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Consolidation package on the tableCabinet proposes ending Slovakia’s flat income tax rate
25 Jun 2012 Jana Liptáková Business
PRIME Minister Robert Fico has presented a far-reaching fiscal consolidation package for Slovakia and challenged the opposition parties in parliament to offer their own proposals to the public. That idea did not receive a cheery response from leaders of several opposition parties who said that improving the country’s public finances is the task of Fico’s government. The package presented by the government on June 18 consists of 22 measures to bring the budget deficit below 3 percent of GDP in 2013 to meet the criteria of European Union treaties.
“Our measures will absolutely not touch 88 percent of the employees in Slovakia,” Fico stated, as quoted by the TASR newswire, after a meeting of the Solidarity and Development Council on June 21. The prime minister added that improving Slovakia’s fiscal health is based on the principle of solidarity and the measures his government proposed will leave low-income and middle-income Slovaks untouched.
In responding to the opposition’s failure to publicly present consolidation measures that would save €300 million in 2012 and €1.5 billion in 2013, the prime minister said that the opposition parties apparently have no alternative to his cabinet’s package and added that any other government would have faced the same challenges in reducing the deficit.
The total impact of the proposed package on the public budget for 2013 should be about €2.3 billion, with €700 million in reduced state expenditures and €1.6 billion in additional state revenue from various tax changes and other measures. Media reported that this is about €600 million more than what is needed to reduce the state deficit to meet the EU’s Maastricht criteria.
While certain measures drew the support of business associations and economic experts as well as the opposition, some critics believe the state could have cut expenditures more and not increased the tax rate on individuals and businesses.
“The new government misspent two months by searching for ways to take more money from people instead of searching for solutions to stop [government] waste and provide citizens with better services,” stated Radovan Ďurana of the Institute of Economic and Social Studies (INESS), as quoted by the Sme daily.
Ján Figeľ, the chairman of the Christian Democratic Movement (KDH), an opposition party, said that the government’s package will not make Slovakia's economy healthier but will rather poison it, TASR wrote. The government’s proposal calls for rises in income tax rates and payroll levies and Figeľ said these will increase unemployment and weaken economic growth, adding that the 'certainty' promised by Fico in his election campaign slogans has turned out to be only a certainty of higher taxes and more unemployment.
Figeľ described Fico’s call for opposition parties to publicly present their own consolidation measures as an empty gesture and a piece of theatre.
“We won’t take part in such a spectacle,” Figel stated, as quoted by TASR, adding that KDH had proposed a package of specific measures directly to Fico but the prime minister had rejected them.
Pavol Frešo, the chairman of the Slovak Democratic and Christian Union (SDKÚ) opposition party, said in reaction to the government’s consolidation package that “socialists from the governing Smer party are motivating people to suck money out of the system rather than supporting the economically-active part of the population”, TASR wrote.
Flat tax rate to end
The proposed consolidation package will bring an end to the 19-percent flat income tax rate paid by individuals as well as businesses as the government proposed to increase the income tax rate to 25 percent on individuals who have a monthly income higher than €3,246.
“I’m speaking about 1 percent of the population,” stated the prime minister, as quoted by TASR, adding that Slovakia’s constitutional officials will also pay at this 25-percent rate even if their monthly salaries are less than €3,246. Judges and prosecutors, however, will only pay the higher tax rate if they earn more than €3,246 per month.
PM Fico confirmed that his government will also seek to increase income tax rates on corporations from 19 percent to 23 percent.
Slovakia introduced its 19-percent flat tax rate in 2004 and it covered income taxes for corporations and individuals as well as the value added tax (VAT). The VAT rate was increased to 20 percent by the previous government on January 1, 2011.
“The flat tax does not have a place in this world during this period of time,” stated Fico, as quoted by SITA.
Rastislav Machunka, president of the Federation of Employers’ Associations (AZZZ) objected to the increase in tax rates and said that progressive taxation punishes those who are successful.
“These are the people who bring behind them other work positions and create new jobs,” Machunka stated, as quoted by SITA, adding that higher taxes might reduce the motivation of companies that use sophisticated technologies from investing in Slovakia.
Contributions halved to second pillar
Employees who participate in Slovakia’s second, privately-administered pension pillar will be limited to contributing 4 percent of their salary to this old-age savings plan rather than the current 9 percent under the proposed consolidation package. Fico told the media that this could be initiated as early as October this year. The government’s proposal does permit second-pillar savers to contribute an additional 2 percent from their net income and that amount will then be deducted from their tax base before calculating income tax.
“We have shocking analyses confirming to what extent the second pillar is disadvantageous and how [participants’ savings] money is depreciated and what the perspective is,” stated the prime minister, as quoted by TASR.
The Solidarity and Development Council also approved changes in Slovakia’s first-pillar pension programme administered by Sociálna Poistovna, the country’s social insurer. Fico announced that the normal retirement age will not increase before 2017 but after then the retirement age will be automatically raised based on average life expectancy in Slovakia. The cabinet also plans to introduce a minimum monthly pension linked to the number of years a person has worked, beginning on January 1, 2014.
Business groups have asked that the number of paid holidays in Slovakia be reduced and the government is likely to propose to eliminate two public holidays on work days, most likely September 1, Constitution Day, and September 15, a public holiday known as the Seven Sorrows of Virgin Mary that honours the country’s patron saint. So that Slovakia is not required to re-open its treaty with the Holy See, the government may propose to move celebration of this religious holiday to a Sunday when it falls on a working day. It is also considering moving the celebration of some other holidays to Friday if they fall on other work days in the week.
The Solidarity and Development Council also discussed temporary employment agreements known in Slovak as “na dohodu” and even though the government’s original plan was to eliminate this type of employment agreement, the council decided it should be retained but in a changed form.
“When we have 800,000 people in Slovakia working on a “na dohodu” employment contract, it is an opportunity for huge payroll levy evasion,” Fico stated, as quoted by TASR. The employing party to such an agreement only pays accident insurance of 0.8 percent and guarantee insurance of 0.25 percent from the amount agreed under such a contract, as well as withholding income tax.
The government is considering two alternatives. The first is to retain this kind of contract for all individuals but make it subject to full payroll levies, while permitting only students and pensioners to pay a lesser amount. The second option is that only students and pensioners would be allowed to work under the terms of one of these contracts.
The next meeting of the Solidarity and Development Council should come within 10 days and at that time measures to support the business sector and spur economic growth are expected to be discussed.
The big picture numbers
The consolidation package proposes to increase tax revenues by €850 billion, with €370 million coming from higher corporate income tax rates and €175 million coming from special taxes paid by banks. Companies operating in the regulated sector, such as utilities and telephone companies, will be required to pay €133 million in special levies under the proposal.
The Sme daily wrote that individuals with standard employment contracts with employers will pay an estimated €20 million to €120 million more in income taxes and payroll levies, adding that higher taxes and levies on self-employed persons should produce additional revenue of €70-€90 million for the state. The cabinet has also proposed the introduction of a new real estate tax, with a varying rate depending on the location of the property, with the goal of collecting more taxes on high-value property that could bring an additional €100 million to the state, according to Sme.
The Hospodárske Noviny daily reported that the biggest surprise in the consolidation package presented by the government is a proposal to curb the pensions received by police officers, fire fighters and soldiers. The government proposed to limit the annual valorisation of pension payments to these retirees and to start taxing these pensions in 2013.
Peter Goliáš, the head of the INEKO institute, a think tank, recommended the complete abolishment of retirement programmes for these public employees and suggested that adding an additional amount to their salaries for future retirement purposes would be a more effective method.
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