Slovak Tax Ceiling Should Protect Future Economic Growth

Rembrandt van Rijn: Moneychanger // Public domain

The tax ceiling is not designed to strengthen the debt ceiling, as the latter has been devised so that the irresponsible governments in the future could not impose bring an unprecedented burden on the public finances. The ambition of the constitutional amendment of the law on budgetary responsibility is a part of the government’s declaration of programme and it is a correct ambition.

The declaration, however, also contains a second ambition. I quote: “the government of the Slovak Republic shall create preconditions for the termination of the increases of the tax burden.” And this ambition is also a right one.

A specific proposal how to achieve this is the already mentioned tax ceiling. The proposed debt ceiling deals with one form of plague, namely the spiralling growth of debt, but it does not achieve a protection of citizens and companies from other two plagues. These two plagues are a consolidation of the public finances without the cutting of the expenses and increasing of the tax burden in the future.

The protection from these two forms of plague comes in the form of Tax ceiling, the ceiling for a maximum level of the tax burden (including the healthcare and social security contributions), for example on the level from 2019. This was the last year of the previous social democratic government and also the last year not impacted by the pressures on the public finances caused by the pandemic.

The negotiations still continue regarding the specific parameters, but as soon as they are finalized, their results will be presented to the public.

In the meantime, however, it is significant to underline the strategic importance of the termination of the increases of tax burden. Slovakia is a part of the European Union, which has a tax burden considerably higher than that of its main competitors.

In 2018, the average tax burden in the European Union reached 40.2% of GDP, six percentage points more than the average of the OECD countries, in comparison with the United States it is 16 percentage points higher. Moreover, since 2010 the tax burden in the EU has continually increased.

There are other voices claiming that the higher tax burden does not have to be a problem in and of itself, if the higher revenues collected from the economy are smartly invested to activities increasing the competitiveness and productivity. And this is a second key problem of the European Union.

Despite the increasing public expenditures in the EU, the last decade has seen the EU lagging in productivity even more, mainly behind the United States. The EU cannot afford to continue long-term with a lethal combination of slow GDP growth, lagging in productivity and high taxation. And Slovakia cannot afford it either.

While the EU productivity is on two thirds of the productivity of the United States, the Slovak productivity is at about 40% of the European Union level.

Therefore, I believe we can look forward to a “win-win” situation, where Slovakia enacts the improvement of the debt ceiling and we also add a Tax ceiling as a bonus. It will come back to us in the form of improved competitiveness of our economy, greater GDP growth and a better standard of living.

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