I would reduce income tax and introduce new excise duties

It seems that we all know everything about taxes, as they change often like underwear, and publicly as well. Taxes have become a currency for paying voters instead of a weapon for growth and employment. And it’s not that we are lacking experts who know what should be done and how.

One of them is Nika Šimurina, a professor at the Faculty of Economics in Zagreb and an external associate of the Economic Council of the President of the Republic of Croatia. Although she has disagreed with the fundamental orientation (towards consumption taxation) since the establishment of the tax system we have today, she conveys that there is room for genuine reform and a shift – but only coordinated with the redistribution and reduction of budget expenditures. Without that, no fundamental change in fiscal policy is possible. Indirectly, neither is GDP growth.

• On various lists comparing tax burdens among countries, we stand both well and poorly. So are we then highly taxed, low, or just incorrectly? – There is no doubt that the overall tax burden is relatively high, which in the context of an unstable macroeconomic environment and an insufficiently effective legal system results in reduced employment and investment. Employers often emphasize that the biggest problem is the high tax burden on labor, but if we compare ourselves with other EU member states, we are certainly below average. According to data from the European Commission, Croatia has by far the smallest share of income tax in total revenues of the general government compared to other EU member states – on average, in member states, income tax accounts for about 21 percent of total general government revenues, while in Croatia it is only about nine percent. Therefore, the overall tax burden is high, not above average, but there is room for reduction.

• Then we can conclude that we are primarily incorrectly taxed. – There is quite a bit of evidence supporting that thesis. For example, previous research has shown that the tax burden on income from self-employment and employment is unevenly distributed, which is not in line with the principle of fairness in taxation. Corporate profit taxation is characterized by relatively low statutory and effective tax rates associated with the application of generous allowances and incentives, but their utilization is weak. The biggest problem is the frequent changes in the basic elements of taxation within fundamental tax forms, which makes our tax system unstable, prone to frequent changes, and a weak tax morale and high level of the gray economy also make it irrational. For example, since 1994, when the first independent Income Tax Act was adopted, this tax form has undergone eighteen major changes. Additionally, Croatia is a country with a pronounced consumption orientation, which means that in total tax revenues we emphasize VAT and excise duties, which account for 85 percent of total tax revenues, and thus we are specific in the EU. A considerable number of problems arise from this.

• This orientation dates back to ’98, when the then German tax ‘guru’ Manfred Rose tailored our system? – Many say that our tax system was modeled after the German one. This is completely incorrect; we only have a system that was created for us by German tax experts, who proposed a completely opposite concept from the German one. Many Croatian tax experts were against such a concept at the time, but now the problem is that for more than 20 years we have had a consumption orientation, the entire budget depends on consumption taxes, and any reduction in that segment is currently not possible. The smartest thing now is to relieve income and then think about a comprehensive tax reform. But undoubtedly, the worst is the instability, the tendency for frequent changes. On average, something in some tax changes once a year, and in the last year or two, it has been almost once a month, which is a terribly bad signal for the business sector.

You can read the entire interview in the new issue of Lider.