A failed debate on progressive taxation

Robert Nesimi

1. A debate without preparations. After a series of started and unfinished reforms, it is now time for one of SDSM’s central campaign themes, progressive taxation. As it promised, SDSM’s government finally opened a public debate for this reform that is supposed to replace the flat tax of 10%. It however looks like the debate has started without any prior preparations, since the government does not have a clear position on what it is proposing. That leaves a lot of open dilemmas that should have been cleared before the debate, since there are a number of definitions missing that should have indicated what the government really wants to do. Without these definitions, it is impossible to have a real debate.

2.Taxation threshold. The income above which the tax would apply is the key parameter of progressive taxation. It defines who will pay the tax and what its effect would be. During the campaign SDSM talked about a threshold of 1.000 Euros, above which an 18% tax would apply. That same thing has now been repeated by minister Tevdovski. Almost immediately. Angjusev contravened him declaring that 1.000 Euros is too low. Meanwhile Zaev has given no indication which way he leans. As things stand it looks like there is no consensus within the government, dashing all hopes of a wider political and public consensus.

3.Gross or net. Even if it had a threshold in mind, the Government has still not said whether it is talking about gross or net income. Judging by Tevdovski who says that the new tax will affect about 2% of all employed it looks like he is talking about net income above 1.000 Euros. On the other hand, Zaev says that it will affect around 74.000 persons, pointing to taxation of gross income. Thus the public is left guessing what the Government might be thinking. It would have been much simpler if it said plainly and clearly what threshold will be taxed, and whether it is on gross or net income.

4.Yearly or monthly. Of equally high importance is the calendar of taxation, i.e. whether the tax will be applied on a yearly or monthly basis. What will happen for example to someone earning 500 Euros net per month, but in September receives a one-time bonus payment of 1.000 Euros. Will that person pay the extra tax in September or will a yearly balance be calculated on which he will be taxed? Will this person be treated as rich in September and poor for the rest of the year, or will the authorities treat his income as a 600 Euro monthly average which will not be taxed? This is an issue that is probably not that important to the Government overall, but may be especially important to the employed concerned.

5.Who pays the tax? Where does the obligation to pay the tax ultimately rest, with the employer or employee? At first sight this may seem like a banal issue which would be resolved by the two subjects concerned, but ultimately it may have real consequences. What happens for example to a person receiving payments from more than one contractor, such as are plenty of programmers. Will the contractor pay the 10% tax and leave the eventual progressive tax up to the employed, or should each contractor calculate and pay the appropriate progressive tax? It is exactly these cases that need clear cut definitions of the administrative treatment of the tax and ultimate responsibility. The Government has no said a word.

6.Public sector. The additional tax has to come from someone’s pocket, whether it be the employer or employed. In the private sector this will be an issue to be resolved between the two, but it is unclear what will happen with high earners in the public sector such as ministers, directors and MPs. Will they pay the tax out of their pocket or will the state pay it for them? Knowing how things work in our public sector, it is more than likely that this tax will come out of the budget. So the progressive tax will be an additional burden to the private sector that has to fill that budget. It seems that it will results with lower salaries in the private sector, so state functionaries may continue to enjoy their benefits untouched.

7.Dividends, rents, profit. Finally it is still unclear what other forms of income will be part of the tax base. Will it include dividends and rents, and will these forms of tax also apply to companies or just physical persons. What will happen to corporate taxes? Does the Government have a plan to tax firms at progressive rates or does it lack courage to face the big players, commercial giants with fat profits.

The list with these issues is not exhaustive. In fact it serves more as a checklist of dilemmas that should have been solved before a real debate could start. It is unfortunate that the Government is treating this important economic issue with such carelessness and has no position on many key parameters of this reform.