Slovakia Needs Tax Revolution

Marinus van Reymerswaele: Two Tax Collectors // Public domain

The presentation of the tax reform proposal by Slovak Finance Minister Igor Matovič is good news for two reasons. Firstly, there is finally a concrete reform proposal on the table, and so the current futile discussion about the fact that a lot of time has passed since this government took office, nobody has seen the tax reform, it may not exist and so probably nobody will see it again, can be replaced by a much more interesting discussion about the advantages and shortcomings of the proposed reform.

Secondly, the proposal presented is neither a piecemeal change nor a cosmetic change to taxes and levies, but is so extensive, comprehensive, and, in some respects, so bold that the author of the proposal himself describes it as a revolution. And a tax revolution, i.e. a fundamental overhaul of our tax and taxation system, is exactly what we need, because it is now almost eighteen (!) years since the last one.

The present proposal is and is not a tax revolution. It is an attempt at a revolution in the form of a fundamental simplification of the system.

However, this tidying up does not have the same strong impetus to kick-start the economy as the flat tax in 2004 and, in that sense, it is not a revolution.

Of the three parts of the reform, family support, labor taxation, and company taxation, only two, which relate to taxation, are a real reform. The proposal to introduce a two-hundred-euro child allowance belongs to the area of social policy. The introduction of order into the welfare system and its overall simplification is a laudable effort, but in the context of tax reform, it seems like an extraneous element.

The tax system should not be used to implement social policy objectives. The tax system should be purely a mechanism that collects from citizens and companies, in the least distortionary way, the least amount of money necessary for the functioning of the state, the financing of its obligations and its policies.

With the proposed changes to labor taxation and company taxation, it is necessary to appreciate the effort to fundamentally simplify the system, in the words of Igor Matovič, ‘tidying it up’, abolishing many exemptions and introducing one tax and one levy in a way that should bring the vast majority of employees a higher net income.

The proposals in the area of company taxation should also be viewed positively, especially the reduction of income tax from 21% to 19%, flexible depreciation of assets or so-called group taxation, and the reduction of the transfer pricing obligation, which for most Slovak small and medium-sized companies is an unnecessary administrative burden introduced under the guise of combating tax evasion.

With regard to financing the costs of the reform, first of all, it should be highlighted that for the first time ever we are discussing a tax reform that is not prepared with the eternal assumption from the past that it should be budget neutral, but that it assumes that any shortfall in revenue will be compensated for by the so-called dynamic effects of its adoption.

On the contrary, the main negative in terms of costs is that the ‘social element’ in the reform package unnecessarily increases them; without it, the cost of the reform would be half as high. And the higher cost of introducing a single measure, even one as divine as EUR 200 per month per child, makes it more necessary to find the resources to finance it in controversial and much-debated ways. From the transfer of hundreds of millions from local authorities to the millionaire’s tax to the taxation of banks.

Paradoxically, the biggest plus of the reform, its radicalness and comprehensiveness, is also its biggest weakness. It contains many changes, many of them very interesting and useful, others less so. And the devil is in the details.

What is missing so far is precisely the calculations of the impact on companies, employees, and public finances. A comparison of the situation before and after the reform. This is the only way to see where we can find a match.

What, then, are the prospects for passing this reform? The reform will pass if we are able to take out of it what everyone agrees on and leave aside what we cannot agree on. The reform will not pass if the debate on support is conducted in an all-or-nothing manner. Then we will have no choice but to extend the time we wait for the tax revolution for another term.

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