Flat tax rate - feasible plan or irresponsible experiment

On Tuesday, Czechs celebrated the so-called day of tax freedom. That means that until then, everyone worked just to pay taxes. All the rest of wages as of now until the end of the year, is net income. Liberal economists calculate this date every year to show people that nearly half of their earnings goes to the state coffers as taxes, social and health insurance and other payments.

The day of tax freedom was just three days before the general elections here in the Czech Republic. In the pre-election campaign this year, political parties have not focused on economic issues very much, with one exception. The right-of-centre Civic Democratic Party, which is running neck-and-neck with the ruling Social Democrats in the polls, came up with a plan to reduce the income tax for individuals to a flat rate of 15 percent.

Currently, income tax rates are progressive, ranging from 15 to 32 percent depending on the level of income. However, there are a number of deductible items, so in the end, no one really pays the set percentage. Party leader Vaclav Klaus argues that the figure is what matters. He says he was always embarrassed at the Davos economic forum to see the Czech Republic near the bottom of a list of countries sorted by their level of taxation.

Besides simplifying the tax system, the Civic Democrats also suggest that low-income groups would be exempt from paying taxes and people with income under a certain limit would pay a negative tax - in other words, receive social benefits.

All the other mainstream political parties of course in some way deal with taxes in their election manifestos.

The right-of-centre Coalition proposes tax cuts, however, they would keep the system progressive. They would increase the deductible sums and introduce allowances for families with children.

The ruling Social Democrats want to keep the overall level of taxation intact, however, they would introduce a steeper progression, that means higher taxes for high-income groups. They consider the proposal for a flat tax rate as an irresponsible experiment.

The Communists would like to completely redistribute wealth in the society. They would like to impose a 55-percent tax on incomes exceeding one million CZK a year. For comparison, the average wage is less than 200,000 crowns a year.

I spoke to macroeconomic analyst David Marek from the Patria Finance company about the proposed tax reduction and its feasibility.