IMF recommends progressive personal income tax to Uzbekistan: economist warns of risks to legal employment and social justice

The International Monetary Fund has recommended that Uzbekistan move from a single 12 percent personal income tax rate (PIT) to a progressive scale. The proposal is explained by the need to expand the tax base and stabilize the share of tax revenues in GDP against the background of increasing fiscal challenges. However, the initiative drew sharp criticism from independent economists.

Economist Otabek Bakirov called the idea "antisocial" and presented four key arguments pointing to potential negative consequences.

1. Threat to the labor legalization process
   According to the expert, the current flat-rate system encourages businesses to move to the legal field. The share of official income from personal income tax shows steady growth, and in the first quarter of 2024, the number of registered taxpayers continued to increase. The progressive scale, Bakirov says, will create the opposite effect — there will be risks of returning to the" gray " salary payment schemes, including cash payments and payments in envelopes.
2. The progressive tax does not apply to the well-off
   Bakirov emphasizes that the real financial inequality in the country is formed not in the sphere of salaries, but through corporate schemes, dividends and pseudo-expenses. Middle-class employees will fall under the progressive personal income tax, while wealthy citizens who receive income through companies will remain outside the new rates. As an alternative, the expert suggests equalizing the taxation of dividends to the level of personal income tax and including personal expenses spent through firms in the tax base.

"Why does an employee pay 12%, and dividends are taxed at a rate of 5%, even with tax breaks? This does not fit into the logic of social justice, " Bakirov said.

3. Higher taxes as a result of inefficient debt policy
   According to the economist, the initiative to introduce a progressive scale can serve as an indirect confirmation of the need to cover budget expenditures against the background of growing public debt. The introduction of new taxes against the background of insufficient returns from government borrowing can worsen the perception of fiscal stability and increase social tension.
4. The tax burden should be redistributed fairly
   Bakirov emphasizes the need to shift the tax burden towards rental and super-profitable segments of the economy. Potential sources include owners of large natural resources, importers with individual benefits, and companies that derive income from monopolies and preferences. The expert emphasizes that a fair tax policy is impossible without dismantling the system of unequal access to public resources.

Historical and international context
Until 2019, Uzbekistan applied a progressive scale with a range of rates from 7.5% to 22%. In some years, the maximum rate reached 40%. Since 2019, a flat rate of 12% has been introduced, which, according to many experts, has contributed to an increase in wage transparency and accelerated the pace of labor market legalization.

For comparison, in the United States, there is a progressive scale with 10% for minimum incomes (up to $11 thousand per year) and a maximum rate of 37% for incomes over $578 thousand. The average effective rate for Americans is about 22%.

Despite public discussions, Uzbek officials have not yet confirmed plans for an immediate return to progressive taxation. Earlier in May, the head of the department of the Tax Committee expressed the possibility of such a reform, but later the agency denied the existence of specific decisions on this issue.