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Flat tax: The greatest publicity gimmick in Central European history?

"ALL they want to hear about is the flat tax. I think you should treat it as one of the greatest publicity gimmicks in Central European history. It is the most clever, inexpensive and effective way that a small country like Slovakia - which most foreign investors cannot locate on a map - could devise to draw attention and capital," said a US journalist when trying to describe how his colleagues and businesspeople view the 19-percent flat tax that Slovakia adopted as part of its ambitious tax reform.

Although, for foreign businesses the "publicity gimmick" may make Slovakia a great place to invest, the country's population is less enthusiastic about it.

A survey by the MVK agency for the daily SME found that most Slovaks do not feel that the flat tax has helped their incomes.

Approximately 30 percent of respondents said that their incomes have decreased since the introduction of the "revolutionary" flat tax, with only seven percent saying they felt it had increased their incomes. A full forty percent said they had noticed no change.

The Slovak government never made any secret of the fact that it was tuning the country's economy to attract foreign investment, which in the long run should create wealth and badly-needed jobs.

The Finance Ministry stands firmly behind its claim that no group should have experienced any significant drop in its income, as the tax rate was designed in such a way as to harm nobody's income.

Not surprisingly, the survey found that opposition party voters, most notably Slovak Communist Party supporters, and people on incomes of between Sk12,000 (€300) and Sk15,000 (€385), were the groups that felt most negatively about the tax.

Smer, currently the strongest opposition party, has been hostile towards the idea of a flat tax since its very inception. Smer chief Robert Fico even suggested that once the voters help him to gain power, he will simply kill the flat tax.

Certainly, Fico is one of the very few politicians who might take pleasure in the MVK survey's results. He is getting nervous because the Dzurinda team's reforms are starting to bear fruit.

Fico says he would introduce two value added tax (VAT) rates to replace the current 19-percent flat tax. He would lower VAT on items such as basic food products, prescription drugs and social housing construction projects, and abolish VAT on selected goods such as textbooks and school utensils.

The Smer boss also promised to decrease the income tax for low- and medium-wage earners.

However, Fico, when facing Finance Minister Ivan Mikloš in public debates, has never been able to defend his economic concepts with anything other than populist declarations about the socially more just world he would create.

Mikloš has warned several times that apart from repelling the foreign investors, Fico's "brave new world" would have a serious impact on the state budget.

"Our estimate of the consequences to the budget is between Sk35 and Sk40 billion (€920 million to €1 billion). So it is absolute and absurd nonsense that Smer's changes would not have any budget consequences," said Mikloš.

Even those who have refrained from heedless celebration of the flat tax say that so far the 19-percent flat rate's pluses outweigh its minuses.

Nevertheless, many warn that the flat tax is not a universal medicine and that a favourable tax system is not enough to boost the country's competitiveness.

According to a recent study by the Institute for Management Development, Slovakia ranked 40th out of 60 states in economic competitiveness.

Martin Knapko, an analyst with the Bratislava-based F A Hayek Foundation, says that sometimes investors put greater importance on the financial relations between firms, banks, and the state, as well as the infrastructure, logistics, science, research and education in a given country, than on any one piece of financial legislation.

Still, the current government has carried out a very brave reform that has had a positive impact on the perception of the country.

Now, the father of Slovakia's flat tax has a new economic brainchild that he says would cut the country's high payroll taxes in half. Richard Sulík, the co-creator of Slovakia's 19-percent flat tax is proposing that a single 20 percent payroll tax rate replace the 13 different payments that exist today. These revenues would be directed into a so-called redistribution fund.

Though his idea has not sparked much enthusiasm in political circles, it at least shows that creative business ideas keep emerging in this small central European country, which certainly has made its mark on the global memory of the business world.

By Beata Balogová

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