MARCH is the month of income taxes in Slovakia. This year, a couple of months ahead of national elections, Prime Minister Robert Fico has seasoned this traditionally taxing time with some hints that he will return to a familiar theme: that the rich should pay a greater proportion of their earnings into the state’s purse than those on lower incomes.
While tax talk always finds audiences across society, observers and the political opposition say that Fico’s words about heavier taxing of the rich were intended for his Smer party’s voters. The prime minister was quick to add that the business community will keep its 19-percent flat tax if he leads the next government and that it has no reason to worry.
Market watchers’ responses to Fico’s talk were cautious but they warned that increasing taxes on high-earners does not guarantee higher receipts for the state. Besides, Slovakia already has progressive taxation for individuals, they point out.
The prime minister dropped a public hint about his tax plans after meeting representatives of the American Chamber of Commerce on March 23, saying he believed in the idea and that he would not rule out reopening the topic in coming months.
“I want to guarantee to the business environment that the 19-percent tax, if we remain in government, will be preserved,” Fico said, as quoted by the public-service broadcaster Slovak Radio. “However, I would stress that it is necessary to consider whether someone who earns €5,000 or €7,000, should not pay higher taxes than someone who earns €300 or €400 or €500. It is a question which I will set on the table when negotiating with my coalition partners.”
Apart from the nearing elections, the plunging tax revenues of the state has made the prime minister nervous. Revenue collection at the end of February 2010 was worse than originally estimated, meeting only 78.74 percent of budgeted receipts, at €1.131 billion, according to the tax authorities. The collection of non-tax revenues also lags behind the budgeted level, with €33.990 million being collected by late February, 81.36 percent of the planned amount.
The collection of revenues from income tax, tax on profit and capital gains tax fell most significantly behind budget, with the state collecting only 51.96 percent of what it had expected, or €179.4 million, the SITA newswire reported. Tax and customs offices should receive €8.871 billion this year.
In terms of the impact that fulfilling Fico’s tax promise would have on the state budget, Radovan Ďurana of the economic think-tank INESS said that it is impossible to assess when it is not known what rates the prime minister has in mind.
“One has to keep in mind that not all tax increases are followed by higher incomes for the state budget,” Ďurana told The Slovak Spectator. “Progressive taxation deters activity, prompts migration, and encourages legal and illegal gaming of the tax laws, for example by people switching to self-employment or establishing limited liability companies.”
Ďurana suggested that lower activity by people with higher incomes, who for example might choose free time over work in order to avoid additional high taxes, might in the end lead to slower productivity growth.
Finance Ministry spokesman Miroslav Šmál told the TA3 news television channel that it would be too early to quantify the influence of a progressive tax, since only the next government can decide on eventual changes to the tax system.
“No one wants to play with taxes,” SITA quoted Fico as saying. “The tax system will, in my opinion, remain untouched regarding the income tax of legal persons. There is no intention to impose any new kinds of tax either.”
Fico’s ruling coalition partners, the Movement for a Democratic Slovakia (HZDS) and the Slovak National Party (SNS), have been carefully tiptoeing away from their previously negative positions, lately becoming more hesitant in their reaction to statements by the coalition leader. The parties said they would be cautious when thinking about progressive taxes, the Sme daily reported.
The Slovak Democratic and Christian Union (SDKÚ) has ruled out any possibility of increasing the tax or payroll tax burden, saying that if it wins the election it will fix the system of payroll taxes instead.
To monitor Fico’s changing tax moods, Sme printed some previous tax talk by Fico: “I do not see any room for raising taxes, we would go against ourselves if we reached for that,” Fico said in January 2006.
Higher tax rates for private individuals who earn above-average incomes were among the objectives that the Fico government put on the table in August 2006. Since then the government has introduced the so-called millionaire tax, by progressively reducing the non-taxable part of the tax base.
“Despite the flat tax rate, we already have progressive taxation of individuals,” Ďurana said. “The installation of a progressive rate would only increase the existing progressivity.”
According to Ďurana, the current progressivity stems from the fact that private individuals pay the effective rate between zero and 19 percent; employees with a monthly salary lower than €387 pay a zero-percent rate, while employees with monthly incomes higher than €2,900 pay 19 percent.
“The result then is that more than 80 percent of tax income is paid by the highest-earning third of employees, so increasing tax rates would further increase the progressivity,” said Ďurana.
In their evaluation of its tax and payroll policies, the Fico government is not given high marks by analysts.
“On the one hand it is a failure and has not kept to the programme statement in the area of payroll taxes,” said Ďurana. “The government has failed to create order in the rates of social insurance; and it has been unable to establish its own concept for the future of the first pension pillar [the pay-as-you-go system], which it will hand over to the next government in an unsustainable form.”
On the other hand, Ďurana said, inactivity in the area of taxes, cosmetic changes such as selective cuts in VAT, the millionaire tax, or the so-called employment bonus, have not fundamentally changed the tax system that Finance Minister Ján Počiatek inherited from his reforming predecessor, Ivan Mikloš.
In fact, Ďurana suggested, the solution is a cut in tax rates accompanied by savings on the spending side.
The Slovak government made several changes to tax laws as part of its efforts to tackle the economic crisis during 2009: it amended the income tax law to increase the non-taxable portion of incomes from €3,435 per annum to €4,026. Parliament also adopted a so-called employee bonus programme which makes minimum wage earners eligible for negative tax, starting with earnings in 2009, but paid in 2010.
The government adopted the so-called millionaire tax back in 2007. It stipulates that if an individual’s gross monthly income exceeds €1,650, then the non-taxable portion of their income decreases.
