Czech elections near: economists urge smarter taxes

As Czech voters head to the polls this weekend, economists are reminding politicians that the real issue is public finances. The phrase “It’s the economy, stupid” helped Bill Clinton win in the 1990s — and experts now warn Czechia needs the same focus. Their message: cut the burden on work, shift taxation to consumption and property, and invest in people and institutions.

Chronic deficits and “destigmatizing” tax hikes

The Czech budget has been running persistent deficits, and a group of leading economists has published a 200-page blueprint called Smarter Taxes.

Petr Janský|Photo: Kateřina Cibulka, Czech Radio

Petr Janský from the Center for Public Finance at Charles University argues that raising revenues does not have to mean higher rates:

“It is possible to increase tax revenues. And it doesn’t necessarily have to be by raising rates, but it is possible to make the system better in a way that will limit economic activity less, that will undermine growth less. But I think realistically, it is also necessary to increase revenues. When I see our overall political debate, then simply the way forward is to destigmatize tax increases and really, let’s raise taxes in a mild, as mild as possible way, but raise them.”

At the same time, he warns that governments often focus on only one side of the budget.

“Governments are supposed to change expenditures and revenues, but it seems to me that this happens separately. Here we decide to spend more on something, or we reduce taxes, but we forget about the health of public finances at that given moment … Or, conversely, when we lower taxes, we don’t figure out which other taxes we will raise, or which expenditures we will cut.”

A hole in public finances

Daniel Münich of the Center for Economic Research and Graduate Education – Economics Institute points to the abolition of the so-called super-gross wage — a system where employees were taxed not only on their salary but also on the employer’s social contributions. He says this has left a massive hole in public finances that every new government will need to address.

Daniel Münich|Photo: René Volfík, iROZHLAS.cz

“Every future government will, as a result of the abolition of the super-gross wage, face a huge problem and the need to consolidate public budgets quickly, parametrically, that means systemically. Either the governments will do it, but then for half of their electoral term they will basically be doing nothing else … Or the wheel will spin out of control again … and then we will get to a level of indebtedness and deficit size where much more draconian measures will have to come, regardless of whether someone likes it or not.”

For Münich, investment should not be defined only as building roads or railways:

“Investments don’t only mean concrete and steel, but they also include, for example, education and science, and they also include a well-functioning state apparatus. And if these things don’t work … then we can say goodbye to higher long-term growth, and therefore to the vision that we could borrow and everyone would benefit from it.”

Reading the study as a whole

Finally, Helena Horská, chief economist at Raiffeisenbank, stresses that the Smarter Taxes study is a comprehensive proposal and not a menu to pick from.

Helena Horská|Photo: Kateřina Cibulka, Czech Radio

“The important thing is, and that is the essence, that we have a comprehensive and above all a calculated proposal. I think that every responsible politician should really chew through the study, or ideally read it themselves. It is 200 pages, it can be read. I think every politician can manage it, and if not, then they should not be a politician, and they should look at what the proposal really sets out comprehensively. This study proposes reducing the taxation of labor … above all the taxation of low-income labor, and on the other hand raising taxation of, for example, consumption but also property.”

One message for politicians

Three economists, three perspectives — but one message. Czechia’s tax system is overdue for systemic reform. Whether politicians will listen remains an open question, but the experts are clear: without change, the deficits will only grow.