Wednesday, June 27, 2007


International Herald Tribune reports that the members of labor unions in Czech Republic are protesting against proposed tax and expenditure reforms. Nevertheless, the GDP growth in Czech Republic accelerated rapidly in recent years. For instance, in 2006, GDP growth rate hit 6,1 percent annually. However, the size as well as the inefficiency of public spending in various sectors present a huge structural problem, putting the competitive position of Czech economy at risk. As in many other transition countries, Czecg trade unions possess a strong role in the course of economic policy and fiscal (un)sustainability, demanding high unemployment benefits, maternity leave payments and health care spending. Nevertheless, high unemployment benefits create a loophole which leads into a spiral of highly regulated labor markets by creating persisting barriers to productivity. By the matter of empirical content, a huge size of public spending is tightly correlated with an increasing inefficiency of the spending itself. Trade unions seem not to realize that the only way to fund all kinds of unemployment and health benefits is to raise tax rates, thus shaping tax basis and penalizing investment and saving which are essential to economic growth.

Economic policymakers in Czech Republic correctly decided to impose a tax reform that would reduce barriers to productive behavior. If approved, a 15-percent flat tax on personal income would be introduced in 2008. Currently, the personal tax rate ranges from 12 percent to 32 percent, depending on income. The corporate tax rate would be cut from 24 percent to 19 percent by 2010.

No comments: