Flat tax dominates pre-election skirmishes

WITH Slovakia's 19-percent flat tax having proven such an effective publicity gimmick for the country, stamping its name on the global investment map in bold contrast, political parties are understandably making taxes one of the main topics of their campaigns before June elections.

WITH Slovakia's 19-percent flat tax having proven such an effective publicity gimmick for the country, stamping its name on the global investment map in bold contrast, political parties are understandably making taxes one of the main topics of their campaigns before June elections.

Prime Minister Mikuláš Dzurinda's Slovak Democratic and Christian Union (SDKÚ) is fighting to preserve its brainchild, the unitary VAT and income tax rate, and even talking about whittling it down. Its main election opponent, the opposition social democrats of Smer, say that the tax system needs a radical revision - upwards, in most cases.

Smer leader Robert Fico has said that people with "above-standard incomes" should be taxed more heavily than lower income groups, which means a return to the progressive of graduated tax system in place before the Dzurinda administration came to power in 2002. He has said he may consider keeping the 19-percent tax for companies.

People who earn more than Sk1 million (€27,000) a year should say goodbye to the 19 percent tax rate and pay 25 percent instead, Smer says.

On the other hand, according to Smer's Jozef Burian, income taxes for low-income groups could be dropped to 15 percent.

Finance Minister Ivan Mikloš of the SDKÚ has been scathing in his criticism of Fico, who he said intends to scrap a tried and true system that has greatly improved the country's business environment.

Mikloš said that the prospects for further cuts to taxes in Slovakia depended on how pro-reform the new government turned out to be.

While Fico has mellowed his rhetoric since his radical call for killing the flat-tax outright, no party with prospects of winning seats in parliament in June is sympathetic to Smer' goal of making deep changes to the flat tax.

The Hungarian Coalition Party (SMK) proposes a two-percent cut to the flat tax while the opposition Free Forum wants the flat tax at 15 percent.

Vladimír Mečiar's opposition Movement for a Democratic Slovakia (HZDS) proposes that VAT be cut on food, medication, books, and tourism. The non-parliamentary Slovak National Party, which also has a good chance of winning seats in parliament, supports the idea of a reduced VAT rate as well.

Former Finance Minister (1998) Miroslav Maxon of the Movement for Democracy (HZD) does not trust Fico's calculations, saying they would neither help the business environment nor benefit the common people.

"The tax system in Slovakia should not change, regardless of who gets into power and who forms the government," said former Hungarian Finance Minister Lajos Bokros, who was attending a conference on a knowledge-based economy in Bratislava on April 11.

"The reform is advantageous for the country and it has brought good results. It is simple and transparent, not because the rates are the same or that they are relatively low, but because they don't include any exemptions or holidays," he said.

Fico also proposes to reintroduce a tax on dividends, a plan that has angered businesses, which regard it as double taxation of their incomes.

The Klub 500, a group of major corporations, says it is convinced that the tax reform led to major improvements in the business environment in Slovakia.

"Klub 500 is against efforts by Smer to intervene into the current tax system, which would increase the tax burden in Slovakia," Klub 500 Director Tibor Gregor told The Slovak Spectator.

"Klub 500 disagrees with Smer's plans to tax company dividends and bring in a progressive income tax system for individuals. The tax reform improved the business environment in Slovakia, as confirmed by the fact that Sk20 billion more was collected in taxes than projected," Gregor added.

According to Gregor, Klub 500 sees room for further cuts to taxes and for a drop in the payroll tax burden, which should encourage a growth in employment.

Meanwhile, the Christian Democrats (KDH), who in January quit the government and moved into opposition, triggering early elections, said they would call for tax sovereignty for Slovakia.

KDH Vice-Chairman Vladimír Palko says that pressures from the EU to harmonise taxes and the tax base throughout the Union, which might restrict reform countries including Slovakia from competing for investment, prompted the KDH to support such a declaration.

"The European Union wants to determine the level of direct taxes. Western European countries refuse to reform their labour laws and tax systems, which is why they are facing a significant withdrawal of companies in favour of new markets," Palko said for the SME daily.

KDH boss Pavol Hrušovský said that the KDH saw a threat to Slovakia's national interests in efforts by the EU to harmonize taxes.

Last October, European Commissioner for Taxes László Kovács complained that the EU had 25 different corporate tax systems, adding that a unified system would make life easier for firms that are active in several EU member states.

He said that a unified corporate tax system, which could become a reality by 2008, should have as few exemptions as possible. According to Kovács, 20 of the EU's 25 members agree with the plan.

Hrušovský, meanwhile, said the KDH wants parliament after elections to declare Slovakia's "exclusive right" to make its own decisions on taxation.

Mikloš said that he agrees with the content of the KDH declaration, although its form still needs to be discussed.

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