Transitional Success USSR to EU — страница 7

property fund. Old debt principals were deferred for a year until 1994. Tax Reform The main elements of the systems prior to 1993 included taxes on enterprise surpluses, payroll and turnover. Wage or income taxes existed but were largely insignificant. The main function of the taxes were to transfer enterprise surpluses to the state budget and to sustain the administratively determined price structures. Tax incentives played no role in the economic system. Sweeping tax reforms dominated the budget for the 1993 year. They included new indirect, direct and property taxes and modification to the payroll tax including a shift in the tax burden from corporate incomes to wage incomes. From 1992 to 1994, relative to GDP, the share of wage based taxes rose while the share of corporate

income tax fell and indirect taxes remained unchanged. These new direct taxes eliminated earlier distinctions for taxation of businesses based on forms of ownership and employment status. The new system of VAT and excise taxes expanded the coverage of indirect taxes to services. It also mitigated the falling implicit rate in the earlier turnover tax and condensed the range of standard tax rates. The reforms promoted investment by lowering the cost of capital to businesses. This reform featured a significant reduction in the statutory rate of taxation, standardization and acceleration of allowed depreciation and a 10 percent credit on investment in selected equipment which reduced the dispersion in effective taxes on investment activities. This is how the cost of capital was

lowered. The tax allowed the rate of taxation on enterprise profits to drop from 55 to 45 percent. A personal income tax was also introduced to replace the previous network (maze?) of taxes on wages of large enterprises, the incomes of artists and authors, and the various forms of income derived from the emerging private sector. The new tax had all wage and self employed income taxes on a progressive scale with marginal rates from 15 to 47 percent, standard deductions and additional deductions allowed for social insurance contributions, children, transportation to work, etc. Interest, dividends and capital gains were subjected to 15 to 25 percent, encouraging investment only slightly. Social security and health taxes on wages of 36 percent from the employer and 13.5 percent

employee replaced the old payroll tax of differential rates. Net taxes on gifts, inheritance and motor vehicles were implemented and the import surcharge was eliminated. Although the system went through amazing changes as outlined above, much of these changes were to no avail. Tax evasion and avoidance The problem with this system is that these any tax structures are still relatively easy to get around if one is willing to operate in the shadows. In the first quarter of 1994, the (23% rate) VAT yield was 30 percent below initial expectations. The corporate and VAT combined barely yield 80 percent of original estimations (one suspects that estimate is high...). Overall, Czech shadow economic activity, though low, is still significant. Estimate suggest anywhere between 15 and 25

percent of the economy works in the shadows. Police claim it is almost impossible to investigate and prosecute tax violations. The criminal codes do not allow for them to effectively investigate such activities, and no other effective mechanisms yet exist. Change in codes and regulations are too complex and far too frequent. The Ministry of Finance claims that between 1993 and 1994 there was a change in the tax codes at least every 4 days. An example is the modification in 1994 of the corporate income tax from 45 percent to 42 percent, a reduction in the highest marginal personal income tax rates from 47 to 44, and an increase in allowable expenses. These simple changes required major modification in software and procedure for the Ministry’s clerks to keep up with the changes.

The Ministry coordinates 12,000 employees in hundreds of local offices that constantly need to register and update databases with the latest tax changes. Due to all the confusion, police estimate they can only catch roughly 10 percent of tax related crimes. A 1994 law adds to the difficulties by allowing businesses to keep their records secret. Employees can be sworn to secrecy regarding certain administrative procedures in firms, like tax issues. The criminal code states that banks can only be forced to reveal tax information after initial evidence from a formal investigation. With no information to go on, investigations rarely reach formal status. Additionally, a great deal of business transactions are still conducted on cash basis due to the ease and tradition. This opens very