Jan Macháček

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Czech Business Weekly

Why the flat tax is not so super after all

02. 04. 2007
Thanks to media leaks the wrapping’s already been pulled from the government’s reform package, to be announced this week. The flat personal income tax of 15 percent will come as no surprise.

But of course, we should always beware of governments that claim to be bearing gifts, so let’s employ a little more scrutiny of exactly what’s offered. Ministers state the lower rate of value-added tax (VAT) will rise from five to nine percent, and this step does indeed seem to go in the right direction.

Most economists agree indirect taxation (VAT, consumer tax, sales tax, etc.) distorts economic activity and motivation less than direct taxation (income tax, corporate tax, etc.). So by upping the lower VAT rate, the government will make indirect taxation more important at the expense of direct taxation. Moreover, by narrowing the gap between the two VAT rates the government is opening the gate for having only one rate sometime in the not too distant future. This isn’t only good because it’s a declared goal of the European Union–it’s also positive because it makes doing business more transparent and that much simpler.

Flatter than yours

The introduction of the flat personal income tax will be hailed as the Civic Democrats (ODS) fulfilling its major electoral promise. The 15 percent rate will also be seen as even lower than the Slovak 19 percent. But in Slovakia they have the “super flat tax,” namely uniform rates for personal income tax, corporate income tax and VAT. Our own “flat” disciples can only champion the income tax.

There are, of course, also other inconvenient truths that the government would rather keep backstage. We may be getting a flat income tax, but we won’t see the removal of most of the complicated cost and tax relief criteria that afflict or unfairly benefit those involved in mortgages, state-subsidized construction savings, pension savings and planning the optimum size of a family! Pinpoint a “tax exception” and then identify the vested interest that flourishes off its back.

But there’s a bigger problem. The government’s minded to lower the income tax rate so much because it intends to widen the tax base. So-called social insurance (the 35 percent of wage costs that the employer must pay before calculating the gross salary) will now be applied to every individual. It looks like a double taxation. It will be paid and then taxed, something the government evidently believes is possible and doable. It’s billed as social insurance, but it’s really an insurance, which can be legitimately tagged as subject to tax, they say. The reality is, however, that it’s effectively a tax–ironically, the only “flat tax” we already have in place. Everyone pays 35 percent no matter how much they earn.

Anyway, whatever the mathematical sleights of hand–and make no mistake, the income side of the budget that details how overall tax receipts will increase by Kč 9 billion (€ 320.8 million) shows the state is getting bigger, not smaller–we’re back with the same conclusion: what this country needs is courageous reform with some serious inroads made into the welfare state.

Nothing of much consequence will ever happen while this country has to make do with two kinds of social democrats: the real ones in the ČSSD and those in the ODS.

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