Government approves proposed tax reform

The Czech government on Wednesday approved a package of tax reform measures intended to simplify the tax system and shift taxation from direct to indirect taxes. The planned reform should abolish the so-called “super-gross salary”, levy a new 20 percent tax on gambling and remove tax breaks on some employees’ benefits such as lunch vouchers. Radio Prague asked economist David Marek about the most significant changes introduced and their overall impact.

Photo: Barbora Kmentová

“The most significant change is a simplification of the system and the fact that we are going back to taxing a gross wage and not the so-called “super-gross” wage, which is something unusual in developed markets. Now we should have comparable taxation of personal income with other countries. We will easily be able to compare taxation in the Czech Republic with that in Germany, Austria, Poland, Hungary and other countries. With the taxation of a so-called “super-gross” wage this was very difficult and we needed special calculation to be able to compare the taxation in reality.”

For most Czechs the most visible part of the reform is the proposed abolition of lunch vouchers and other employee benefits. Although there are measures to cushion the loss trade unions say they are in adequate and are arguing that the abolition of lunch vouchers is a hidden increase of the tax burden. What do you think about that?

“I think that lunch vouchers are something that should be abolished because they are something that distorts taxation and provides a special exception for some companies in the Czech Republic which use them. The system will be better without such an exception and I do not understand why labour unions are against it because the new system should provide other benefits more or less of the same value.”

Why, in that case, are Public Affairs and even the Civic Democrats willing to maintain them?

“It is simply because of public opinion and trying to gain some political capital from this measure. The economic reasoning is simple – it is a mistake to have such an exemption in the tax system.”

How do you view the proposed 20 percent gambling tax?

“It is definitely something that needed to be introduced because gambling is something that should be taxed in the same way as alcohol and tobacco. I see that as a very good measure. ”

Mr. Marek, the Finance Ministry claims that despite all these changes Czechs will be paying more or less the same in taxes. Would you agree with that or do you see an increase or decrease of the tax burden anywhere as a result of these changes?

David Marek

“As a whole the tax reform is prepared as fiscally neutral. There was no target to increase or decrease the tax burden. The main goal is to shift taxation from direct taxes to indirect taxes. That’s the reason why VAT is increasing while direct taxation is decreasing, for example. Taxation of dividends will be abolished as well. That is something that is positive for the impact of the tax system on the economy. Economists know that direct taxation is more prohibitive and has a greaterre negative impact on economic activity. So the tax reform, as it was outlined, is something that should provide better conditions for the future development of the Czech economy.”