Monday, April 02, 2007


"Czech Prime Minister Mirek Topolanek has reportedly stated that his government's plan to introduce a flat income tax is a near certainty."

While 24 percent tax rate on corporate income is not the lowest in the region, Czech Republic has attracted numerous international investment due to its advanced labor force, low operation costs and advantageous geographical location in the center of Europe. Czechinvest announced a triggering value of foreign investment inflows worth US$ 4.6 billion. The largest investment project in 2006 was that of South Korea's Hyundai Motor Company, which invested over US$1.2 billion into a plant in the Moravia-Silesia region, creating 3,000 jobs.

Macroeconomic picture of Czech Republic shows a high budget deficit coupled with a high public spending rate approaching 40 percent. The government now proposes a 15 percent flat tax rate on corporate and individual income. For now, there is a progressive tax on personal income at a maximum of 32 percent. Published proposals so far include a flat 15 percent income tax with an increase in tax-deductible items from an average value of Kč 600 (€ 21.44) monthly to Kč 2,070 monthly, and an increase in child allowance from Kč 500 to Kč 870. For Czech Republic, statistics has shown a high tax burden in the share of the GDP. The newest reform proposal is ought to setup one of the lowest corporate tax rates in Europe which should have a positive impact on foreign investment inflows. However, the proposal also includes a double-taxation on a portion of individual's income, hampering the simplification of tax code, napping the marginal tax rate and burdening the compliance costs. The net effect of pure simplification of tax code is wider if a tax system does not include all sorts of deductions and loopholes, leading investors and individuals to hide the money meanwhile tax base shrinks when supply-side measures are simply eliminated or excluded.

Czech Republic is still a country in a metamorphosis from post-communist to free-market economy. In the light of meeting the Maastricht criteria, the Czech government should reduce the spending pressure on budget and adjust the temporary shock caused by tax reform by lowering the amount of public consumption and by cutting budget deficit while this would have a positive impact on Czech Republic's path to Eurozone.

Bradley Gardner: Tax reforms face rugged and long road to passage, Czech Business, 3/26/2007 (link)

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