Minister: Reform, even if it hurts

REFORM is necessary even if it is going to hurt, said Slovakia’s Finance Minister Ivan Mikloš as he tried mid March to push his ruling coalition partners closer to a compromise over the changes it is considering making to ways of calculating income tax and mandatory payroll taxes.

The self-employed, illustrative stock photo The self-employed, illustrative stock photo (Source: Sme - Pavol Funtál)

REFORM is necessary even if it is going to hurt, said Slovakia’s Finance Minister Ivan Mikloš as he tried mid March to push his ruling coalition partners closer to a compromise over the changes it is considering making to ways of calculating income tax and mandatory payroll taxes.

A tug-of-war has been raging between advocates of higher taxes on the self-employed and those working under Slovakia’s system of one-off contracts, and those who oppose the plan by suggesting that heavier payroll taxes will drive many self-employed people out of business.

“It is easiest to say that we are not going to do it because it will also hurt,” Mikloš warned on March 15, as quoted by the SITA newswire, adding that the ruling coalition would soon have to reach an agreement. “I expect those who are against to put an alternative proposal forward.”

Most-Híd, led by Béla Bugár, has been trying to soften the edges of the reform plan advocated by the Slovak Democratic and Christian Union (SDKÚ) and Freedom and Solidarity (SaS). While the fourth ruling party, the Christian Democratic Movement (KDH), has commended the government’s aim of developing a unified system for collection of income taxes, customs duties and mandatory payroll taxes its MPs have urged detailed assessment of the impact the changes will have on self-employed people.

The government of Iveta Radičová has said its ambition is to simplify the overall system and ease some of the administrative burdens on employees as well as employers.

The proposal, which is now being debated by the ruling coalition parties, market watchers and representatives of the self-employed, assumes the introduction of a so-called super-gross wage from which one social insurance and one health-care contribution would be paid. The proposed healthcare levy is set at 9 percent for all groups.

The Ministry of Finance has proposed setting social contributions at 19 percent for employees, while the self-employed would pay 16 percent and so-called one-off contract workers would pay 13 percent. The self-employed would also be offered a tax bonus.

Mikloš has denied that the changes would increase the overall payroll tax burden on Slovaks.

The minister noted that 1.65 million employees and 67,500 self-employed would be better off if the reform is given the go-ahead. He conceded that another 228,000 self-employed people may indeed take a hit, but this would only constitute doing away with distortions in the system, the TASR newswire wrote.

Fundamentals of the reform

While experts agree that so-called artificial self-employment needs to be addressed, they differ on the best approach.

“I consider the shift from employment to artificial self-employment, which is motivated only by a lower payroll tax burden, to be a problem since this leaves less money for health care or financing current pensions, for example,” the director of the INEKO think tank, Peter Goliáš, told The Slovak Spectator.

Goliáš considers the basic intention of the reform, which along with simplifying the payroll-tax system would also lower the motivation to switch to artificial self-employment, as correct.

“The question is to what degree the high payroll taxes on employees will be reduced and by how much the burden on self-employed and contract workers will increase,” Goliáš said.

“One of the solutions could be to make payments for sick-leave insurance and employment insurance voluntary, while in the event of illness or job loss limited drawing of funds from the second [old-age pension savings] pillar would be allowed.”

For the sake of reducing the payroll tax burden on low-income people and thus helping employment, INEKO also proposes having a deductible item for payroll taxes, similar to those for taxes, Goliáš concluded.

However, another think tank suggested that the problem is not the low payroll taxes of the self-employed but the high payroll taxes of employees.

Radovan Ďurana of the INESS economic think tank gave a negative assessment of the plan to pay for a reduction in the burden on low-income employees by placing a heavier load on the self-employed and contract workers. Ďurana told The Slovak Spectator in an earlier comment that he expected such a change would decrease flexibility in the labour market and have a negative impact on employment growth.

“We think that the government should be reducing the payroll tax burden of employees and not increasing it flatly for other groups,” said Ďurana.

Are the self-employed endangered?

Meanwhile Stanislav Čižmárik, the president of the Slovenský Živnostenský Zväz (SŽZ), which represents self-employed trade and craft workers, said that in January 2011 alone more than 6,000 self-employed people announced the termination of their businesses. Additional closures would probably follow if the government were to adopt the measures it has planned, he said, as quoted by TASR.

While the government argues that the current lower levies for the self-employed are unfair on regular employees, Čižmárik pointed to the differences between the two groups, stressing that the self-employed bear full responsibility for their entrepreneurial activities, guaranteeing them with their own property, while paying deductions regardless of whether they are making money or not.

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