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Equal tax has helped wider classes

Last update: 19.05.2006 06:00

Today, the number of Slovak citizens employed is 116,000 higher than at the beginning of this election period. The unemployment rate fell during the last three years from 18.5 to 11.4 percent. Regional differences in unemployment are decreasing because it is reducing most rapidly in the poorest regions.  Food prices fell during the last two years which means that neither accession to the European Union nor the tax reform resulted in their rise.  And since 2002 Slovakia has been the most rapidly growing economy in Central Europe.
All these are the results of the current Government’s reforms. In particular, the tax reform contributed to them to a large extent. Slovakia is at last known all over the world and more and more investors are coming to us thanks to the tax reform.

Fairer system
A flat-rate tax is fair and it has helped wide layers of society – not only companies and entrepreneurs.  We had a very complicated progressive tax system before the introduction of the flat-rate tax –this means that the richest population groups should have paid the highest taxes. But in reality they were the persons who often benefited from the system and paid significantly lower taxes than the middle class.

The complicated system and high taxes also motivated really rich people and big companies to hire tax advisors who found a way for them to pay the minimum. Only entities which could not afford expensive advisors – small and medium-sized companies and regular employees – paid the high taxes.

The current system is significantly more efficient and fair, especially because it is incomparably simpler. Almost all the exemptions, special items and rates were cancelled and one nineteen percent rate and a unified deductible item were introduced. 

The poorest gained
Everyone who had an income in 2005 lower than SKK 8,462 per month paid no tax. The tax is only paid on revenue above this value. Therefore a man with a monthly income of SKK 15,000 paid a monthly tax of SKK 1,076 which represents 7.2 percent and a man with an income of SKK100,000  paid tax of SKK 16,532 which is 16.5 percent.

Thanks to the deductible items, the poorest working families benefited the most from this reform.  Nor did the cancellation of the reduced VAT rate bring any negative impacts, because the prices of goods which belonged in the lower rate have grown by only a few cents. Although a part of the opposition depicts Slovakia as the beggar of Europe, independent studies show that, compared to most EU countries, we have a relatively low rate of poverty.  And this also is thanks to low taxes for people with low incomes.

Today it is clear that the middle class also benefited from the equal tax. The tax of some of them increased slightly in 2004 – e. g. for an employee living alone with an average wage it was a growth of SKK600 per year. But, thanks to the same reform, the growth in average wages accelerated, so that most of them moved into a higher income band. And, already in 2005, such a person paid approx. SKK 2,000 less tax than he/she would have paid before the reform.

Support for educated
The current simple system does not permit tax evasion but at the same time it provides no motivation to anybody to attempt it. Besides this, the reduction of the highest income tax rate did not help the typical “privatizing bodies” and “big capitalist” at the most. These have to pay the profits tax on capital today. They were able to legally avoid it before the reform. The reduction positively influenced people with higher education such as managers, lawyers and university professors. I am persuaded that it is fair that the state should not punish with high taxation the people who have invested in their education.  On the contrary, where their work contributes to the creation of new knowledge or new jobs, the state should support them.

There is no way back
The “Smer” party is dangerous because its representatives are willing to do anything in order to obtain power –even introduce poorly-thought-out proposals which at first sight seem attractive but which would have very negative effects.  This was also confirmed by the professional public, who literally had the laugh of Smer’s suggestions in the tax area. Implementation of the reduced VAT rate would lead to a decrease in state revenues by almost SKK19 billion. And education and health care would certainly feel the lack of this money.

If someone declares that this will be solved by renewing the tax from dividends, this would bring in to the state a maximum of SKK 600 million in net terms. The state would collect this money in particular from domestic small- and medium-sized entrepreneurs because foreign companies are not obliged to pay this tax in our country according to European legislation.  This handicapping of our entrepreneurs would surely be reflected in lower employment and lower growth in salaries.  Increasing further taxes, the introduction of exceptions and rates for rich would also not bring much money into the Treasury because these entities would again return to seeking ways how to avoid paying the taxes.

The representatives of Smer have often used the word “return” recently. Slovakia has not experienced any times to which it would be worth returning. On the contrary, such reforms as the tax reform have made Slovakia an inspiration for those countries which are still much richer but, in contrast to Slovakia, whose growth rate is decreasing. Do not return when we have a chance to go forward.

Ivan Mikloš
Deputy Prime Minister and Minister of Finance