Saturday, June 30, 2012

Flat Tax Update: June 30, 2012

The first half of 2012 brought changes in the hitherto stalwart flat-tax countries of Slovakia and the Czech Republic.  The putative purpose in both is reduce budget deficits and increase progressivity in the tax code. 


Prime Minister Robert Fico’s socialist party won a landslide victory in an election in March 2012.  Shortly thereafter, in mid-May, Slovakia’s parliament approved a four-year budget that included several tax-rate increases.  In 2004, Slovakia adopted a 19% flat tax on both individuals and corporations.  If Fico’s proposed new tax rates are approved in parliament, the corporate rate will rise from 19% to 22%, and a new marginal top rate of 25% will be imposed on earnings exceeding $43,600 a year (€33,000).  As of June 30, 2012, parliament had not yet enacted the tax-rate increases, but legislation is on track for a final vote later this year.

Czech Republic

In the Czech Republic, the center-right government of Prime Minister Petr Necas (ODS, Civic Democrats) has pushed through tax changes that would undo the party’s signature 19% flat tax enacted in 2008.  Scheduled to take effect on January 1, 2013, for a limited period of three years, a 7% “solidarity tax” surcharge will be imposed on individuals with gross incomes exceeding 100,000 Czech Crowns a month ($1=18.9 Crowns), thus increasing the top individual rate from 15% to 22%.   The corporate rate would rise from 19% to 23%.  The first reading was approved in parliament on June 7, 2012.  The legislative process requires three readings of a bill before it becomes law.  A final vote is expected sometime after the summer recess.


If the current governing Social Liberal Union (USL) party wins reelection this fall, Prime Minister Victor Ponta plans to submit to parliament a draft budget that would include replacing Romania’s 16% flat tax on personal income with three rates of 8%, 12%, and 16%, to take effect on January 1, 2013.  The 8% rate would apply to those with taxable income up to Romanian New Leu (RON) 800, 12% between RON 800 and RON 1600, and 16% above that.  ($1=RON 3.6)  The 16% flat tax was implemented in 2005 by the then governing National Liberal Party, which is now part of the ruling USL.


In a country report published in January 2012, the IMF recommended that Hungary revisit its flat tax to increase revenue and reduce the “regressive mix of tax and spending policies.”  Prime Minister Victor Orban, in bailout talks with the European Commission and the International Monetary Fund, has thus far refused to debate any changes in the country’s flat tax.