Thanks to his extensive experience and over three decades spent in the financial world of investment products and services, Milan Horvat, CEO of FIMA Plus, definitely has a great insight not only into events in the capital market but also into economic developments in Croatia and the world. He regularly selflessly shares his knowledge on LinkedIn, where more than 40,000 people follow his texts and analyses. In addition to capital markets and investing, we also discussed a whole range of other topics with him, from the tax system, pension funds to economic growth and potential recession.
Recently, the sixth round of tax reform was announced, aimed at increasing wages for low-income workers. How do you view these announcements?
– I do not view it from the populist angle of wage increases. By entering the EU, Croatia entered a certain system of economic values and will have to adopt them over time, as well as the legal frameworks of that EU system. This means that sooner or later we must introduce property tax, which is a key capitalist tax. This is because property tax requires that assets be capitalized, i.e., that this capital be active, not dead and passive. Wealthy countries have dynamic capital to create new value more quickly.
From my perspective, this is the essence of all these tax reforms, and they will occur here until we align with the EU. All other matters are media, political, populist. However, property tax does not mean, and this is what people fear the most, that they will have to pay tax on their house or apartment in which they live, but only on what is not used for living but for creating some new value, although before the elections, there will certainly be nothing from this tax.
Is it perhaps a solution to keep a certain amount of property value tax-exempt per owner or per square meter of living space?
– There are various solutions. The last case I followed was during the introduction of the same tax in Slovenia, where there were also significant obstructions with completely identical arguments and positions against it, and the Slovenians eventually resolved it similarly to what you said. They defined criteria that clearly stated what the basic size of a property is for a family to live in it. In that context, they set minimal tax rates, and everything above that grew in tax terms. This solution in Slovenia passed without major problems in the end.
Should we tax properties that are not in any function, which are left empty, more or progressively?
– I like to say that this is cemented capital. It serves no purpose other than to show that a person who invested in this way does not know how to manage their property. They harm themselves, and they are not even aware of it. As for the tax system, it is better the simpler and more progressive it is. This means that such a tax system allows people to live decently, and those others, who create significant added value, are forced to pay for it.
Namely, they create greater value in the environment in which they live, and their responsibility is to pay a higher tax. This is normal everywhere in the world. Unfortunately, we have the opposite situation where those who earn a lot often pay little or no tax. This is not normal from either a capitalist or a social aspect. Such a person must have the obligation to return part of what they have created in a certain environment. These matters need to be presented well.
When we talk about reforms, from healthcare, justice to public administration, education… what is your impression of those made so far? Where do we ‘stutter’ the most? Do we need reforms in the capital market?
– I see this in a broader context. In high school, I learned in sociology that when one system of values collapses, it takes three generations to establish a new one. Even in the Bible, it states that Moses did not allow anyone born a slave to enter the promised land. He wanted only Jews born free to enter it. According to biblical tradition, he led them for 40 years through the desert so that the older ones would never enter the promised land. From my perspective, the criticisms related to reforms concern the capital market.
In my opinion, this is a fundamental condition for a society that wants to be democratic because without a developed capital market, there is no democracy. On the other hand, you have tycoonization and crony capitalism. Privileged wealthy individuals who have the state or some institutions in their business model. Thus, their wealth is based on privileges. In this way, a middle class is not created. Even China has realized this and has been intensively developing its capital market for the last 30 years. Today, it has four of the 10 largest stock exchanges in the world. Ten years ago, it had only one. It has 165 million shareholders who invest in those exchanges.
Americans have 150 million. Here, that number is tragic, counted in hundreds of permanently active, not even in thousands. Occasionally active, there may be a few thousand. It is good that our active investors invest in American and Western European stock exchanges. Even better is that this process has accelerated further in the last two years. People have realized that they must invest, not save in banks with zero percent interest. I was, for example, thrilled with what happened with government bonds, which were subscribed in much larger volumes than expected. The reason is also that the establishment supported it by speaking encouragingly about them. And of course, people reacted fantastically.
