Proposed tax reforms not radical enough say critics

The government announced a new financial reform package on Monday evening, which it wants to put before parliament. The proposed measures include the introduction of a flat tax of fifteen percent, which is being hailed by supporters as a brave move aimed at ensuring that people can pay lower taxes while at the same time increasing government revenues. Is this the sort of step needed to reduce the Czech Republic's worrying public deficit or is it - as critics maintain - all just smoke and mirrors?

Foto: archiv Českého rozhlasu - Radia Praha
The government's proposed tax reforms include the introduction of a flat 15-percent income tax for Czech workers as of next January. The government argues that this will simplify the tax system and also boost state coffers.

Critics say that the tax won't make put more money in people's pockets because it will be applied to worker's gross wages before health and social insurance deductions are made. When these are subsequently taken out of the net wage, people won't be getting much more than they got before.

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

Not much of a revolutionary reform says Ales Michl, a financial analyst with Raiffeisenbank:

"I think it is a pseudo-reform because you have a cut in personal income tax on the one hand but on the other hand the tax base has been enlarged and value-added tax has been increased. So overall I don't think there's any tax cut. This reform is neither a liberal reform like in Slovakia or nor a modern social reform like in the United Kingdom."

One of the government's reasons for introducing the reforms is to increase revenues so that it can reduce the country's budget deficit, which is in danger of not being under the three percent needed for euro adoption.

Although some spending cuts - such as a reduction in the number of civil servants - are being made, the government is primarily trying to reduce the budget deficit by increasing revenues from taxation.

Ales Michl - like many others - says the administration is going about things the wrong way and that an opportunity is being lost to make serious reforms to the country's somewhat chaotic public finances at a time of relative economic prosperity:

"Solving the budget deficit means you have to focus on the expenditure side of the budget not on the revenue side. So tax cuts are very popular and all very well, but it won't solve the budget deficit. You have to focus on expenditures - on social benefits, pensions, healthcare. It's a great advantage that we have the biggest economic growth in history and revenues are growing very well. It's a great time for us to focus on the expenditure side of the budget because it will cost us less to do it now than when times are bad."