Parliament approves significant tax cut that will affect 4 million Czechs


The Czech Parliament on Tuesday passed a significant tax cut which will affect some 4 million Czech taxpayers next year. Employees will save an average of around 400 crowns per month - or about 13 US dollars. That isn't much but it is significant when one considers that in the Czech Republic the average monthly salary still averages only 18,000 crowns - around 800 dollars US. In that light, many Czechs will see the break as a significant step.

Finance Minister Bohuslav Sobotka,  photo: CTK
Some analysts have suggested it is the most significant change to the tax law in over a decade. Pushed through by the Social Democrat-led government, and affecting the majority of Czech employees, it received support from both parties in opposition - the Civic Democrats as well as the Communist Party. The changes will most benefit those in the lower- and middle-income brackets.

Finance Minister Bohuslav Sobotka:

"We are lowering taxes in the first two income brackets from 20 to 19 and 15 to 12 percent - that biggest change in taxes since 1993. On average, the cut translates between 4,000 to 4,700 crowns per year. That's how much people will be able to save. The cut will encompass those earning up to 30,000 crowns, which represents about 90 percent of tax-payers."

Some, however, feel that the cut doesn't go far enough: the right-of-centre Civic Democrats, for example, took issue that the cut would have virtually no impact on high-earning workers and entrepreneurs. In the end, they raised their hands for the bill, but not without reservations, explains Tibor Bokor of Wood & Company:

"The opposition party that wants to introduce even further tax cut in the future had to admit that even small cuts in the taxes were better than nothing, so they all agreed and approved anonymously this law. Lowering taxes actually raises the tax revenues for the government, basically due to better behaviour by the tax payers. Therefore I believe that the further lowering of taxes will be beneficial for the government and for the budget. However, the current lowering of taxes is not sufficient and not enough."

Czech personal income tax rates are among the highest in the European Union and ahead of the 2006 general elections no party can afford to be seen voting down a tax cut. Should the Civic Democrats win next year - as many polls have suggested they might - they will almost certainly try and have the rate lowered for higher income earners.

For now, ordinary Czechs can look forward to their tax cut next year - if it is passed, as expected in the Senate - and by the country's president. On the other hand, few in the government are now enthusiastic about discussing cuts elsewhere. On the contrary, consumer taxes are expected to rise in 2007, followed by the introduction of an 'ecological' tax in 2008, which will affect gas, heating fuels, and gasoline.