HUP recently proposed modifications to certain tax rates and tax brackets with the aim of further relieving businesses. The proposal to reduce the contribution for the first pension pillar from 15 percent to 13 percent of gross salary represents about 3.3 billion kuna or just over 7 percent of total expenditures for pensions from the first pillar. Furthermore, the reduction of health insurance contributions from 16.5 percent to 15 percent of gross salary amounts to about 9 percent of HZZO’s revenue, or around 2.6 billion kuna.
The proposals to increase the non-taxable income from four thousand kuna to five thousand kuna, as well as to reduce the lower income tax rate from 20 percent to 15 percent and to raise the upper limit of the application of the higher rate from 30 percent on income above 50 thousand kuna instead of the previous 30 thousand kuna would have somewhat lesser effects, but not negligible ones, quite the opposite.
I am a strong advocate for reducing taxes and decreasing the state’s bite at all levels, except for a few exceptions – such as national (military) security. Despite criticisms from interest groups claiming they could lose their ‘rights’ which look more like privileged positions compared to others (but at the expense of others!), there have also been observations that changes are difficult to implement at this moment. We have been hearing such narratives, in one form or another, for over 20 years. Interests are declared as rights, and all state costs are considered ‘given’ and unchangeable for this or that reason (some are revenues of the central state, some are off-budget funds, some are local state – and everything – in the full sense of the word and deed – is influenced by politics with its economic imprudence because they do not spend their own but other people’s money).
Constant balancing between the interests of all stakeholders
If only 10 percent of total state spending in all its forms is superfluous (which is a very conservative assumption), it represents almost 20 billion kuna. This indicates the existence of room for significantly greater tax relief than what HUP proposes, moreover. Nearly two-thirds of people in Croatia live directly or indirectly off the state’s spending (1.2 million pensioners, 420 thousand people in the public/state sector who, on average, support one more person, which gives at least 840 thousand people, about a hundred thousand formally unemployed, and around three hundred thousand employed in the private sector for whom the state is a dominant buyer (assuming about 30 percent of employees in the private sector).
Of course, any reduction in tax revenues requires thinking about how to reduce expenditures without removing anyone from their comfort zone, i.e., by maintaining ‘acquired rights’. Some raise the question of whether eventual tax relief will lead to an increase in net salaries – the question is legitimate, but we must understand that the chances of increasing net salaries are much greater if the tax burden is lower (with everything else unchanged). All businesses with 100 units of their revenue, forced by market forces (even those that have state protection through various mechanisms of crony capitalism) constantly balance between the economic interests of all stakeholders – employees who want higher wages, suppliers who want better prices and payment times, creditors who seek interest payments and principal repayment, the state that unconditionally collects taxes, and owners who expect profits commensurate with the risks they are exposed to.
