Study: New income tax system will leave lowest paid no better off

Photo: nazreth, stock.xchng

In a major change to the Czech Republic’s income tax system, what’s known as the super gross wage is being abolished, with most employees set to pay a 15 percent rate from next year. However, the change will cause a sharp fall in state revenues and, suggests a new study, will be of virtually no benefit to the lowest paid.

For over a decade, the Czech Republic has been using what is known as the super gross wage to calculate income tax. It is the sum of an employee’s gross salary plus social and health premiums.

That system is set to end in January 2021, when a new income tax rate of 15 percent will come in for almost all employees.

The small percentage of people who earn CZK 139,000 or more a month will pay tax of 23 percent on their earnings.

The minister of finance, Alena Schillerová, says the aim is to leave Czechs with more cash in their pockets.

However, a new study suggests the change will mean the lowest paid 10 percent of Czech employees will take home only around CZK 100 more a year, which is essentially no change at all.

This is by contrast with the highest earning 10 percent, who will benefit to the tune of CZK 44,000 annually.

Klára Kalíšková, photo: archive of CERGE-EI

One of the authors of the report Klára Kalíšková, from the think tank Idea, explains why the change won’t benefit the worst paid.

“Under the current system such people are already not paying any income tax. A reduction doesn’t affect them. Income tax is currently relatively low, and we also have a generous system of tax breaks. So even today those who are on low incomes, or who combine different tax breaks, or who don’t work all year or work on short-term contracts, pay zero tax, or only a few hundred crowns a year.”

The Idea report suggests that the change in the income tax system will cause a CZK 80 billion shortfall in state revenues yearly, more than the CZK 74 billion that the minister of finance has conceded.

This difference stems from the fact that Ms. Schillerová expects the highest earners to spend the money they have saved on income tax, so ploughing the money back into the economy.

Economist Klára Kalíšková believes this view is mistaken.

“A lot of this money will go to people with very high incomes. And there we know, unfortunately, there is a lower tendency to consume. In lay terms, when these people receive an extra CZK 44,000 a year they won’t go to a shop and spend it. So this money won’t find its way back into the state budget.”

A poll by the Median agency for Czech Radio released on Monday suggests that 56 percent of Czechs are in favour of the abolition of the super gross wage.