In an attempt to make Croatia more attractive and to attract foreign investors, the Government is also considering the model of a so-called flat tax rate, a system that has proven quite successful in several countries in the region.
This would mean that the current corporate tax rate of 20 percent and personal income tax rates of 12, 25, and 40 percent would be reduced to a unified rate, writes Jutarnji list, noting that in some countries the unification also includes VAT, which is 25 percent in Croatia.
A high source in the Government confirmed that this is one of the models being considered for future tax reform, but that calculations must first be made to see what effects it would have on the budget. The goal is primarily to increase investments, and the Government will consider any economically reasonable measure that can provide an incentive, the source told Jutarnji.
This sounds like quite a revolutionary idea, given the changes it requires, especially at a time when revenues are falling and inspectors tirelessly seal the premises of tax debtors. Regardless of whether the Government will dare to undertake another tax reform, the fact is that the introduction of a unified tax rate is a concept that has “fallen out of fashion,” as some countries, such as Slovakia and the Czech Republic, have abandoned the flat tax rate during the crisis.
However, the Baltic countries, pioneers of this model, have remained loyal to it despite the severity of the crisis that hit them. In the mid-1990s, they initiated the introduction of a simple tax system, primarily because they wanted to attract foreign investors and stimulate economic growth. Since then, they have further reduced tax rates and today are considered countries with the least tax burden in the EU (in Latvia it amounts to 26 percent of GDP while in many countries it exceeds 40 percent).
The economic boom that followed in the Baltic countries impressed many, prompting other countries to introduce flat taxes as well, including Russia (13 percent), Slovakia (19 percent), Romania (16 percent), Serbia (14 percent)… In an effort to present it as attractive as possible, countries boasted that the flat tax brought them simplification of the tax system, increased investment, exports, employment, and revenue, as well as reduced the shadow economy.
During the crisis, however, other arguments became important: many began to complain that the system is not fair because everyone pays the same tax rate regardless of wealth. Additionally, foreign investments fell for everyone, regardless of the tax system. Thus, Slovakia decided in December last year to abandon its trademark “19 percent tax for all” and introduced a higher tax rate for the wealthy, politicians, and companies.
