Equity and Inequity

Nikola Popovski

The Public Revenue Office published the processed data on citizens’ personal income and paid taxes for them in our country for 2017. They are a valuable analytical material for the researchers, but with the right interest they are precisely the data on the largest incomes of individual citizens by various bases and the activities from which they come from, as well as the data for the oldest and the youngest persons who have earned millions, etc.

We shall focus on one of those data in order to point out the absurdity, unsustainability and inconsistency of the concept of total taxation in our country, especially the proportional ones, incorrectly shown in our opinion as flat tax rates and the system of taking social security contributions. Namely, the PRO data for 2017 reveal that the person with the highest annual gross salary in that given year is from the private healthcare practice and that it is close to 168 million denars, or 2.73 million euros. Reduced on a monthly basis, this would average to around 227,000 euros. In our system in 2017, 10 percent personal income tax and contributions for compulsory social security paid only to the amount of 16 average gross salaries was paid for this kind of income, regardless of the actual salary over that amount.

In a normal case of gross income up to 16 average gross salaries, these contributions would amount to about 27.5 percent of gross wages, but in this case, where the enormously higher gross salary of those 16 average, the contributions were charged only gross salaries of 16 gross salaries or gross income of about 6,400 euros per month, and all that is paid more than that amount, in this case up to 227,000 euros per month, is exempt from such social security contributions. In this particular case, social security contributions at a rate of 0 (zero) percent are payable on the gross salary of 220,600 euros (227,000 – 6,400).

The, let’s call it, anomaly in the social security system in the country stems from one fact and one assurance. The fact is that contributions as a type of earmarked tax do not have the nature of irretrievable payments without a direct counter-service by the state, but vice versa, partly or fully repayable payments, which result in direct counter-services to the insured taxpayer. The assurance that in circumstances where that direct counter-service from the state is limited in the form of capping of possible social benefits (for example, pension) to a certain maximum amount, there is no need for contributions to be partial or fully repayable payments, but also fully solidarity payments, but only to a certain amount, in this case, the amount of income from 16 average gross salaries. This favors economically more powerful individuals with very high incomes, whose solidarity in the social security system is limited. This, in turn, leads to a situation in which they, as a percentage of the total income realized, pay relatively lower total duties to the state than those with lower incomes.

Namely, in this case it looks as follows. Total taxes on the state on the basis of personal income tax and social contributions from the gross salary in 2017 for salaries of up to 16 average gross salaries in the economy were about 49 percent of the net salary. But for those with higher gross salaries, that percentage is correspondingly reduced as there is no taxation with the contribution rate for additional (marginal) income over 16 average gross wages. The more you earn, the less the total fees you pay.

On the gross monthly salary of 227,000 euros, the highest salary paid in Macedonia to the net salary is about 203,000 euros, that is, the fees to the state for all the bases of that net salary are only about 24,000 euros, that is, only about 11,8% (the so-called effective tax rate), which is more than four times less than the fees of about 49 percent of gross salaries in the amount of up to around 8,450 euros per month or about 102,000 euros as approximately the annual amount of 16 average gross-salaries. This, de facto, only confirms that we had expressed regressive taxation where the individual’s income is higher, the effective rate of total personal income earnings is lower with a tendency to reach a height that is only slightly higher than 10 percent.

It is neither fair nor righteous. For such inequity, the above-mentioned system of payment of social contributions was most responsible, but the proportional tax rate of the PIT of 10% which, recall, was still in use in 2017. Today, one of the irregularities in the taxation of income is partially corrected, and on the net salary above the level of 1,000 euros per month, or 12,000 per year, the rate of PIT (according to the current new law, the rate of personal income tax) from 2019 was raised on 18 percent. In this particular case, with the highest paid salary in the country in 2017, this would mean that the amount of the personal income tax would be 10 percent on the net salary of 12,000 euros and 18 percent for the additional income up to 203,000 euros, that is, the additional 191,000 euros would apply for a rate of 18%. This is significant, because the difference in tax on such income today is 8 percentage points more than before.

When the government would gather up the courage and raise the upper limit of the income on which social contributions are paid additionally to the actual amount actually paid, or at least to a much higher level than the amount of the current 16 average gross salaries, then the equity in determining the total tax burden would be much bigger. It is truly unacceptable for citizens with annual earnings on the basis of a gross salary of 2.73 million euros to continue to pay taxes that are relatively lower than those with lower incomes.
Starting this year one part, but only a minor part of such injustice seems to be reduced, but that is not enough, nor is it acceptable. Further moderate, but sure, steps of the authorities in the right direction are needed in order to exclude the opportunities for such economic and social Golgotha, in which from the earned 2.73 million euros by one or more citizens, our relatively poor country does not wants to collect more than 11.8 percent in the form of public duties, and these are economically powerful citizens in our society.

Views expressed in this article are personal views of the author and do not represent the editorial policy of Nezavisen Vesnik