The Slovak Minister of Finance claims a tax and contribution burden on self-employed people should be increased in order to be “fair“ in comparison to employees. Why can’t we put a sign of equality between these two statuses? Why doesn’t the term “fair“ make sense?
A remuneration of a self-employed person has two economic components – the business remuneration (profit) and the work remuneration. The entrepreneurs look for opportunities in the market and then connect inputs to outputs (products), while one of the inputs is also work. They decide on the direction of capital (own or foreign) and bear the full financial and reputational risk. They build intangible wealth in the form of a brand.
A self-employed person is closer to a business company than to an employee. Theoretically, all self-employed people in Slovakia might act as a single-member LLC, but the status of self-employed person gives the entrepreneurs the opportunity to join the state social system for a fee and at the same time they don’t have the status of unemployed without having to take over the complete bureaucratic burden of formally employing themselves.
Who Should Pay Which Taxes
One of the points of contention is flat-rate expenses. Let those self-employed people claim only the real costs! This would be a great argument if they could do so. The truth is that they can claim only the allowable expenses. And that is the difference. The allowable expenses are bureaucratically determined items that create only a part of the entrepreneur’s costs.
Let’s take the example of a business accountant. Their costs consist of all the books, law, and guidelines they have ever read as well as all formal and informal meetings, thanks to which they have built their client network.
Similarly, a self-employed person does not depreciate their living room which he works in (they can rent it to themselves, but this involves transfer pricing and additional bureaucracy), or other assets that cannot simply be included in capital assets.
The flat-rate expenses are the recognition that the costs, which are not exactly identified by law or regulation, exist. There is also a bureaucratic argument – flat-rate expenses make it easier for people to enter the business world. Not to mention that self-employed people, unlike large companies, usually do not have a prime minister’s phone number or receive a subsidy for new iron smelting furnaces.
Let’s compare this situation with the Czech Republic. There they not only have a very generous flat-rate costs (80% for craftsmen, 60% for other trades, 40% for non-trades and even 30% from the rent), they also have self-employment tax and contribution flat rate.
A self-employment person, who chooses this flat rate pays about 2,600 euros per year (12 month payments), which means that the taxes and contributions have been paid without any accounting and bureaucracy. The only condition is an income of up to around 40,000 euros per year.
For comparison, the minimum contribution itself of a self-employed person in Slovakia is 3,089 euros per year. We have been calling for a similar tax-contribution package for self-employed people in Slovakia for years.
So, should the total tax and contribution burden of a self-employed person income be lower or higher than that of an employee? It depends on the will of politicians.
However, there is no point in comparing them, as these are two different worlds. In economics it works as follows: if you tax something more, it’s production decreases. Do we want more employees and fewer self-employed people, or vice versa? The profession of the entrepreneur is not a universal solution for every homo sapiens.
It’s more like looking for sports talents – the more children undergo the football preparation, the greater the chance of discovering a new Hamšík. Therefore, I prefer a tax system that motivates people to do business to the one, which discourages them.
What to Do About It?
Self-employed people are a litmus test in the economy. The number of such people is society-wide survey of interest in the state social system (very little is said about the fact that for their minimum contributions the self-employed people receive a minimum pension as well). They are a buffer zone of the economy.
When a crisis hits, it is often them who use their own reserves and not draw sources from the state budget. We probably don’t have to give pandemic examples here. The self-employed person is also a walking representation of the costs of the Labour Code (in case you would be looking for a reason why employers have no problem to pay self-employed people).
This leads to another logical conclusion – the disposable income of many self-employed people would decline after the reform described at the beginning of this text. Some of them would transfer the increase of taxes into the rise of prices for consumers, but many would not be able to bear such a change and their business would cease to exist. Simply put, any increase in the tax means the reduction in the wealth produced and reduction in consumer benefits.
So, what should we do about it? Nothing! In Slovakia, we have the problem of high-taxed employees, not low-taxed self-employed people. Do not be fooled into saying that public finances “need” new taxes. New taxes are needed only by politician with ambitions to spend more.
In 2012, the public administration in Slovakia collected 20 billion euros in taxes and contributions. In 2019 it was 32 billion euros. Yes, the number increased by 60% (the average wage increased by 35%, inflation by only 7%)! The pandemic drop to 31 billion euros in 2020 and the proposed revenue for 2021 of 33 billion do not indicate any revenue catastrophe.
On the contrary, the side of the expenditures is disastrous. While in 2012 public expenditure accounted for 37% of the Slovak economy, during the pandemic in 2020 this percentage almost reached 50%. Creating a conflict between employees and self-employed people is just a cover for finding new sources for increasingly grandiose governments’ promises.
Translated by Paulína Ivanišová