Tax proposals spur coalition disharmony

FINANCE Minister Ivan Mikloš and Labour Minister Jozef Mihál said they had a plan to remove what they called “unsubstantiated exemptions and other deformations” in the country’s income tax and payroll tax system. Mikloš of the Slovak Democratic and Christian Union (SDKÚ) and Mihál from Freedom and Solidarity (SaS) party argued that their proposed changes would bring more money into state coffers and that the level of the current budget deficit dictates an urgent need to close any loopholes that allow untaxed income to escape. But neither business leaders, nor even other political partners in the ruling coalition, seem to fully share the enthusiasm or the optimism expressed by these two government ministers.

Labour Minister Jozef Mihál (left) and Finance Minister Ivan Mikloš.Labour Minister Jozef Mihál (left) and Finance Minister Ivan Mikloš. (Source: Sme - Tomáš Benedikovič)

FINANCE Minister Ivan Mikloš and Labour Minister Jozef Mihál said they had a plan to remove what they called “unsubstantiated exemptions and other deformations” in the country’s income tax and payroll tax system. Mikloš of the Slovak Democratic and Christian Union (SDKÚ) and Mihál from Freedom and Solidarity (SaS) party argued that their proposed changes would bring more money into state coffers and that the level of the current budget deficit dictates an urgent need to close any loopholes that allow untaxed income to escape. But neither business leaders, nor even other political partners in the ruling coalition, seem to fully share the enthusiasm or the optimism expressed by these two government ministers.

Mikloš stated that the proposed changes could bring as much as €440 million in new revenue to the state purse in 2011, with prospects of increasing that flow to €560 million and €635 million in the following two years. The source of the new revenues proposed in the Mikloš-Mihál package would be higher compulsory social and health insurance taxes on self-employed Slovaks who work on the basis of trade licenses.

Critics of the package have insisted that the proposal to increase these citizens’ payroll tax burden should be offset by lower rates and by making certain types of social insurance voluntary. Some economists have suggested that instead of tampering with the social insurance contribution system to increase state revenues, the state should consider a hike in indirect taxes such as the value added tax.

After a week of intense internal debate, the ruling coalition announced on August 25 that the package originally proposed by Mikloš and Mihál will be reworked.

“Yes, we have differing opinions; me too,” said Prime Minister Iveta Radičová, as quoted by the Sme daily, after a meeting of the four-party Coalition Council held on August 24.

Disagreements emerged not only between the parliamentary opposition parties and ruling coalition and internally among the four ruling parties but within the Freedom and Solidarity party itself disagreements seem to exist because Mihál’s proposals apparently did not have the support of the party’s chairman, Richard Sulík, or Economy Minister Jozef Miškov, a nominee of SaS.

The Mikloš-Mihál package includes an increase in the maximum calculation base on which mandatory health and social insurance premiums are paid to a level of five times the average salary in Slovakia as well as an increase in the base for small entrepreneurs. The TASR newswire wrote that the proposal would mainly result in increases in monthly social insurance premiums for self-employed people and freelancers such as artists and journalists. In addition, Mikloš and Mihál proposed to unify lump-sum allowances at a single level of 30 percent in place of the three current levels of 25, 40 and 60 percent and as well to begin taxing income received from the sale of real estate.

Mikloš and Mihál have also proposed eliminating the current tax exemption enjoyed by Slovaks who participate in special-purpose savings plans, who purchase life insurance, and for those who make additional personal pension savings.

Mikloš noted that the proposed changes in taxes will also affect government officials who would begin to have their lump-sum allowances taxed, the TASR newswire wrote.

“Furthermore, we propose taxing bonuses on incomes from dependent activities that aren't currently being taxed,” Mikloš said. “This applies to judges, assessors, prosecutors and legal claimants of prosecutor’s offices.”

Mihál stated that the proposed changes in the tax code would primarily affect 20,000 artists and journalists and 30,000 self-employed people, and argued that this is rather a small group of people given the fact that around 2.4 million Slovaks earn incomes.

“I don’t see reason for concern then,” he stated, as quoted by TASR.

Mihál said that freelancers are the best-off among Slovak workers, currently paying only 13 percent of their total income to the state. He also asserted that other self-employed persons retain 75 percent to 85 percent of their invoiced income while ‘ordinary employees’ in comparison see around 43 percent deducted from their gross salaries in taxes, TASR wrote.

Business leaders in Slovakia are saying they dislike the planned changes emanating from the workshop of Mikloš and Mihál. The Slovak Business Alliance (PAS), which includes many major businesses in Slovakia, stated that elimination of exemptions in the tax and payroll contribution system should not serve as the main source of new revenue to tackle fiscal consolidation. PAS warned that the proposed measures would actually increase the payroll tax burden and the cost of labour and might as well have a negative impact on people’s motivation to work, the SITA newswire reported. Robert Kičina, the general director of PAS, suggested that the government should tax consumption instead.

Another employer association, the National Union of Employers (RÚZ), also expressed its disagreement with the proposed tax changes, writing in a statement that, “An additional burden placed on labour would complicate dealing with the society-wide problem of unemployment.”

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