The Inconspicuous Charm of Hidden Tax Increases

Shadows-by-Georgie-Pauwels
Georgie Pauwels via flickr || Creative Commons

The slowdown in raising the deductible item did exactly what the Slovakian government needed. More taxes are paid to the budget and people have not even noticed it.

Have you spotted the fact that the basic rate of income tax has been changed in Slovakian tax law? Of course, the number 19 percent stayed unchanged. However, what has been changed is an effective tax rate, that is, the ratio of the real paid tax to income.

In 2009, a working man could reduce the tax base by € 286 each month. Today, the deductible item is already 317 euros, which is 31 euros more. At the same time, the average wage increased by 168 euros. Since a deductible item is cleverly set as a multiple of the living minimum, which increases according to inflation and not according to wages, the State will take more from the person with average income every month. In 2009, the income tax was 9.2 percent of the average gross wage, now it is 9.9 percent. We will use another example, so that the taxpayer can understand how much it really is.

Higher Taxes and Levies

Let’s suppose that the deductible item grows as fast as the average wage. The minister responsible for a tax collection would have to raise the rate of income tax to 20.45 percent in order to take from a person with an average income as much as today, which is 90 euros per month.

But if the minister – or the party – built their election campaign on increasing of income tax of the average employee, they certainly would not be sitting in the government today. However, slow increase of deductible item (slower than the growth of the economy) did exactly what government needed. More taxes are paid to the budget and people have not even noticed it. The same model was applied in the case of deductible items for health payments. It was set in such a way that it did not raise the cost of wages of low-paid employees for employers when the government enforced a radical increase in the minimum wage to 380 euros.

Today, the minimum wage is 435 euros, but the deductible item has not changed. In 2015, a person with a minimum wage paid levies 28 percent of the price his work, now it’s 31 percent.

Growth Is Faster

Economics knows this political trick well, the English term for this is “a real fiscal drag”. It indicates the fact that the state’s tax revenues grow faster than they would correspond to the growth of wages, the economy. Of course, there may be a situation where inflation is higher than the average wage growth, and in that year the effective rate of income tax would fall.

But if we look at the last ten years, such situations are rather a crisis exception. Even in long-term forecasts, economic growth in Slovakia is expected to be faster than inflation. The effective tax burden on workers, i.e. the share of taxes actually paid and levies on labor costs, is increasing. This growth will only be noticed by the attentive taxpayer.

What about Saving Elsewhere?

The system of concealing the actual amount of employee contributions (employers’ contributions) and the transfer of the obligation to tax returns and the calculation of contributions and taxes to the employer, made the employees fiscally illiterate. That makes it easy to sell them a statement that the government reduces the deficit by its management (the growing tax collection is not mentioned) and that the only way to raise the living standards of citizens is by exerting the pressure on employers.

But there are also other options of how to put a burden on private sector again. One of them is an increase of deductible items. Such a proposal, however, requires “work” on its own political backyard. For example, making public administration more efficient by canceling nonsense transfers and spending.

Translated by Natália Hlaváčová

Radovan Durana
INESS