Needs for Deregulation of the Tax Systems in Central Europe: a Comparative Study Institute for Private Enterprise and Democracy, Poland
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Institute for Private Enterprise and Democracy, Poland Institute for Market Economics, Bulgaria Institute for Liberal Studies, Slovakia Needs for Deregulation of the Tax Systems in Central Europe: A Comparative Study Institute for Private Enterprise and Democracy, Poland Institute for Market Economics, Bulgaria Institute for Liberal Studies, Slovakia Needs for Deregulation of the Tax Systems in Central Europe: A Comparative Study © Institute for Private Enterprise and Democracy, Warszaw, 1998 © Institute for Market Economics, Sofia, 1998 © Institute for Liberal Studies, Bratislava, 1998 This project was made possible by support from Freedom House under the auspices of the Democracy Network Project, which is funded by the U.S. Agency for International Development The opinions expressed herein are those of the authors and do not necessarily reflect the views of Freedom House or USAID List of authors Poland Mieczys?aw B?k Leader of the Project Przemys?aw Kulawczuk Anna Szcze?niak Bulgaria Krassen Stanchev Country Project Leader Andrey Ivanov Latchezar Bogdanov Dotcho Mihailov Slovakia Juraj Rencko Country Project Leader Pavol Karasz Jan Oravec Pavol Karasz jr. Jan Marusinec Contents Introduction ............................................................................................................. 7 1. Basic Features of the Tax System in Slovakia, Bulgaria and Poland .......................... 9 2. Deregulation Needs in Central and Eastern Europe ................................................... 17 3. Country Reports ....................................................................................................... 36 4. Lessons from Tax Reforms in Developed Countries ..... ............................................ 91 5. Needs for Tax Deregulation .................................................................................... 130 Introduction An over-regulated tax system creates similar hindrances to business development to those caused by a high taxation burden. The cost of compliance with tax regulations may take the form of financial costs, due to the payment to consulting firms or employees, and time costs, of the managers or business owners, who must spend a significant part of their working hours dealing with tax issues. A complicated tax system also increases the cost of tax administration for the government. Therefore, a number of countries address the issue of tax deregulation in their policy and introduce a tax system more adjusted to the needs of businesses. Tax complexity has also become a problem in Central and Eastern Europe, despite the fact that the tax systems in the region were formed only a few years ago. Regulations introduced in these countries, which were transforming their economies, were at the beginning relatively simple. Then, as the years went by, new regulations and executive instructions were added. Flexible tools came into use, which were based on individual interpretation of regulations rather than explicit criteria. Tax systems in Central Europe started to suffer from a common disease: growing bureaucracy syndrome. Therefore, three think tanks, Institute for Liberal Studies from Slovakia, Institute for Market Economics from Bulgaria and Institute for Private Enterprise and Democracy from Poland, decided to elaborate on the report on the Needs for Deregulation of the Tax System in the respective countries. In our opinion, in order to meet the challenge of competition, transforming economies need: · Simplification of the tax system; · Evening of disparities between taxes paid by individual groups of taxpayers; · Restriction or elimination of the flexibility of decisions on tax issues; · Limitation of the tax allowances, exemptions and other exceptions to the rule of the general character of the taxation system. All these issues are addressed in our study. According to the three organizations which have prepared the report, there is a growing need for the reduction of the role of the state and the adaptation of the tax system to the actual capabilities of the private sector. Only when this is achieved, can the growth rate be increased and the economic relationships based on partnership with Western countries be built. Cooperation with the business community may facilitate the achievement of the above-mentioned objective. Therefore, our organizations decided to base the assessment of the current situation and our recommendation for change on the opinions of representatives of the business community. Surveys conducted in the three countries showed that entrepreneurs support a reduction in the number of tax rates. They also consider that the top rate should be a maximum of two times higher than the minimum rate. Tax declarations should be simplified and the frequency of submitting PIT declarations should be less frequent than now. Problems with tax complexity are very strongly related to tax subsidies and tax reliefs, which are included in tax systems to achieve selected economic objectives. Opinions on the macroeconomic effects of tax relief are rather different in the three countries. There is a relatively strong belief in the stimulating role of investment tax incentives in Bulgaria, while in Slovakia only less than 2 percent of entrepreneurs recognize the stimulating role of tax exemptions and allowances. In Poland only one six to one-fifth of entrepreneurs find an economic stimulation mechanism in tax relief. These results show that lifting investment tax incentives is supported only in Poland and Slovakia. Proposed amendments to the current tax system can be based on the experience of the United States and Western Europe. Therefore we decided to include a brief presentation of the tax systems of the USA, UK, Sweden, Italy, Switzerland and Germany. We included the countries that have successfully deregulated their tax systems, as well as countries like Germany, which have made an attempt at tax reform but have not succeeded yet. All these experiences are useful for discussion in Central and Eastern Europe. We hope that our report will start a debate on the most appropriate tax systems for countries in our region. 1. Basic Features of the Tax System in Slovakia, Bulgaria and Poland Tax systems in Slovakia, Bulgaria and Poland differ, and comparative study of these systems would be difficult to understand without a presentation of the basic characteristics of the tax systems in the respective countries. We do not intend to present in-depth analysis of taxes in the three countries , but to focus only on basic issues. 1.1. Main Characteristics of the Slovakian Tax System The present structure of the tax system was introduced in the Slovak economy through a tax reform on January 1, 1993. Its basic components are: · direct taxes: Þ income taxes (personal income tax and corporate income tax); Þ real estate tax (tax on land, tax on buildings, real estate transfer tax, inheritance tax, gift tax, road tax); and · indirect taxes: Þ value-added tax (universal tax on consumption); Þ selective excise duties; Þ tax on international trade and transactions. A. Characteristics of personal and corporate income taxes1 Personal income tax is a general income tax levied on individuals with permanent residence in the Slovak Republic. The tax covers all forms of income earned by private individuals; i.e., income from contingent activity and employment, income from business activity or other independent income-earning activities, income from capital gains, rent income, and other income. According to the Law, the PIT construction is progressive, with five tax rates, ranging from 15 percent to 42 percent. Corporate income tax is levied on all legal entities with a registered office in the Slovak Republic (with some exceptions; e.g., National Bank of Slovakia), with a common tax rate of 40 percent. Regarding the characterization of the economic impact of the tax system, it is important to note how the deviations from and/or exemptions to the general tax law are solved, and in which areas they are concentrated. In the case of the tax on personal income, the following items are exempt from taxation: · interest on foreign-currency deposits; · interest on home savings deposits, including that on state premium. With regard to special tax rates, from the point of view of economic policy, mainly the application of the 15% rate is important: 1 Income Tax Act No. 286/1992 Zb. with subsequent amendments. · on interest, premiums, and other income from savings deposits on passbooks, certificates of deposit, and similar deposits, shares and temporary bonds, yields on bonds, participation certificates, certificates of deposits, and similar deposits; and · on dividends from the earnings of limited liability companies and limited partnerships. In general, the law on the taxation of personal and corporate income can be evaluated as comparable to similar laws in advanced market economies. At the same time, we must state that some aspects of taxation are not adequately covered by this law, some provisions are out of date and need amendment, and the law contains some distorting provisions. The law on the taxation of personal and corporate income supports both savings and investment, but contains no provisions designed to support job creation. The support for savings is laid down in the law in the form of a reduced tax rate on income from capital gains (special rate on savings deposits, tax exemption for yields on shares held for more than a year, etc.). However, the law does not provide enough support for collective investment,