Proposed tax reform evokes mixed reactions

Proposed tax reform evokes mixed reactions

Earlier this week the Czech coalition government approved proposed tax reforms to help the country pay for the enormous damage from the floods.

The proposals, which have yet to be approved by parliament, entails higher consumer taxes on alcohol, tobacco and, in due time, petrol, a rise in the lower rate of VAT from 5 to 7% , a higher income tax for the rich and - in the hope of generating more investment and jobs - a reduction of corporate income tax by three percentage points starting in 2004. The proposal has come under fire from the opposition Civic Democratic Party, which claims that the government has found the easiest way out of this crisis -by making taxpayers foot the bill. Earlier DL spoke to economic analyst Radomir Jac to find out how he feels about the government's tax-reform plans.

"I'm not sure whether tax-hikes are the optimal way of dealing with the situation. There are two other alternatives : one is the use of privatization funds, the second is to find ways of reducing expenditures from the government budget and other public budgets."

Is the government using these two alternative means -and, if not, why not?

"I think that, at the end of the day, the government will use a combination of all three. New proposals on how to finance the flood incurred expenses appear every day. The debate on the positive and negative aspects of the government's proposal is ongoing and the issue is far from closed."

Now, can we go on to the possible impact these changes would have on the macro-economy. We can expect a rise in inflation, can we not?

"Definitely, the whole point of tax hikes is to get higher revenues. The government is counting on an extra 10 billion crowns in extra revenues in 2003 and possibly an extra 17 or 18 billion in 2004. Of course the major part of this additional revenue will come from changes in VAT and consumer tax - in other words from inflation. Although, we can estimate that the direct impact of these changes on inflation will be lower than half a percentage point. In other words, we can expect inflation to remain relatively low. My rough estimate for end-of-year inflation in 2003 is around 2.5%."

How will it effect economic growth?

"Well, frankly that is quite difficult to predict. As I said, in the end result, the people will have to foot the bill, the money the government wants to spend will come from citizens' pockets so it is unlikely that this whole transaction will be very positive for GDP on the other hand the government is going to spend all this money so I think that, on average, we will see some slightly positive impact on economic growth. However due to recent trends in the economy we can expect relatively slow GDP growth this year: around 2 -2.5%."