Sandra Švaljek: Tax reform can increase economic growth but also complicate the work of local government units

Expert associate at the Economic Institute Zagreb Sandra Švaljek, based on the published general announcements about tax reform, stated that it is known that the reform, for example, should contain a reduction in the highest income tax rate on one hand, and an increase in the non-taxable part of the salary on the other, which means that in this part the reform would be neutral, i.e., it would not affect the progressiveness of the profit tax.

– However, what we still do not know are the final effects and all the details of such a tax reform, and it is questionable how it will reflect on the financing of local government units, whose income is derived from this tax. If such a tax change leads to a reduction in total income from income tax, it will complicate the functioning of local government units, Švaljek said during the conference on the role and functioning of the public sector organized by the Institute of Public Finance, adding that such a tax reform could still have a positive effect.

– Recently, a tax reform was also implemented that aimed at relieving salaries, but income tax revenues did not decrease to the extent that would be expected, precisely because there was also new employment, so this measure can in some way increase economic growth and employment and lead to higher revenues in local budgets, Švaljek assessed.

When asked whether it is realistic that a comprehensive reform will occur as early as the beginning of 2017, she replied that “a lot of preparation is needed for a comprehensive tax reform, and January 1, 2017, is very close.”

Director of the Institute of Public Finance, Katarina Ott, whose employees participate in the working group preparing the tax reform, stated that the general position is known that the Institute is “an advocate of strict fiscal consolidation, introducing more transparency in fiscal and budgetary issues, greater accountability of authorities, and greater public participation.” When asked what the reform should contain for the tax system to be sustainable in the long term, Ott said it is difficult to say that anyone can make a reform that will last that long, especially in such changing economic circumstances.

When asked about announcements regarding the reduction of the general VAT rate over a certain period, Ott said that everyone wants that, but that it is the last thing that should be undertaken in the tax reform.

– First of all, we need to focus on the efficiency of collecting tax revenues and consolidate expenditures. As long as the expenditure side of the budget is not drastically reduced, in my opinion, one should not even think about reducing the general VAT rate.