Czech Government Rethinks Income Tax Cut

by Ulrika Lomas, Tax-News.com, Brussels

27 March 2008

The Czech government is reported to be reconsidering its proposal to cut income tax by 2.5% next year, in favour of the less expensive option of reducing social insurance tax.

According to Czech daily Hospodarske Noviny, Finance Minister Miroslav Kalousek wants to shelve a plan agreed with the ruling coalition last year to cut the Czech Republic's 15% flat tax on personal income to 12.5%, scheduled to come into effect in 2009.

He argues that will cost too much money at a time when the government is struggling to lower its budget deficit to below 3% of gross domestic product, which would help pave the way for the country to enter the euro zone.

Kalousek reportedly believes that the income tax cut will reduce tax revenues by CZK35 billion a year (USD2.15 billion), and the government should instead explore alternative tax cuts, such as a 1% decrease in the social insurance levy to 11.5%, which he estimates will lower tax revenues by a more manageable CZK13 billion annually.

However, a number of senior representatives of the ruling Civic Democrat (ODS) ruling coalition in the Czech parliament are known to be unhappy at the Finance Ministry's U-turn, accusing him of reneging on a hard-won coalition deal on tax reform last year, which passed the legislature by a razor-thin majority.

"ODS insists on the 12.5% rate for the next year. We do not accept any attempts by Kalousek to cancel the last year's (coalition) agreement," an ODS deputy chairman was quoted as stating by the newspaper.

The 2007 tax package also reduced corporate tax by 3% to 21% in 2008, and proposes an additional 2% drop to 19% in 2010, but Kalousek's comments have cast doubt on future tax rates.

The Finance Minister did, however, tell the paper that he will "very likely come up with other alternatives" and suggested that these may be more agreeable to the governing parties.

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