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Czech Government Announces Bold Tax Reform Plans

by Ulrika Lomas,, Brussels

05 April 2007

The Czech government has announced a raft of major tax reform plans, which include a flat tax on personal income, a significant reduction in tax on corporate income, and changes to the value-added tax regime.

Under the proposals announced by Finance Minister Miroslav Kalousek, if approved Czech taxpayers will pay a 15% flat tax on their personal income, while companies will see their income tax rate drop to 19% from the current 24% by 2010.

At present personal income tax rates vary according to wages, and range from 12% to 32%.

The lower rate of value-added tax will increase under these reforms to 9% from 5%, but the headline rate will remain unchanged at 19%.

However, the Financial Times suggested in a report that while the flat tax appears at first glance to be quite a generous measure for a government attempting to slash its budget deficit in preparedness for adopting the euro, in reality the rate will effectively be something like 23% - not 15% - because it will be charged on gross income which includes employers social security and health care contributions.

It is also not guaranteed that the fragile centre-right governing coalition will succeed in pushing the tax reform measures through parliament and must count on the support of all its members. But with the tax cuts accompanied by some major cuts in welfare spending, such as unemployment benefits and healthcare, the government is sure to encounter opposition from the left.

The Czech Republic had initially hoped to join the European single currency by 2010, but the slow pace of fiscal reform has compelled the government to temper its ambitions and postpone this date by two years.

The budget deficit is expected to equal 4% of GDP in 2007, 1% higher than the ceiling set by the European Union Growth and Stability Pact which underpins the euro.

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