Raising taxes has been a high priority for Georgian president Mikheil Saakashvili since his first days in office. In February of 2004, the Georgian government announced they collected $22 million in taxes in the first two months of the year – a 30% jump over the previous year. In June, President Saakashvili announced his plans for a tax code overhaul, and accented the role taxes would pay to improve social conditions. But while his new tax code might be bringing in revenue, it is alienating small businesses and fostering an environment of tax evasion.

When President Saakashvili announced his plan, last summer, he was quick to point out that without tax revenue, the government was hopeless to make changes. “We can\'t get rid of taxes completely,\" he said in a televised speech. \"We have to raise salaries and pensions. If we don\'t raise taxes, where will we get the money?\" But he also promised a graduated tax, so small businesses paid less. In later speeches, he pledged to protect small and medium business owners, offering them a grace period of a few years before expecting them to pay full tax on their income.

In January, the Georgian government passed a flat tax law, which reduces the number of taxes businesses had to pay and the VAT, good news for large businesses. However, it was an unexpected blow to small and medium businesses, especially when it became apparent they would, in fact, be expected to pay, regardless of when they started their business or whether or not they are currently making a profit.

The new tax code has been generally well received by business organizations in Georgia, however small businesses rarely participate in organizations where annual dues can cost hundreds of dollars. And according to many economists, Georgia desperately needs to develop and support its small businesses, in order to create a middle class and anchor the economy.

According to the new tax code, businesses are obliged to pay 32%, which is a combination of VAT and income tax. Therefore a small enterprise that is making a mere 10,000 GEL ($5,555.00) is expected to pay 3200GEL. All of this is adding up to small business owners not paying. According to reports, tax collectors themselves are educating businesspeople how to beat the system, by maintain two sets of books and pay the government considerably less than it should, by law, receive.

Even an income of even 6800 GEL a year is substantially more than the average salary, which clocks in at roughly 150 GEL a month or 1800 GEL a year. However, according to information provided to this author from tax collectors, small businesses are willing to risk the wrath of the law and declare less than pay the government – and the tax collectors are teaching them how.

The willingness to cheat the government is two-fold: not only do small businesses feel cheated and deserted by the government after promises of support, but also Georgians are universally skeptical that the money paid for taxes will be used to help them, largely since for over a decade they received nothing from the government in return.

While the Georgian government had a tax code during Eduard Shevardnadze’s 11 years in office, it was full of holes and not enforced. What little money businesses did pay was never seen again in any form. There were no tax-funded projects such as pensions ($7.00 a month when paid at all), roads, free ambulances or any of the multitudes of services associated with the civic duty of paying tax.

In order to survive and prosper, a country must collect taxes. But in pursuit of tax revenue, the Georgian government is hurting the very entrepreneurs it needs to create a stronger country: small businesses. If the current tax code is not amended in favor of small businesses, President Saakashvili risks not only losing revenue through tax evasion but also further fostering the atmosphere of distrust and disrespect toward the rule of law – an attitude that is as fatal for Georgia’s future as empty coffers. In addition, Georgian society is still cynical about what their taxes are being used for. An educational program, or even public announcements informing people that projects were funding through tax collections, could improve tax collection in the long run, even if the level of taxes required remains high.