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Cabinet defends cautious tax policy

It's a blustery Friday in early January, and the owner of a small Slovak business is visiting a tax office in the Bratislava district of Petržalka to inquire about a new special tax cut for self-employed people. His initial enthusiasm, sparked by the prospect of a 1.5% tax rate, ebbs as he looks around the empty room.
His misgivings are confirmed by the tax official on duty, who reports that only 500 people nationwide have so far been in to apply for the new license scheme. Neither he nor almost any of Slovakia's 350,000 self-employed qualify for the tax cuts, the businessman is told. "Who qualifies? Nobody does," the official says.


Ivan Mikloš supports Finance Minister Schmögnerová's strategy.
photo: Vladimír Hák

It's a blustery Friday in early January, and the owner of a small Slovak business is visiting a tax office in the Bratislava district of Petržalka to inquire about a new special tax cut for self-employed people. His initial enthusiasm, sparked by the prospect of a 1.5% tax rate, ebbs as he looks around the empty room.

His misgivings are confirmed by the tax official on duty, who reports that only 500 people nationwide have so far been in to apply for the new license scheme. Neither he nor almost any of Slovakia's 350,000 self-employed qualify for the tax cuts, the businessman is told. "Who qualifies? Nobody does," the official says.

The license scheme, which was to have allowed small businessmen with incomes under 1.5 million Slovak crowns ($35,000) a year to pre-pay their 2000 fiscal year taxes at rates of between 1.5 and 2.5%, was touted by the Finance Ministry as one the most important development impulses for the business sector this year. But due to last-minute amendments to the bill in December, only 7,000 to 8,000 small business people now meet the conditions for the tax incentive.

The Finance Ministry's conservative approach to tax policy has been roundly criticized by businessmen, who say that the license scheme should have been far more inclusive and last November's cut in corporate tax from 40 to 29% far more bold. But economic analysts have supported the ministry's cautious policy, saying the government must guage the effects of tax cuts on state budget income before it takes any big steps.

"I fully understand the Finance Ministry's attitude towards incentives and tax policy," said Ivan Chodák, an equity analyst with CA IB Securities. "The state budget for 2000 is very tight, and it will be difficult enough as it is to hit the government's ambitious targets."

Even right-wing politicians who usually battle Finance Minister Brigita Schmögnerová over tax and budget issues now say she is right to prefer caution over risk.


Ivan Mikloš supports Finance Minister Schmögnerová's strategy.
photo: Vladimír Hák

"We realise that it's necessary to take risks, but we always have to look for compromise," said Deputy Prime Minister for Economy Ivan Mikloš in an interview with The Slovak Spectator on January 19.

"It's logical that the Finance Minister considers, for example, the issue of incentives in the context of the entire state budget and goes slowly, step by step, to see what incentives will mean for revenues."

Small business complains

Although the cabinet may be united behind the Finance Minister, backbenchers have been more vocal in their criticisms.

Pavol Prokopovič, a member of parliament for the ruling SDK party and chairman of the Slovak Union of Businessmen, said he considered the Finance Ministry's tax policy to be a "small fiasco," especially in light of the fact that only 500 small businessmen have even applied for the new incentives.

"They just don't want to take risks," Prokopovič said. "But if they gave more people a chance to buy a licence, they would actually help our deteriorating business sector."

Prokopovič clearly has an axe to grind. The author of a law on small businesses, he lobbied Finance Ministry officials to get his suggestions incorporated into the new tax law, but was ignored. Prokopovič now refers to the ministry officials as "arrogant," and Finance Minister Schmögnerová as a pawn in the hands of her advisors.

"From the discussions we've had, I have the feeling that the Finance Minister is too much under the influence of her officials, who very often come up with totally unreasonable arguments," Prokopovič said.

But with even free-market reformer Mikloš against deeper cuts, Prokopovič's arguments are clearly finding few sympathetic ears. "We simply have to realise that this [incentive policy] is a risk which could have a negative influence on state budget revenues," Mikloš repeated.

Finance Ministry spokesman Peter Švec added that eligibility for the licenses could eventually be broadened if the ministry felt its state budget deficit target to be safe. "If we see that it [incentives] doesn't hurt the deficit too much, we can broaden the number of self-employed persons who can buy a license at any time," Švec said.

Markets approve

Economic analysts, surprisingly, are four-square behind the government, saying that the tax cuts approved at the end of last year have temporarily left the Finance Ministry with no room to maneuver on the income side.

According to CA IB's Chodák, only cuts in state budget expenditures could now permit further experiments with tax incentives. "I would reduce the expenditures of ministries, which would allow the Finance Ministry to make further cuts in turn," he said.

Martin Barto, the director of the strategy division at the state-owned bank SLSP, said the Slovak economy could indeed benefit from further tax cuts, but only if these were paired with deep reductions in public spending.

"I don't want to repeat myself over and over, but reform of the public sector, the education system, health care and agriculture would allow the Finance Ministry to approve more risky incentives," Barto concluded.

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