Can the Czech Republic expect sweeping tax cuts?

20-01-2005

The governing Social Democrats are considering a major shift in their tax policy. They say they would like to reduce income taxes. What are their plans and what does the opposition think?

Income tax rates in the Czech Republic are about average for the European Union. Corporate income tax is 28 percent, and it is to be reduced to 24 percent by 2006, while personal income tax rates vary between 15 and 32 percent. Until recently the Czech government led by left of centre Social Democrats seemed quite happy with the situation, but now, with the prospect of the Czech Republic adopting the Euro in about five years, the government is beginning to toy with increasingly radical reforms. Social Democrat MP Jan Mladek.

"We do believe that the overall tax burden in the Czech Republic is actually quite low. We don't see too much space for a general decrease of taxes; however we are not against a certain shift of the tax burden, in particular from economic activity towards consumption, and we would also like to support the lower middle class and to stimulate people who are working so they can have a higher net income than today. That is the main direction of the tax changes that are supposed to stimulate economic activity."

The opposition Civic Democrats have been criticising the government for excessively high taxation for a long time. As once of their MPs Vlastimil Tlusty points out, they've been proposing a so-called "flat tax" rate of 15 percent. That would be regardless of income, and there would also be a flat Value Added Tax rate.

"Our idea is to implement a very simple system which would be easy to understand for all people, for all entrepreneurs - a system in which it would be easy for the state to control if people are paying correct taxes."

But the Social Democrats' Jan Mladek does not believe that the opposition proposal would mean lower taxes.

"They are willing to cut taxes to wealthy people. The wealthy people who are now paying a marginal rate of 32 percent would suddenly pay 15. They are claiming that even people with lower incomes will benefit from their tax reform. But it's not quite true. They may benefit from a few thousand crowns per year in personal income tax - and even this is questionable - but they will pay it back in higher VAT. Part of the Civic Democrats' reform is to have only one VAT rate. They are claiming 15 percent, but it would be more likely 19 like in Slovakia. It means that the taxes for food would be increased nearly 14 percentage points, so the lower middle class would actually pay more than they pay today, after their reform."

Vlastimil TlustyVlastimil Tlusty Vlastimil Tlusty insists that the flat tax is fairer, and that due to deductions, it will be convenient even for people with lower incomes.

"Today you can see several rates of income tax in the Czech Republic. 15 percent is the lowest one. If we implement the lower tax rate, it will mean that we will implement the lowest level. We are also going to increase the so called deductible. Today it is 38.000 crowns per person per year. We are going to make it at least 48.000. This change will mean better conditions for people with lower incomes."

Any sort of tax cut is broadly welcomed by economy experts. David Marek from Patria Finance sees pros and cons in both of the proposals, but he says that the general trend they establish will certainly be beneficial for the Czech economy.

"Both the proposals go the same direction. One is more revolutionary, the other is slightly more cautious, but I think that the demand in the Czech society for lower taxes is so significant that neither party can ignore it, and I think that it is something that will be interesting in the run up to the next parliamentary elections."

20-01-2005