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Czech PM Wins Fight To Cut Corporate Tax

by Ulrika Lomas,, Brussels

22 August 2007

The lower house of the Czech parliament has narrowly backed plans by Prime Minister Mirek Topolanek for a cut in the rate of corporate tax and the introduction of a flat rate of tax on personal income.

Lawmakers voted by a razor thin majority of two votes in the 200 member assembly for a package of tax cuts that will, if enacted, reduce Czech corporate tax by 3% to 21% in 2008, and by a further 2% to 19% by 2010. The package also proposes a 15% flat tax for personal income in place of the current progressive levy of up to 32%. The bill would also reportedly eliminate most corporate write-offs, and lower state-funded social benefits.

The tax cuts are expected to reduce the government's revenues by CZK35 billion (EUR1.26 billion), but the government claims that the revenue loss will be offset partly by an increase in the lower rate of value added tax, which applies to food and medicine, to 9% from 5%. Cuts in welfare payments such as unemployment benefits, sick pay and child benefits will also go towards meeting the cost of the tax cuts, as will new fees for visiting a doctor.

The proposed tax package is controversial, however, and is opposed by several members of Topolanek's centre-right governing coalition, including the former Finance Minister Vlastimil Tlusty, leader of the Prime Minister's own Civic Democrat Party; the bill was approved in the lower house of parliament only after two rebel social democrats (who, along with the opposition communists, opposed the measures) broke ranks and voted for the package. The bill must now pass through the Senate before it can be signed into law, but it is expected to get an easier ride in the upper chamber, given the Civic Democrat's majority there.

Critics of the tax package contend that it will do nothing to address the government's budget deficit, which must be lowered to below 3% of gross domestic product before the Czech Republic can be considered for entry into the eurozone; the Czech Republic faces a 3.9% public finance deficit this year. Others argue that the reforms will make many Czech families worse off. However, defending his proposals, Topolanek argued that all of his tax proposals will be "positive" for the Czech people and the economy.

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