Tax Expert on Announced Taxation of Capital and Property: Insignificant Cost Compared to Earnings from That Source

Following the recent introduction of a tax package consisting of nine laws, which abolishes the surtax for cities and municipalities and allows for an increase in income tax rates, the City of Zagreb has already announced that it will compensate for the loss of revenue from the surtax by introducing the maximum allowable income tax rates of 23.6 and 35.4 percent. The abolition of the surtax in Zagreb (which has the highest surtax rate of 18 percent) results in a shortfall of €140 million, explained Damir Bakić, a member of parliament from the Možemo! party.

However, as reported by Jutarnji list, there is now room for this not to be the case, as the mentioned tax package could be amended in the second reading in parliament. Income tax rates could be raised less, creating room for the remaining revenue in cities, including Zagreb, to come from an increase in income tax rates on property and property rights as well as capital. This would allow salaries for residents of the capital with average wages to rise somewhat more than in the first case, where they would have risen minimally.

Insignificant Cost Compared to Earnings

Bakić recently touched on these topics in an interview for Lider, emphasizing that property tax should replace the utility fee.

– It would be best if we could tax income synthetically. Since both property and income taxation are revenues for local self-government, introducing socially sensitive property taxation would open up space for reducing income taxation. Therefore, local self-government does not need more revenue, but rather needs to balance them – believes Bakić, who thinks that the taxation of property ownership, which has long been a critical issue,’needs to be seriously considered’.

– When looking at the structure of consolidated revenues of EU member states, it is evident that we have a much lower tax burden on capital and property compared to consumption and labor. I believe we need to introduce a property ownership tax, but this tax must also be socially sensitive. Thus, for those who have one property for their residence, this tax should not be higher than the utility fee they currently pay. For each subsequent property, this tax should be progressive – explained Bakić.

Confirming a well-known fact, accounting and finance advisor Marija Zuber states that the taxation of earnings from property rentals is ‘inappropriately low compared to income earned from labor’.

– Of course, such a tax system is deeply unfair, which is a value issue for Croatian society, but that is a smaller problem. A much bigger problem for Croatia is that such a tax incentive leads the economy in a direction that is vulnerable to exogenous factors, adversely affecting the prices of many resources, not just property prices, influencing preferences and decisions of citizens… The announced increase is an insignificant cost compared to earnings from that source of income – believes Zuber.

Escape from Zagreb?

When asked whether citizens will start deregistering from Zagreb due to the mentioned tax changes, Zuber believes they will not.

– There is no fear that citizens will register in other places because, according to the Income Tax Act, income from renting properties for tourist purposes belongs to the municipality or city where that property is located. All other sources of income are taxed according to the taxpayer’s residence, and only this source of income is taxed according to the location of the rented property – explains Zuber.

Also, cities cannot make decisions on taxing income from capital.

– Municipalities and cities will not gain the authority to prescribe tax rates for income from capital, such as dividends and profit shares, interest, exemptions, and earnings from trading securities in the announced amendments to the Income Tax Act. They will gain authority for income from labor, which includes salaries, pensions, self-employment, and other incomes, and they already have the authority to prescribe tax on tourist property rentals, but within the range set by the state – adds Zuber.