Croatian Tax Reform Expected to Boost Incomes

The Croatian government in session. Photo: BETAPHOTO/HINA/Denis CERIC/MO

The tax reform proposed by Croatia’s centre-right government, which will lower income taxes for ordinary people and companies in order to trigger spending and economic growth, “will benefit all”, economic analyst Velimir Sonje told BIRN.

“I think the reform is useful because it will reduce taxes, both income tax and corporate income tax. This will make employment easier and positively affect economic activity, as well as increasing general demand in the economy. Therefore, I see almost exclusively positive effects,” Sonje said.

“There are no losers in this reform since nothing is taken from anyone, no one’s income will be reduced,” he added.

The tax reform, which has been discussed in the Croatian parliament since Tuesday, includes amendments of 15 laws and will reduce general income tax rates for all employees.

Before the reform, people with salaries between 300 and 1,750 euros a month were taxed at 25 per cent, while now everyone earning up to 2,325 euros a month will be taxed at a 24 per cent rate.

People earning more than 2,325 euros a month will have a 36 per cent tax rate, replacing a 40 per cent tax rate for anyone earning over 1,750 euros a month.

The reform will also the raise the tax threshold – below which no tax is paid on income – from 345 to 505 euros a month.

The average salary in Croatia is 755 euros a month.

Corporate income tax will also be cut from 20 to 18 per cent for large companies and from 20 to 12 per cent for small and mid-level companies whose income is no higher than 400,000 euros annually.

Seeking not to jeopardise living standards for people on lower incomes, the government proposes not to raise the five per cent VAT rate for bread, milk, medicine and orthopaedic equipment.

The proposed reform has however upset the owners of cafes, bars and restaurants, as VAT for their services will be raised from 13 to 25 per cent.

There are however some disputes about the reform exist between the partners in the coalition government – the leading Croatian Democratic Union, HDZ and the junior Bridge of the Independent Lists, MOST.

MOST does not want the incomes of state officials’, or those of MPs, to rise as a result of lower income tax rates.

It also disapproves of the government’s idea to shift the tax department of the Office for Suppressing Corruption and Organised Crime, USKOK, into the general tax administration, fearing that the anti-graft department will lose its impartiality in a larger bureaucracy.

Sonje said that the wages of professionals such as managers, doctors and programmers will increase the most as a result of the reform, while companies’ net profits will grow as well.

He said that the changes will increase general economic demand and spending, which will also benefit citizens with lower wages, because smaller companies will have more money to increase their wages too.

Another economic analyst, Guste Santini, also told BIRN that he sees the reform as positive for the economy as a whole, and said it should result in “developing and raising the level of economic activity”.

Nevertheless, he argued that the reform “should be even more ambitious” than the one proposed by the government.