Ruling coalition agrees on a tax reform

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The Czech Government is planning to introduce a tax reform to raise money for flood damage repairs while insurers upgrade their flood damage estimates.

The leaders of the three parties which form the Czech governing coalition have agreed on a series of changes in the tax system as of 2003 as a means of covering the repairs of flood damage. The most significant amendment is the furthering of the tax progression - the introduction of new tax brackets for people earning more than 900,000 CZK a year. They will pay a 35-percent tax on income exceeding that level. Now, they pay 32 percent on income exceeding 350,000. On the other hand, the corporate income tax rate should be reduced from the current 31 percent to 30 percent and subsequently to 29 or 28 percent. However, indirect taxes are also to rise. Besides an increase of consumer tax on alcohol and cigarettes, VAT on some goods will rise from 5 percent to 22 percent.

In order to soften the impact of the changes, the government promised to introduce a combined taxation of family income. That would help in cases when for example the husband earns significantly more than his wife - their combined income might fall into lower tax brackets than the high income itself.

Analysts predict that the recent catastrophic floods and the tax hike planned by the government will lead to higher prices of foodstuffs and some services, as well as real estate, property insurance and construction work. They say the impact of the floods on consumer prices will be insignificant but higher indirect taxes can add up to one percentage point to the inflation rate next year.