Friday, November 28, 2008

The Flat Tax Spreads to the Czech Republic

August 27, 2007

By Alvin Rabushka

On August 21, 2007, by a narrow vote of 101 to 98, the Chamber of Deputies (the lower house of the Czech Parliament) approved a public finance reform package submitted by the center-right cabinet of Prime Minister Mirek Topolánek. Although the measure requires the approval of the Senate (the upper house of Parliament, where the ruling coalition has a majority), and the signature of President Václav Klaus, both are expected to approve the package. Opposition deputies pledged to revise the reform when they return to power. The current government in Slovakia made a similar pledge during the last election campaign, but once in office have made no serious attempt to undo the country’s 19% flat tax on personal and corporate income.

The reform package consists of two major changes in taxation. One involves the personal income tax. Beginning January 1, 2008, the current system of four rates, 12, 19, 25, and 32%, will give way to a flat rate of 15%, followed by a further reduction to 12.5% in 2009. In exchange for the lower rates, social and health insurance contributions will be included in the tax base of the personal income tax. When the 12.5% rate takes hold, the flat rate on gross income will come to 19.4%. (The information reported in several English-language press reports does not provide any details on the level of personal exemptions or if the tax base excludes any other deductions. Further details will be posted to this site when they become available.)

To maintain competitiveness with other Central and Eastern European countries, the package successively reduces the corporate tax rate from 24 to 21% in 2008, 20% in 2009, and 19% in 2010. These reductions will put the Czech Republic on an even playing field with its neighbor Slovakia.

This web site has chronicled the adoption of the flat tax around the world since its first adoption in Estonia beginning 1994. The list of countries in Central and Eastern Europe also includes Lithuania, Latvia, Russia, Ukraine, Serbia, Slovakia, Georgia, Romania, Macedonia, Montenegro, Albania, and Pridnestrovie (self-declared independent country adjoining Moldova, but which lacks international recognition). The remaining countries in the region that still retain multiple rates on personal income are Poland, Hungary, Slovenia, Bulgaria, Moldova, and Belarus.

New elections are anticipated in autumn 2007 in Poland, with one of the leading parties supporting a flat tax. Slovenia recently enacted a slight reduction in its personal tax rates, but rejected the flat tax. Bulgaria has narrowed its three rates to 20, 22, and 24%, which makes the prospect of its adopting a flat rate increasingly likely. At the time of this writing (late August 2007), there are no major movements toward a flat tax in Hungary, Moldova, and Belarus.

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