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TAX EXPERTS SAY CABINET PLANS ARE THE BEGINNING OF THE END FOR FLAT TAX

Cabinet to squeeze the rich for fatter budget

THE STATE might soon start reaching deeper into the pockets of taxpayers who earn an above-standard income.
The new government's manifesto put an end to the guessing game about how Robert Fico's team would treat the country's much acclaimed 19-percent flat tax: it declared higher taxes for people who earn far more than the average and tax deductible allowances for those with thin purses.
The state hopes to collect Sk2.5 billion (€65 million) through the so-called millionaire tax, as the local media has referred to it.

Finance Minister Ján Počiatek (left) faces tough times.
photo: ČTK

THE STATE might soon start reaching deeper into the pockets of taxpayers who earn an above-standard income.

The new government's manifesto put an end to the guessing game about how Robert Fico's team would treat the country's much acclaimed 19-percent flat tax: it declared higher taxes for people who earn far more than the average and tax deductible allowances for those with thin purses.

The state hopes to collect Sk2.5 billion (€65 million) through the so-called millionaire tax, as the local media has referred to it.

PM Robert Fico has said the tax is common within the European Union and that the move would bring more solidarity to the tax system.

Though the ruling coalition has not yet stated at exactly what income the teaxpayer would become doomed to pay more, Fico has hinted it will be those who earn above Sk50,000 (€1,315) or Sk60,000 monthly.

Finance Minister Ján Počiatek believes the millionaire tax should be imposed even on state servants and parliamentary deputies, who earn around Sk60,000 a month, plus non-taxable bonuses.

Economists estimate about 40,000 people would be affected by the new tax, including the upper middle class and most employees and managers of large corporations.

Tax experts claim this signals the beginning of the end of the flat tax, which has brought transparency to the system and appealed to foreign investors.

Chief economist with ING Bank Ján Tóth says the disadvantages of introducing different income tax rates outweighs the advantages.

Former Finance Minister Ivan Mikloš, whose name is synonymous with the flat tax, says that taxing above-standard incomes is indeed a punishment for the upper middle class and would demotivate people from working harder.

"Killing the flat tax, disrupting pension reform or remaking the Labour Code to its 2003 form, will decelerate economic growth," Mikloš said.

Meanwhile Mikloš calculated that Robert Fico's government might produce a state budget deficit somewhere between Sk50 billion (€1.3 billion) to Sk100 billion (€2.631 billion) depending on how aggressively it pursues its programme.

Several analysts agree that the millionaire tax could potentially discourage people and that taxing higher incomes will not make the state coffers much fatter.

The National Employers Association (RÚZ) says that the millionaire tax is an unfortunate step indeed.

According to RÚZ secretary Martin Hošťák, the planned changes might bring chaos into a simple and transparent system, as it would push people to look for ways to dodge the rules.

Todd Bradshaw, a partner and tax leader for PricewaterhouseCoopers (PwC) says the tax system may partly achieve a social objective but that there are usually negative knock-on effects, such as discouraging individuals from working and from declaring their income.

"Under such a system, the middle class usually end up bearing most of the tax burden, as the wealthy are usually able to structure their activities in order to minimise their tax," Bradshaw told The Slovak Spectator.

Fico has been known as a bold critic of the flat tax, suggesting that it is "unjust and is obviously meant to benefit rich people and companies."

But he softened his rhetoric shortly after the parliamentary elections, driven by fears of throwing the markets off balance.

Though firms and companies do not have to say good bye to flat tax yet, monopolies at odds with rulings of the antitrust authority might have to.

Fico says the government has a right to take action against monopolies that achieve extraordinary gains. As an example, he mentioned the major gas company Slovenský plynárenský priemysel (SPP), which according to Fico, made a profit of Sk20 billion, yet continues to request further increases in the price of natural gas.

According to the SITA news wire, SPP paid over Sk5.1 billion in taxes and Sk19.9 billion in dividends last year. Since the state owns a 51-percent stake in SPP, it received over half those dividends.

"Does the government have the right to take steps against monopolies that make record profits and pay almost no taxes but come up with proposals for additional price increases? I say the government has such a right, because it has to protect its citizens," the daily SME quoted Fico as saying.

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