Business backs payroll tax cuts

THE WORLD Bank's recommendation that Slovakia lower its payroll taxes has fallen on sympathetic ears. Labour Minister Ľudovít Kaník has proposed a cut that would reduce the amount of payroll taxes paid by employers on behalf of their workers. While the business community is appreciative of Kaník's proposal, the Finance Ministry is sceptical that Slovakia can afford it.

THE WORLD Bank's recommendation that Slovakia lower its payroll taxes has fallen on sympathetic ears. Labour Minister Ľudovít Kaník has proposed a cut that would reduce the amount of payroll taxes paid by employers on behalf of their workers. While the business community is appreciative of Kaník's proposal, the Finance Ministry is sceptical that Slovakia can afford it.

The Labour Ministry wants to cut sickness insurance premiums in half for the self-employed, proposing they make payments equivalent to 2.4 percent of their taxable income rather than the current 4.4 percent. The ministry also wants to reduce sickness insurance premiums for businesses. Instead of asking employers to put the equivalent of 1.4 percent of an employee's taxable income toward sickness insurance premiums, the ministry would require employers to pay only 1 percent.

Minister Kaník has not yet discussed his proposal with his ruling coalition partners.

"The labour minister considers the gradual reduction of payroll taxes to be the main investment stimuli not only for foreign but also for domestic businesses. The imbalance between what employers (25.2 percent) and employees (9.4 percent) pay to the social insurance company, Sociálna poisťovňa, is too great. Our main intention is to gain the support of the business environment to reduce their burden of payroll taxes," Labour Ministry spokesperson Martin Danko told The Slovak Spectator.

Kaník's opponents said the proposal was incapable of solving the financial burdens of the self-employed. For example, they would save just Sk200 (€5) per month on average. The proposal would not greatly impact businesses, either. An employer would save just Sk70 (€1.80) per employee per month (based on an average income).

The Labour Minister said his proposed cuts were a first step and that he sees room for much deeper cuts to payroll taxes in the future.

The Finance Ministry is sceptical that Kaník's proposals will work. While officials deny that the ministry is categorically against payroll tax reductions, they maintain the importance of creating realistic proposals.

"We do not resist cutting payroll taxes but we do not want to build such cuts on positive rhetoric but rather on expert data," said Peter Papanek, an advisor to the Finance Minister.

Papanek says payroll tax reductions are not possible without creating a deficit for the social insurer, the Sociálna poisťovňa.

The Labour Ministry is not discouraged by the Finance Ministry's initial negative response. Labour Ministry spokesperson Danko told The Slovak Spectator: "We see it as one of the opinions that are emerging from the Finance Ministry. It is exactly this department with which we need to have a serious discussion about cutting payroll taxes starting January 1, 2006."

Danko believes payroll tax cuts would not result in a deficit provided Sociálna poisťovňa continues to perform well. Even if the social insurer does not make a profit, according to Danko, "There is a political will to cut payroll taxes even if the price is a temporary risk."

The World Bank and European institutions claim that a high tax wedge (the difference between a worker's take-home pay and what it costs to employ him) is partly responsible for long-term unemployment in Slovakia.

Slovakia has one of the lowest income tax rates in the EU. However, income taxes make up just a small sliver of the overall tax wedge, while payroll taxes make up the greatest portion. In Slovakia, payroll taxes are among the highest in the union.

It is uncertain whether Kaník will gain the support of his ruling coalition partners. "The proposal will be submitted for an inter-departmental review and we are ready to discuss the issue and push through an even bigger cut to payroll taxes," Danko told The Slovak Spectator.

According to the news agency SITA, the Labour Ministry proposes decreasing the sickness benefit, which people on sick leave draw starting on the fourth day of sickness, from the current 55 percent to 50 percent of their taxable income.

The Klub 500, an association representing Slovak employers with a workforce exceeding 500 people, is supportive of Kaník's proposal. However, they consider the proposed changes symbolic.

"The business calls for a change that would ease the overall payroll tax burden by 2 to 4 percent," Klub 500 Executive Director Tibor Gregor told the news wire.

Gregor says that in the case of lowering payroll taxes the government should be similarly courageous as when it voted for the flat tax. He is confident that the move would remove job creation obstacles and that the social insurer would increase its revenues since there would be more clients to pay the insurance. In mid March, the Labour Ministry promised that payroll taxes would drop by 2 to 4 percent as of January 2006. The ministry made an optimistic estimation that the reductions could save businesses more than Sk5.5 billion.

The Finance Ministry has been warning that the performance of Sociálna poisťovňa is not as good as expected, which might make cuts to payroll taxes more complicated.

The World Bank stresses that lowering the tax wedge would need to be done in a budget neutral manner: "While lowering the tax wedge might partly finance itself through higher employment and output, additional revenue measures or preferably expenditure cuts would likely be required, not least in view of emerging demographic pressures on social spending. In most countries, there is considerable room to streamline subsidies and rationalize social transfers, including through better targeting of these."

Thomas Laursen, the World Bank's chief economist for Central Europe and the Baltic countries, stated: "There is an urgent need for labour market reform in the EU8 countries, where a decrease in the tax wedge - in a budget neutral way - particularly for low skilled workers should be contemplated as a policy option in order to boost employment and reduce high unemployment in some countries."

Anton Marcinčin, a World Bank economist for Slovakia, told the daily Pravda: "Taxation of personal incomes [in Slovakia] is lower than in other countries in the region. Currently, further discussion on income tax rate cuts makes no sense."

Slovak analysts have no doubts that payroll tax cuts would help the Slovak economy. However, they do not think the government will cut taxes in 2005.

"The biggest challenge facing Slovakia in 2005 is payroll tax cuts. Despite the Finance Ministry saying Slovakia has one of the lowest tax burdens, payroll taxes make labour costs high. I doubt the ministry will lower payroll taxes in 2005, but perhaps it could become a pre-election agenda for certain political parties," Ľudová banka's Mário Blaščák told The Slovak Spectator in an earlier interview.

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