In the last decade, Croatia has reduced the tax burden on income from work, with changes most significantly affecting employees with high earnings. For workers with average salaries, the share of taxes and contributions in gross salary has remained almost unchanged, as shown by an analysis based on data on hypothetical standardized employees, writes Ivica Urban in the latest issue of the Institute of Public Finance’s Review, where he analyzes the tax burden on income from work in Croatia and compares it with selected EU member states.
Compared to EU countries, Croatia ranks in the middle of the tax burden scale for income from work, which applies to both employees with average salaries and those with higher salaries. Employees with high salaries in Croatia pay more taxes than their counterparts in the Czech Republic, Slovakia, or Hungary, but still less than in Slovenia, Italy, or Austria. Thus, Croatia is not among the countries with the highest tax burden on work, but it also does not offer a sufficiently competitive framework for attracting and retaining highly qualified professionals.
The Review considers variants of tax changes that would further reduce the tax burden on high-income employees. Among the proposals are the introduction of a maximum contribution base for health insurance, a reduction of the maximum base for pension contributions, lowering the upper income tax rate, and increasing the threshold above which that rate applies. Such measures would increase the net salaries of highly paid employees and could be designed not to represent a significant cost for public budgets.
Key for the long-term development of the economy
The specific proposal for tax relief on high salaries includes four changes:
1. Introduction of a maximum base for calculating contributions for health insurance, at the level of five average gross salaries from the previous year.
2. Reduction of the maximum base for pension insurance contributions from six to five average gross salaries from the previous year.
3. Increase of the threshold for applying the second income tax rate to 7,200 euros per month.
4. The city where the employee resides chooses the lowest allowed second income tax rate – which is 25 percent.
According to these estimates, revenue from health insurance contributions would decrease in 2025 by 55 million euros (1.2 percent), from contributions for the first pillar of pension insurance by 14 million euros (0.3 percent), and from income tax by 51 million euros (by 1.8 percent).
– Highly educated and highly qualified workers are key to the long-term development of the economy. Retaining them in Croatia, as well as attracting professionals from abroad, largely depends on the tax framework. The proposed measures show that it is possible to reduce the tax burden on labor and thus increase competitiveness without jeopardizing the stability of public finances – emphasizes the author of the analysis, Ivica Urban.