FINANCE Minister Ivan Mikloš.
Mikloš said that by eliminating income-tax brackets, the proposed changes will create a fairer tax system and reduce tax evasion if implemented next year as planned. Although the minister has not yet specified the flat income-tax rate, there has been widespread speculation in the media that it will be set at around 20 per cent.
"We have in mind to simplify and clarify today's very complicated tax system. We want to reduce taxes from income and place a greater emphasis on indirect taxes. The result should be an improved business environment and reduced space for tax fraud," said Mikloš.
"More than anything else, [the biggest problem is that] income from different activities is taxed differently. In the law there are 90 exceptions, 19 income items that are not taxed, 66 items that are tax-exempt, and 37 items with their own specific tax rates. We want to eliminate these exceptions," he said.
Additionally, said Mikloš, Slovakia will unify its current two-tier value-added tax (VAT) regime into a single VAT rate. Currently most basic necessities are charged a 14 per cent rate, while most other items are charged 20 per cent.
The plan will also apply new guidelines for property taxes, replacing the current system of tax based on a property's area with a system based on an assessment of a property's value.
Analysts have praised the plan, saying that Slovakia's current tax system is too complicated, and that simplifying the process will increase tax revenues.
"Dismantling the different deductible items, exemptions, and special rates will certainly simplify the system," said Slávia Capital analyst Pavol Ondriska, adding that a simpler tax system would improve the accuracy of tax reporting.
While Mikloš's proposal must still pass parliamentary debate, for now the plan has the strong support among the four-party ruling coalition.
Opposition left-wing parties Smer and the Communist Party (KSS), however, have attacked the proposal, saying that it places a higher tax burden on the poor while benefiting the rich. In addition, say opponents, the plan will mean lower tax revenues for the state.
"We in the Smer party in no way support establishing a flat tax because it can only damage the transitional Slovak economy," said Milan Murgaš, Smer's shadow finance minister.
"We see the establishment of a single VAT rate, which would be higher than the current lower [VAT] rate, as practically a catastrophe because it will mean further restrictions for citizens and businesses," he said.
The KSS has been stronger in its condemnation of the proposal, saying that the state would be abrogating its responsibilities towards citizens.
"[This tax plan] would result in eliminating the principle of the social state, meaning that the rich will become richer and the poor, poorer. Those with the greatest financial resources will be paying lower taxes," said KSS MP Ivan Hopta.
Analysts, however, say the fears are unwarranted and the overhaul of the tax system will bring benefits to the overall economy.
"It is necessary to point out that with a single tax rate, a person with a higher income will pay more in taxes, but his additional activities will not be classified at a higher level of taxation," said Róbert Prega, analyst with Tatra banka.
"Cancelling the growth of tax rates according to income brackets and unifying VAT rates should have a definite stimulating effect on the economy," said Prega.
A proposal to apply road taxes to individuals, however, has been criticised by some politicians and analysts. Currently, businesses are required to pay road taxes but citizens are not.
"The reform proposal is very good and I agree in principle also with establishing an automobile tax for citizens. But the reality is such that it could hurt socially weaker people," said Eugen Jurzyca, head of the Institute for Economic and Social Reform (INEKO) think tank.
Critics say that cars are already taxed as movable assets and that levying additional duties for roads would mean citizens have to pay for the same thing twice.
"Additional taxes on cars would mean taxing something that has already been taxed, and that is contrary to the philosophy of the whole reform," said Juraj Kotian, analyst with Slovenská sporiteľňa bank.
Despite the criticism, Mikloš said the plan would increase fairness and transparency in the tax system without bringing heavier tax burdens on citizens.
"We want to set up the system so that nobody has to pay higher taxes than they do now," said Mikloš.
Principal features of Mikloš's proposed tax reform
* Establishing a single flat income-tax rate for individuals and firms
* Cancelling tax exemptions and items with varying tax rates (bank interest, honoraria, etc)
* Cancelling a citizen's option to apply 1 per cent of tax to a select institution
* Cancelling lump tax
* Allowing companies freedom in applying depreciation formulae
* Merging Slovakia's two VAT rates
* Cancelling "triple tax" on gifts, inheritance, and property transfer
* Applying property taxes according to real values rather than area
* Fairer taxation of motor vehicles - either by levying vehicle taxes on citizens or cancelling
vehicle taxes on firms
* Increased excise taxes on tobacco and beer
3. Feb 2003 at 0:00 | Dewey Smolka