Government reportedly set to push for 15-percent flat income tax rate

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According to press reports, the right-of-centre Czech government is planning to introduce a 15-percent flat income tax at the start of next year. That would be the lowest in Europe, and the idea does seem radical. But just how revolutionary is it? And who would really benefit?

On Saturday the daily Mlada fronta Dnes reported that the minister of finance, Miroslav Kalousek, wants to introduce a flat 15-percent income tax for Czech workers from January next.

Tax would also be levied on social and health insurance, including that paid by the employer, which does not currently appear on pay slips.

There would be a cap, however, on the social insurance paid by the highest earners - those on four times or more the national average salary. Critics say this means the well-off could be the only real beneficiaries.

Alongside the change in income tax, the basic VAT rate would almost double, from 5 to 9 percent, and that would mean rises in the prices of food, medicines and public transport, among other things.

Mr Kalousek's reported proposal also envisages a gradual decrease in corporate tax from 24 to 19 percent.

I discussed these ideas with a former finance minister, Pavel Mertlik, who is now chief economist at Raiffeisenbank. He cautioned against speculating too much, given that the story is so far based on press reports alone. But he said any such changes would be significant.

"I think it will be quite radical, particularly in the sense that it redistributes part of the tax burden from certain groups of the population to others.

"So far it looks like a bigger part of the burden will be on employees and a smaller part on self-employed people and entrepreneurs."

What about the proposed VAT rise - how much will that possibly cancel out any other benefits?

"Basically the increase of the lower tax rate from 5 to 9 percent relates to food and some other basic things. So basically it will be lower income groups which will suffer from that."

What about the possible impact on investors, investment in the Czech Republic? And on the budget deficit?

"It seems the taxation change is constructed as more or less budget neutral. So it will not change much the total tax burden in the Czech Republic.

"As regards the interest of investors, definitely a 15-percent tax rate in personal income is sexy and sounds interesting.

"But at the same time for those companies which do tax analysis - and this is most international investors - they know that the tax base is important as well. This will be quite radically increased, particularly for employees, if I understand right, so the final outcome will not be very strong."