REVIEW #12: Tax Labor and Labor Will Leave: The Bosnian Example

The fiscal burden of labor in the Federation of Bosnia and Herzegovina is one of the largest in Europe. Although living among the poorest countries on the continent, workers in Bosnia and Herzegovina pay a lot to a high tax wedge, which is over 40%. In particular, at EUR 100 net salary, the employer gives EUR 73 to the government (at the expense of contributions and income tax).

Although in the last five years there was an attempt to reform the fiscal system under the guidance of international partners, the reforms have failed.

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The consequences of having the largest fiscal burden on labor are numerous, but the most significant are: a high unemployment rate of over 18%, a gray economy comprising 25% of GDP, and, finally, the departure of over 200,000 workers from Bosnia and Herzegovina in the last 10 years.

If you tax labor, then labor (like capital) will leave as soon as the first opportunity is created. This is what has been happening since 2010, when a visa-free regime was established with most EU countries.

In general, high taxes on labor, in the long run, are forcing labor outside the country, which puts pressure on large social systems (such as pensions and health), which, again, creates the need to maintain high labor taxes or, ceteris paribus, introduce new taxes.

Reforms are painful but necessary, and the reform of the tax system must be carefully and smartly managed.

Fiscal Frankenstein

The tax system is a sub-system of the economic system that covers all taxes, contributions, and similar instruments that provide public revenue to cover public expenditures. Bosnia and Herzegovina has a very specific tax system, whose organization was inherently a political issue, as is often the case with other countries, and is not rooted merely in financial reasons1.

It is a system that results from the legal and fiscal legacy of almost 50 years of communism within the former Yugoslavia, obligations made from that period, but also the wartime events of the 1990s, as well as the specific constitutional order stemming from international efforts to stabilize the political and economic situation in the country – the Dayton Peace Agreement.

All of this has led to the development of a complicated tax framework, which, according to all relevant global reports such as the World Bank’s Ease Of Doing Business Index, the Index of Economic Freedom by the Heritage Foundation and the Wall Street Journal, the Economic Freedom of the World by Fraser Institute, as well as the Global Competitiveness Report by World Economic Forum is one of the biggest obstacles for developing the domestic economy.

This is why the tax system was in the focus of one of the largest post-war economic reform packages, called the Reform Agenda for Bosnia and Herzegovina (now in the form of a new socio-economic reforms package). There are numerous consequences of such a tax system. First of all, it is necessary to clarify the characteristics of the tax system of Bosnia and Herzegovina, in a simple and precise manner.


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1 Jusufbašić E. (2011) Organization of Fiscal Policy at the Level of Bosnia and Herzegovina, Fondacija Centar za javno pravo – Analize.