If they win the upcoming general election, the Social Democrats will propose abolishing the so-called super-gross wage and renew progressive taxes, with people with an annual gross income higher than CZK 1.2 million a year required to pay 38%. That would mean an end to the reform efforts of the finance minister under former PM Mirek Topolánek, who wanted to simplify the Czech tax system.
Anyone who pays taxes must have appreciated the efforts of Finance Minister Miroslav Kalousek and his team to introduce a simple, transparent, easy to understand, predictable and stable tax system that only has a minimal amount of exceptions. It was a plan that was even open to any potential political changes because some of its parameters could be adjusted, while still keeping the main structure of the system intact.
An attack on the middle class
Those most opposed to progressive taxes are, of course, business owners, although for them there are always several options to get around paying high taxes. One way is to optimise your tax situation by buying new equipment (computers, telephones) to replace older but still functional equipment. This can work as a sort of “scrapping bonus”, but the effect on the economy would be negligible. The most important thing will be to avoid progressive taxes.
Those who don’t have the option to “optimise” make up a big proportion of the middle class: highly educated professionals who are salaried employees and who are more successful and more hard working that most of the population.
The Czech Republic does not belong among countries where it’s common to have several different jobs, but there are professions, where having several jobs is not only common, but necessary, if only from an economic standpoint.
Those who tend to have several different jobs in this country are doctors, who, besides working in a hospital might also teach university courses, do research and publish scientific articles.
A trap for bright minds
The situation is similar for successful academics who work at universities and research institutions. They too have several sources of income from the various projects they are involved in, in addition to their academic salary. We can only hope that this group of bright minds will keep growing. But the Social Democrats are preparing a trap for them.
Throughout the year, their employer deducts taxes based on the level of their main salary. But in a system of progressive taxes, they would suddenly need to pay additional taxes at the end of each year when they submit their tax returns because when all their incomes are added together, they would suddenly find themselves in a higher tax bracket. Rather than being rewarded for being hardworking and being involved in many different projects, these people would suddenly be punished.
Professionals, we don’t want you
This year’s tax returns showed who really benefited most from the flat tax. Business owners did see an improvement, but they were always able to deduct expenses and thus bring down the amount they actually have to pay. The recently-introduced flat tax mostly helped successful salaried professionals, who who had several sources of income. For the first time, they didn’t have to pay extra taxes at the end of the year.
And there is another reason why we should worry. Since coming into existence 14 years ago, this country’s tax law has been amended 92 times. No wonder financial offices always seem to find different interpretations of the law and tax payers complain that there is no legal accountability. The breakthrough tax reform tried to bring more stability, transparency and accountability, so that at least all financial offices would interpret the law the same way, even if the courts would not.
The Social Democrats’ proposal would mean several steps back. The question remains, who will benefit from such populist measures? Only those, who believe that, going into elections, the best tool is to make people envious of one another. We can only hope that the number of those who would fall for this trick keeps shrinking. If being hardworking does not pay off, those who will benefit most will be those who are unable or unwilling to work.
Simona Weidnerová is a member of the Institute for Social and Economic Analyses.
