The main aspects of tax policy are reduction of personal income tax, reduction of payroll tax by 6 percentage points, increasing of excise duties on oils, alcoholic beverages and cigarettes, increasing the tax base for real estate resulting in higher tax obligation and higher waste fee. The overall effect of these changes is higher tax revenues. In 2006 the corporate income tax rate was not decreased but changes were made concerning the fixed assets depreciation and taxation of some expenditure. The zero tax rate on reinvested earnings was not implemented.
The heaviest burden is applied to the labor(1) and in 2006 the rate is between 29% to 43% for gross wage of EUR 81.8 and EUR 715.8 respectively while in 2005 the rates were 33% and 46%. As a result from the progressive personal income tax and regressive payroll tax the average income persons pay the highest rates while low and high income persons pay relatively less.
Corporate income taxed was kept unchanged of 15% while taxation on dividends was 7%. Currently, there are at least 7 countries taxing the corporate profit with lower rates. There is a zero tax on reinvested earnings in Estonia; the tax rate is 9% in Montenegro and 12.5% in Ireland. The consumption is taxed by 20% value added tax as well as excise duties on some items. The VAT rate is one of the highest all over the Europe and where 15 countries have lower rate. The excise duties rates are still relatively low but are increased every year.
The overall tax burden is too high but the government does not have intentions to reduce it during the next years according to its official documents. Moreover, some ruling coalition officials suggested that the direct tax rates should be frozen due to the VAT collection problems arising from the EU accession. Therefore, the tax burden will continue to be high.
At the same time the possibility for tax reduction really exists because of consolidated budget surpluses. It happened in 2005 and will happen in 2006 either. The available budget data until the middle of the year imply that the overfulfillment of revenues would be at least EUR 613.5 million which means that the surplus would be 3% of GDP. This money could be used for entire abolishment of personal income tax or the corporate tax or higher reduction in payroll tax or a combination of them. It did not happen missing the opportunity to encourage the economy more actively. Thus the real economic growth would be again near 5% while the 2-digit growth remaining just a good wish.
The fiscal reserve dynamics is determined to growing extent by the budget surplus (public savings) than by privatization. Its utilization during this one year period could be characterized as prudent as its main function was prepayment of public debt. As a result, the size and the ratio of public debt to GDP as well as the cost of servicing decreased. The fiscal reserve amounts at EUR 2.6 billion at the end of June 2006.
Budget expenditures’ effectiveness continues to be low and one should notice the increase of their total size and of particular groups. Promised optimization of number and activities of administration and budget servants as a whole which was supposed to reduce the costs did not virtually happen. The government keeps fulfilling functions typical for the private sector instead of withdrawing from them. The public services’ quality remains a significant problem because it is either the same or even lower thus forcing people to search for alternative suppliers and reducing their willingness to pay taxes.
To conclude, tax and budget policies during the last year could be directed to encouraging the economic activity which did not happen. The main determinants for this were on the one hand the advises of external institutions like the International Monetary Fund but on larger extent due to the lack of political will among the ruling majority to implement real tax reform.
(1)Labor taxation includes persona income tax and payroll tax