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OECD Economics Department Working Papers No. 245 The Tax System Chiara Bronchi, in the Czech Republic Andrew Burns https://dx.doi.org/10.1787/242706151678 Unclassified ECO/WKP(2000)18 Organisation de Coopération et de Développement Economiques OLIS : 25-May-2000 Organisation for Economic Co-operation and Development Dist. : 02-Jun-2000 __________________________________________________________________________________________ English text only ECONOMICS DEPARTMENT Unclassified ECO/WKP(2000)18 THE TAX SYSTEM IN THE CZECH REPUBLIC ECONOMICS DEPARTMENT WORKING PAPERS NO. 245 by Chiara Bronchi and Andrew Burns Most Economics Department Working Papers beginning with No. 144 are now available through OECD’s Internet Web site at http://www.oecd.org/eco/eco. English text only 91640 Document complet disponible sur OLIS dans son format d’origine Complete document available on OLIS in its original format ECO/WKP(2000)18 ABSTRACT/RÉSUMÉ This paper discusses the tax system in the Czech Republic and offers some specific suggestions for reform. Viewed in international context, the Czech system is broadly similar to those operated in other OECD countries. Like them, it exhibits a number of non-neutral features, some of which reflect the economy’s command and control past and others which reflect compromises between the desire to minimise economic distortions and the need to implement a system that is administratively and politically practical. The evidence, reviewed in this paper, suggests that the main priorities for reform should include: eliminating the tax bias in favour of self-employed work forms; substantially reducing the number of goods and services subject to the reduced VAT rate; lowering social security contributions and increasing reliance on the personal income tax system. In addition, more use of property taxes, in particular real estate, might be warranted from the points of view of revenue enhancement and income distribution. Finally, tax administration could be strengthened by a more comprehensive registration of taxpayers, better training of personnel, tighter enforcement and the introduction of binding tax-rulings. JEL Code: H2 Keywords: taxation, the Czech Republic ***** Ce document examine le système fiscal de la République tchèque et formule plusieurs propositions spécifiques concernant les réformes à mettre en œuvre. Dans une optique internationale, le système de la République tchèque est assez proche de ceux des autres pays de l’OCDE. Comme eux, il présente un certain nombre de caractéristiques non neutres, dont certaines tiennent au passé communiste de l’économie et d’autres reflètent un compromis entre, d’une part, la volonté de réduire au minimum les distorsions économiques et, de l’autre, la nécessité de disposer d’un système qui soit pratique sur le plan administratif et politique. L’analyse présentée dans ce document incite à penser que les réformes devraient viser en priorité à éliminer le biais fiscal en faveur du travail indépendant, à réduire sensiblement le nombre de biens et services assujettis au taux réduit de TVA, à réduire les cotisations de sécurité sociale et à mettre davantage l’accent sur l’imposition des revenus des personnes physiques. Par ailleurs, un alourdissement des impôts sur la propriété, immobilière notamment, se justifierait à la fois du point de vue du renforcement des recettes fiscales et de celui de la redistribution des revenus. Enfin, l’administration des impôts pourrait être améliorée grâce à un enregistrement plus systématique des contribuables, une meilleure formation du personnel, une application plus rigoureuse des obligations fiscales et l'adoption d'une procédure de décision préalable contraingnante. Classification JEL : H2 Mots-clés : fiscalité, la République tchèque Copyright OECD, 2000 Applications for permissions to reproduce or translate all, or part of, this material should be made to: Heads of Publication Service, OECD, 2 rue André Pascal, 75775 Parix Cedex 16, France. 2 ECO/WKP(2000)18 Table of Contents Page I. Forces shaping the system: past, present and future ...................................................................4 II. Main features.............................................................................................................................11 III. Problems with the system..........................................................................................................25 IV. Suggestions for reform..............................................................................................................35 Annex Details of the tax system ...........................................................................................................42 Bibliography .............................................................................................................................................59 3 ECO/WKP(2000)18 THE TAX SYSTEM IN THE CZECH REPUBLIC Chiara Bronchi and Andrew Burns1 I. Forces shaping the system: past, present and future 1. The tax system in the Czech Republic is broadly similar to that observed in many OECD countries and it carries relatively few vestiges of the pre-transition system. Nevertheless, several of its features reflect the difficulties inherent in moving towards a market-based economy. Box 1 provides a brief description of the system under communism and the reforms undertaken at the beginning of the transition. The most important of these were the elimination of a large variety of negative tax rates used to subsidise “socially sensitive” consumption and the establishment of a corporate tax system that was rule-driven and not subject to negotiation as had been the case under central planning. Following these initial steps, a more fundamental reform was passed in 1992 by the Czechoslovak Parliament but entered into force only in 1993, after the break up of the country into the Czech and Slovak Republics.2 It replaced the previous tax system with one based on the same principles as observed in mature market economies. 2. In its main features, the structure of the new system compares with those of most OECD countries. The overall tax burden is about average (Figure 1), although at 36 per cent it is much higher than observed in almost all OECD countries when they were at similar stages of development.3 The tax mix is fairly diversified, with personal income, social security contributions and consumption taxes accounting for the major part of revenues (Table 1). By international comparison, the share of corporate income tax is average, while those of consumption and social security contributions are high (taken together they account for more than 75 per cent of total tax revenues). Individual income taxes represent a smaller proportion of tax revenues than in most other countries, while that of other taxes, including those levied by local governments (property taxes and other fees) is very small (Table 2). 1. An earlier version of this paper served as background for the OECD Economic Survey of the Czech Republic, which was published in February 2000 under the authority of the Economic and Development Review Committee of the OECD. Chiara Bronchi is economist in the Policy Studies Branch of the Economics Department, where Andrew Burns is Head of the Czech Republic/Hungary Desk. The authors are indebted to Val Koromzay, Andrew Dean, Jørgen Elmeskøv, Jean-Claude Chouraqui, Thomas Dalsgaard, Flip De Kam and David Holland for valuable comments. Special thanks go to Raoul Doquin de St. Preux and Chantal Nicq for technical support and to Anne Eggimann, Nadine Hofman and Diane Scott for secretarial assistance. The paper has benefited from discussions with numerous Czech experts in the Ministry of Finance, in the private sector and at the University of Economics, Prague. 2. Both the Slovak and Czech Republics adopted the 1992 Czechoslovak legislation. Since then, subsequent modifications have caused the legislation in each country to diverge increasingly. 3. Of the five non-transition OECD countries (Greece, Ireland, Korea, Portugal and Spain) which have or had a similar or lower level of income compared to that in the Czech Republic in the preceding 35 years, all had lower average tax burden at that time than the Czech Republic does now. Their aggregate tax rates ranged between 17 and 24 per cent and averaged about 20 per cent. Looking at the remaining OECD countries, their average tax burden in 1965 was 28 per cent at a time when their incomes were on average twice as high as those currently observed in the Czech Republic. 4 ECO/WKP(2000)18 Figure 1. The overall tax burden in OECD countries (1) 1997 Per cent of GDP Per cent of GDP 60 60 50 OECD average 50 40 40 30 30 20 20 10 10 0 0 Italy Spain Korea Japan Ireland Turkey Austria France Poland Mexico Iceland Greece Finland Norway Canada Belgium Sweden Portugal Hungary Australia Denmark Germany Switzerland Netherlands Luxembourg New Zealand United States United Kingdom Low income Czech Republic High income 1. Tax revenues as per cent of GDP. Source: OECD National Accounts, OECD Revenue Statistics. Table 1. General government consolidated tax revenues 19891 1993 1994 1995 1996 1997 1998 Per cent of GDP Profits taxes/corporate income taxes 11.0 7.0 5.6 4.9 4.0 3.3 3.7 Payroll and social security taxes 12.6 16.9 16.6 16.4 16.5 17.0 16.9 Turnover tax (net)/taxes on goods and services 11.4 14.1 13.8 13.2 13.0 12.6 11.9 Wages tax and other taxes on individual 7.0 3.8 4.6 5.0 5.1 5.2 5.2 incomes/individual income taxes Other taxes (agricultural land, trade taxes,
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