ON JUNE 7, the average Slovak taxpayer will have worked off his total tax burden for 2005, says the F.A. Hayek Institute, an independent research organization that has been calculating Slovakia's so-called tax freedom day since 1999. From that day forward, everything the average Slovak earns, he puts in his own pocket.
Last year, Slovakia's tax freedom day fell on June 3. Previous to that, for three years' running, June 4 was the designated day.
"Slovakia's tax freedom day comes four days later than last year because public spending is increasing faster than the economy is growing," Martin Chren, director of the F.A. Hayek Institute told the press.
Chren said that this year, the Slovak government is spending almost half of the public's money: Sk424 (€10.83) for each Sk1,000 (€25.54) earned.
Not surprisingly, the Slovak Finance Ministry dismissed the institute's June 7 calculation. The ministry announced and celebrated Slovakia's tax freedom day a month ago, on May 5.
The Finance Ministry says it welcomes organizations that calculate tax freedom days, as they put public pressure on governments to effectively manage public finances. Nevertheless, the ministry refuses to budge on its calculations, maintaining that the F.A. Hayek Institute is in error.
In response, the F.A. Hayek Institute claims that the methodology used by the ministry to calculate tax freedom day is not used anywhere else in the world.
One thing that both the F.A. Hayek Institute and the Finance Ministry agree on is that Slovakia's tax system is effective and functioning well.
"The structure of Slovakia's tax system is one of the best in the world," said Ivan Švejna of the F.A. Hayek Institute.
The Finance Ministry faults the calculation methodology used by the F.A. Hayek Institute as well as the Slovak Taxpayer's Association in three areas.
According to Peter Papanek, the Finance Minister's advisor, expenses should not include items that the "state moves from one pocket to another". In other words, the ministry discounts funds that are transferred internally.
"Take state-paid insurance as an example. Although a state budget expenditure, it flows into the pocket of the social insurer, Sociálna poisťovňa, and registers as income. All these transactions should be left out of tax freedom day calculations," Papanek explained in a memo for The Slovak Spectator.
The Finance Ministry also argues that expenditures covered by European Union funds should not be included in the calculations.
The foundation says that it is an issue for discussion. It admits that the funds are not coming from the Slovak taxpayer's pocket but it is still money that the state spends.
Finally, the ministry's stance is that "it is good to consider the risks of exceeding budget limits. However, it would be useful to check the results retroactively, as there are situations when finances are not drawn, for example, in the case of co-financing," Papanek said.
However, the institute claims that it based its calculations on the Finance Ministry's official estimations of the risks that the state would exceed the budget.
"If their numbers are wrong, then of course our numbers are wrong, too," Chren told the daily SME.
There are two ways to calculate tax freedom day. One is to count the total tax amount collected including insurance payments. The other is to add global public spending into the mix. Both the Finance Ministry and the F.A. Hayek Institute agree that public spending must be taken into account, since it is generally higher than the sum of collective taxes and insurance payments.
According to the liberal Adam Smith Institute, which calculates tax freedom day in the United Kingdom, tax freedom day is a measure showing the total tax paid each year by a taxpayer on average, including indirect taxes, local taxes and national insurance contributions, as a percentage of that individual's total income.
The Slovak Spectator asked Gabriel Stein, director of Lombard Street Research, to shed light on various calculation methodologies. Stein calculates tax freedom day in the United Kingdom for the Adam Smith Institute.
"The calculations should include all taxes. That means direct taxes, indirect taxes, state taxes, local taxes, VAT and municipal taxes should all be included and these should be related not to gross domestic product but to the net national income," said Stein.
Stein, a Swedish economist who has lived in the UK since 1990, says that the real question is whether tax freedom day calculations should include government expenditures, and whether the budget deficit deserves a look.
"On one hand, you can say that you should not take account of the budget balance because you are simply looking at the amount of taxes taken in by the government in any one year. On the other hand, if you do not review the budget balance, a government that taxes its citizens very little but spends heavily comes out looking wonderfully well, despite its huge deficit. A government with a low tax burden and high deficit has to find money one way or the other, usually by increasing taxes. Conversely, the government that takes over after a long-term deficit and then tries to move the deficit into surplus looks like a high tax government," Stein told The Slovak Spectator.
"Basically, the method we use at the Adam Smith Institute [to determine the UK's tax freedom day] is the one that simply looks at tax and does not look at the budget balance. But whenever we give the date we say that if you include the budget deficit and government borrowing, then the tax freedom day would be so and so," said Stein.
While Slovakia has received praise for its tax system, the country's payroll taxes have been a source of criticism by the European Commission and even the World Bank. The F.A. Hayek Institute says that Slovakia has one of the highest payroll taxes in the world, which is a factor in Slovakia's relatively late tax freedom day.
Other countries where organizations mark their citizens' tax freedom day include Canada, South Africa, Slovakia, the Czech Republic, Lithuania and India.
13. Jun 2005 at 0:00 | Beata Balogová