Income tax cuts an unlikely economic solution

TAX cuts might be a tempting political gambit for the country's opposition, but it is very unlikely that attempts to reduce income taxes would get through the parliament, tax professionals say.

TAX cuts might be a tempting political gambit for the country's opposition, but it is very unlikely that attempts to reduce income taxes would get through the parliament, tax professionals say.

Just a couple of months ago, the parliament rejected an amendment to the Income Tax Act proposed by the three opposition parties - the SDKÚ, KDH and SMK. Prime Minister Robert Fico called the proposal to reduce income taxes from the current 19 percent to 17 percent "sabotage."

Finance Minister Ján Počiatek said earlier this year that cutting income taxes would be unrealistic. Tax experts agree that the government would undermine most of the tax-related steps it must take to secure Slovakia's entry to the eurozone.

"At the moment, there is not enough room to decrease the current nominal tax rate of 19 percent, which has attracted many investors over the past couple of years," Todd Bradshaw and Radoslav Krátky of PricewaterhouseCoopers told The Slovak Spectator in an e-mail interview. "It is more important for Slovakia at the moment to keep its budget deficit in line with the Maastricht criteria in order not to risk entry to the eurozone."

Lower tax incomes would also mean less money for the Fico government to meet its agenda, which promised to take a socially-oriented line after the elections in 2006, Martin Lenko, an analyst with VÚB Bank, told The Slovak Spectator.

Viliam Pätoprstý of the UniCredit Bank said the income tax rate is not one of the country's 10 most serious problems.

"However, I still think that a fiscally neutral reduction would certainly support economic activities," Pätoprstý told The Slovak Spectator. "A reduction of two percent would seem doable."

A PricewaterhouseCoopers and World Bank survey showed that Slovakia suffers from high taxes on labour.

Companies in Slovakia paid almost 49 percent of their commercial profits in taxes in 2005. In comparison, this figure was only 38 percent in Po-

land, mainly due to lower employment taxes and con-tributions. But there are also several countries within the EU that ranked worse than Slovakia, according to the survey.

Reducing labour taxes could have a positive impact on Slovakia because it encourages employment. The PricewaterhouseCoopers and World Bank survey shows that the richest countries are the ones that tax less, according to Bradshaw and Krátky.

"If there is an area for future reductions in tax, we believe it should be in the area of labour taxes," they said.

There are many areas in the Slovak tax law that could help foreign and local investors and entrepreneurs run their businesses with more confidence, said Bradshaw and Krátky.

For example, the system of binding tax rulings - letting taxpayers request the tax authority to issue rulings on their specific cases - is one area that still remains unexplored by Slovak legislators. But perhaps it is only a matter of time until these improvements are introduced in our country, they said.

The Business Alliance of Slovakia survey showed high payroll taxes was the fourth-biggest obstacle to starting and expanding a business in Slovakia. Most business people support a general reduction in payroll taxes - which are 38.5 percent surcharges on salaries that must be paid by employers to the state - even if it means raising corporate taxes, according to the survey from last year.

However, according to last year's report by the Organisation for Economic Cooperation and Development (OECD), the tax and payroll tax burden in Slovakia decreased from 30.3 percent in 2004 to 29.4 percent in 2005. In 2003 the proportion was 31.2 percent, the Hospodárske Noviny daily wrote.

Of the 24 countries evaluated, Slovakia was one of only five whose burden decreased during the monitored period.

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