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Slovakia Urged To Reform Property Tax

by Ulrika Lomas,, Brussels

18 January 2016

The International Monetary Fund (IMF) has recommended that authorities in the Slovak Republic introduce a market-value-based property tax, improve corporate tax and value-added tax collections, and look to reduce the labor tax wedge.

The IMF said lowering the labor tax wedge, especially for low wage or part-time workers, would foster labor force participation and help reduce disincentives to hiring. It said, in general, Slovakia's current tax structure is distortive, with a comparatively high reliance on social security contributions (SSCs). The average tax wedge as well as the SSC share is higher in Slovakia than the OECD average, and although the corporate tax rate compares favorably with other OECD countries, it is high among other countries in the region. To preserve competitiveness and foster job creation, Slovakia should shift from labor and corporate taxes toward less distortive revenue sources, the Fund recommended.

The Fund said the 2016–18 Budget plan sets ambitious fiscal targets to achieve a sharp adjustment but said it will be challenging to implement. It contained a number of deficit-increasing measures as part of social packages, such as a reduction of the VAT rate on basic foodstuffs from 20 to 10 percent. Given that offsetting spending cuts, largely in government consumption, have not been specified in great detail, the IMF has estimated a 2016 deficit of around 2.2 percent of gross domestic product (GDP). However, the Government is targeting a deficit of 1.9 percent of GDP in 2016 and 0.4 percent of GDP in 2017.

The fund said a one percentage point increase to the headline VAT rate could yield 0.5 percent of GDP. It added that the introduction of a market-value-based property tax could yield about one percent of GDP in revenue and would be more equitable and less harmful to growth than other taxes. It noted that the country currently collects little from a relatively regressive property tax based on square meters.

Environmental taxation is also low compared to peers and could yield up to 2.5 percent of GDP over the medium-term, the IMF said.

It concluded that plans to merge the tax, customs, and social security agencies should be sped up.

TAGS: tax | economics | value added tax (VAT) | property tax | fiscal policy | revenue guidance | gross domestic product (GDP) | International Monetary Fund (IMF) | corporation tax | Slovakia | food | social security | tax reform | Europe

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