When the topic of taxes arises, especially income tax, and terms like ‘redistribution’, ‘decentralization of public services’, and similar expressions are used, many people hold their heads in despair. However, when you speak with an eminent expert and university professor in the field of taxation, some things become clearer.
Anto Bajo from the Institute of Public Finance delivered a brief lecture at Lider’s conference ’48 Hours: Meeting of Mayors and Entrepreneurs’ on the impact of frequent changes in tax policy on cities and municipalities. While all employees celebrated this year when salaries increased due to a higher non-taxable portion of income, local government leaders were left in despair. This tax, which is only a small part of the many taxes and levies in Croatia, has become an instrument of state manipulation over the local environment. And how, explains Professor Bajo.
In your presentation at Lider’s conference ’48 Hours’, you stated that the goals, motives, and reasons for changing tax policy towards local government units are unclear. What are the consequences of changes without a clear vision?
– Previous governments, including the most recent one, have used income tax as an instrument of policy to mitigate fiscal inequalities between local units, as well as an instrument of fiscal decentralization, social, demographic, and regional policy. The constant changes in income tax and the way its revenues are shared between the state and local government units reflect the real inability of our governments to clearly profile national fiscal and economic priorities. Due to the lack of a comprehensive economic strategy, there is also no clearly defined concept or plan for fiscal decentralization. The state has attempted to achieve all possible goals through interventions in the income tax system, when it should have simply divided tax revenue and filled fiscal inequalities between local government units with transfers from the state budget based on clear and transparent criteria. Governments have been reluctant to pursue greater fiscal decentralization, which is why they have manipulated income tax revenues through its complex and unclear distribution with local units that were in a special, preferential tax treatment. Thus, through constant changes in the percentage of income tax revenue distribution, the state has assisted areas of special state concern, mountainous areas, island local units, and local units that have taken on more obligations for financing decentralized functions of primary and secondary education. The concept has not changed today, as income tax is used as an instrument of regional policy to assist supported areas while fulfilling other unclear goals. This desire to manipulate the tax is primarily a result of its importance for financing local units. Namely, income tax constitutes more than half of the revenues of local government units, or more than 90 percent of their tax revenues.
