Obituary for the flat tax

Steve Forbes, who use to call the US tax code "the nine million-word monster" that wastes countless hours of American taxpayers' time, once commented dreamily that a flat-tax system "would be so simple, you could write it out on a post card."

Steve Forbes, who use to call the US tax code "the nine million-word monster" that wastes countless hours of American taxpayers' time, once commented dreamily that a flat-tax system "would be so simple, you could write it out on a post card."

Prime Minister Robert Fico is obviously not of the same mind, having had his issues with the flat tax from its very inception. Fico has never hidden his opinion that the flat tax was designed to make the rich even richer and throw a heavier tax burden onto the shoulders of the poor.

Fico openly said in a May television debate that he hates to see "a company, that makes a profit of Sk10-20 billion (€267-533 million) a year pay only 19 percent tax, when at the same time, the [former] rightist government is forcing ordinary people to pay more for energy, food, medicines and so on, due to increases in the VAT to 19 percent."

One of the flat tax's main architects, ex-Minister of Finance Ivan Mikloš, argues that Fico is deliberately disregarding evidence that shows the flat tax system has resulted in lower-income groups paying taxes either very close to what they had paid under the progressive taxing system or even less.

Now that they've had the chance to scan the programme of the new ruling coalition government that's opening the gates of power to the leftist Smer party, Vladimír Mečiar's Movement for a Democratic Slovakia (HZDS) and the far-right Slovak National Party (SNS), business and market watchers are saying the beginning of the end is near for the flat tax.

After much guessing about how Fico would pacify his frustrations, it seems the fatal blow to the much-acclaimed tax reform will come in the form of a tax for above-standard income earners, which coalition politicians and media promptly baptized as a "millionaire tax."

Characterising higher taxes on those whose income exceeds Sk50,000 as a "toll for millionaires" will certainly appeal to Fico's voters and will help him reinforce the impression that he has not forgotten Smer's campaign promises. Journalists and the current opposition have mostly dubbed these promises populist rhetoric.

Tax professionals have also cried out that returning to progressive taxation would revive complications they had hoped would sink into oblivion. They say it will only inspire more evasion and that the effect might be quite to the contrary of the desired: tax collection might drop.

Indeed, 2005 was one of the most successful years in the history of tax collection in contemporary Slovakia.

Tax and customs offices collected a total Sk222.6 billion (€5.95 billion), or Sk20.6 billion (€551 million) more than predicted. Another Sk40 billion (€1 billion) raised in personal income and motor vehicle taxes went to the country's regional governments.

This success, according to tax experts, proves the theory that the 19-percent flat tax has indeed motivated people to declare their real income.

In addition, the World Bank suggested in a recent study that Slovak tax reforms, in particular the introduction of the 19-percent flat tax, have reduced the level of corruption.

In February 2006, an MVK survey found that most Slovaks do not feel the flat tax has helped their incomes. Approximately 30 percent of respondents said their incomes have decreased since the introduction of the "revolutionary" flat tax and only seven percent said it had caused an increase. A full forty percent said they had noticed no change.

In fact, MVK noted that voters for Smer, the HZDS and the SNS, and most notably sympathizers of the Slovak Communist Party, as well as people on incomes of between Sk12,000 (€300) and Sk15,000 (€385) were actually worse off due to the new flat tax. Obviously, the burial of the flat tax will bring some illusory relief to Fico's voters.

However, the eventual introduction of the "millionaire tax" is not motivated only by an effort to ease voter frustration over millionaires not paying their fair share to the state piggy bank.

If Robert Fico and his squad fulfill all their campaign promises and implement the official programme, they would dig a budget deficit as deep as somewhere between Sk50 billion to Sk100 billion, based on Mikloš's calculations.

Yet very few remedies have been proffered for how the government would fill this budget gap.

Economists have warned that the demise of the flat tax and squeezing the country's 44,000 "millionaires" will not serve the purpose of filling state coffers ahead of euro adoption in 2009.

Fico also hinted that defiant monopolies with an unquenchable thirst for profit will be forced to pay higher taxes as well. Mikloš has already said that will not be enough either.

Some foreign journalists often characterised the flat tax at the time of its creation as one of the greatest economic publicity gimmicks in Central Europe and a clever, inexpensive and effective way for a small country like Slovakia - which most foreign investors cannot locate on a map - to draw attention and capital.

Obviously, Fico and his team feel they must put their voters ahead of investors and the international community. There would be nothing wrong with that if it didn't result in harming not only those he aimed to please but those who did not vote for him.

By Beata Balogová

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