budgetary problems for all municipalities. All municipal budgets in Georgia have been cut. In addition to the financial losses for municipalities, the aforementioned experiment disturbed the implementation of the constitutional requirement for equal socio-economic and demographic development of self-government in the country. It has also impeded the implementation of the country's financial equalization policy in accordance with the European Charter of Local Self-Government. Hence, it is recommended to: (i) immediately stop the experiment, which is flawed, and to make a legislative reverse; (ii) re-establish the equalization transfer with a new calculation formula based on objective, political goals and standards; and (iii) re-classify income tax as local tax.