Download 1. TAXES

1. TAXES
1. 1. ABOUT TAXES IN GENERAL
WHAT TAXES ARE
Taxes are compulsory contributions that the state, without providing any direct or
immediate services in compensation, takes from persons and firms so as to be able,
with the help of the money collected, to finance public expenditure. In other words,
we all have to pay part of our income or earnings to the state so that it, in return, can
provide for us such public services as health care, education, public security, care for
the older and poorer members of the society, and so on. In this definition two things
are important: taxes are compulsory contributions and for the payment of which
there is not any immediate and direct counter-service.
1. The definition that taxes are compulsory contributions means that when they are
due, they have to be paid to the state. Otherwise, the state can claim its rights through
coercion, via the courts and the police. That is why some people call taxes forcible
extortion.
2. It is also important that an individual, for the taxes he or she pays, receives no
direct service in compensation; in other words if you pay HRK 1,000 of tax in May,
it does not mean that in this same month you will be able to use the services of
hospitals, schools, the police and so on to the amount of HRK 1,000 – and that
additional services will be denied you. Similarly, if you use services to the value of
HRK 700, the state is not going to give you back the unused HRK 300 of tax. There is
no purpose set in advance for taxes, nor is the amount of services that you will get for
your taxes determined.
WHY WE HAVE TO PAY TAXES
Taxation is the only known practical manner for collecting resources in order to
finance the public expenditure for goods and services that we all use. It seems that the
taxmen beset us from every angle: income taxes and social security contributions are
taken directly from our wages; value added tax increases up to the price of articles
that we buy; we also pay real estate tax if we buy a flat, excise tax when we fill up at
the petrol station or when we drink a beer in a cafe. Some kind of tax accompanies
almost every single one of our activities related to goods or services. As Benjamin
Franklin observed, in life there is nothing certain except death and taxes. Despite our
disapprovement, it would seem that this simply has to be like this. Taxes are the
price of the public goods that we use almost every day, often without asking what
their price is. Public goods are, for example, public health care, public education for
our children, law and order on the streets, the controlled running of traffic, museums,
parks, clean air and the like. In order to be able to enjoy these goods, we have to pay
taxes.
HOW TAXES CAME INTO BEING
Taxes are as old as civilisation. There has never been a civilisation that has not
collected taxes. The first civilisation that we know something of started six thousand
years ago in Sumeria, the fertile lowland area between the Tigris and the Euphrates, in
today's Iraq. The awakening of civilisation and of taxes too, is registered on clay
tablets that have been excavated in Sumeria. The inhabitants of the area accepted the
need to pay taxes during a great war. However, when the war was over, the taxmen
did not want to give up their privilege of collecting taxes. Since that time, taxes have
never been abolished. On the contrary, during history they have simply gained in
importance. During major wars they have usually increased with head-spinning speed,
and after the end of the war, they have commonly not returned to their pre-war level,
but have continued growing. But in peacetime periods too the level of taxation tends
to increase.
THE GROWTH OF TAXES OVER TIME
In OECD countries, the proportion of total taxes rose from 10% of GDP 1 in 1900 to
36% of GDP in 2006. In a period of a century, the share taken by taxes rose
almost four times. The idea of the welfare state that prevailed during the 1960s, with
societies opting for a relatively large amount of public goods to be obtained from the
state, and the aging of the population led to a considerable rise in the tax burden in
that period in the world's developed countries.
T otal taxes in GDP in OECD countries
40
35
30
%
25
20
15
10
5
19
00
19 .
20
19 .
40
19 .
60
19 .
65
19 .
70
19 .
75
19 .
80
19 .
85
19 .
90
19 .
95
19 .
98
19 .
99
20 .
00
20 .
01
20 .
02
20 .
03
20 .
04
20 .
05
20 .
06
.
0
Source: Ken Messere, 20th Century Taxes and Their Future, Bulletin, IBFD, Vol.54, No.1, January
2000; OECD Revenue Statistics 1965-2007, Paris, 2008.
HOW TAXES CAN BE DIVIDED
Taxes can be divided in several ways:
-according to the basis on which the tax is levied (on income, for example, or on
consumption),
-according to the level of government to which the tax revenue belongs (national
government taxes, county taxes, etc.),
-according to which section of the population they hit most (whether they are
progressive or regressive taxes, etc.).
Nevertheless, the most commonly mentioned division is into direct and indirect.
Direct taxes are those that we pay personally, or which our employer pays directly
into the Treasury. These taxes are worked out as a certain percentage of our income or
assets, and as a rule cannot be shifted to someone else. This means that the one that
pays the tax does actually have to bear the tax. Examples of direct tax are the income
tax that we pay from our salaries, from royalties or trades, and corporate income tax.
1
GDP (gross domestic product) is the market value of all goods and services produced in a country
during one calendar year.
Indirect taxes are not borne by the person that pays them into the Treasury; rather,
they are most often shifted onto other people. Taxpayers of indirect taxes most
commonly shift the burden of these taxes through the prices of their goods and
services, onto the end user, that is, to the population at large. The best-known indirect
tax is value added tax, in Croatian known as PDV.
Tax Shifting
This is a question that at first glance appears to be completely superfluous, because
everyone thinks that if they pay a tax, it also means that they ultimately bear it as
well. But this does not always have to be the case. It is the characteristic of some
taxes that they can be shifted to another person. Here is an example: when a tax on
fur coats is introduced, it is mainly the rich who pay, since they are the main
purchasers of such garments. But if the tax on fur coats is increased, the rich will
perhaps decide not to buy, because coats have become too expensive because of the
taxation. Then the sales of coats will drop, and the furriers will have to reduce their
costs, including, very likely, the wages of their workers. Thus the increased fur coat
tax has not been paid, ultimately, by the wealthy; rather the furrier has passed it on to
his employees in the form of decreased earnings.
THE CHARACTERISTICS OF GOOD TAXES
The principles of taxation outlined below characterise a good tax system.
1.Efficiency. Taxes must have as little as possible impact on relative prices so that
scarce economic resources are used as efficiently as possible.
2.Equity. Taxes must be justly distributed among the members of some
community.
3.Productiveness. Taxes must provide an amount of public revenue adequate to
cover reasonable amounts of public expenditure.
4.Simplicity. Taxes must be as simple, clear and intelligible as possible, so that the
costs of collecting the tax for both the tax administration and the taxpayer
should be as low as possible.
5.Stability. The taxation system must not change very often, because firms and
households need stability in order to be able to make proper economic
decisions.
Just to list the principles of taxation shows how complicated it can be to make a good
tax system. In practice, these principles are frequently at odds with each other, and
there is no tax system that respects all the principles equally. The more equitable a
tax, the less efficient it is, or the more complex in application. Some taxes are more
equitable than others, some are more efficient, and some are simpler to apply.
EQUITY IN TAXATION
According to this criterion, the rich should pay more tax, since they are more capable
of paying it. But just how much more should they be paying? A great many tax
debates have been held about this question. We shall attempt to illustrate the problem
with the help of the following table.
Income
(HRK)
Proportional tax
Regressive tax
Progressive tax
Amount of tax Tax as % of Amount of Tax as % of Amount of Tax as % of
(HRK)
income
tax (HRK) income
tax (HRK) income
50,000
12,500
25
15,000
30
10,000
20
100,000
25,000
25
25,000
25
25,000
25
200,000
50,000
25
40,000
20
60,000
30
Source: Mankiw, H.G., Principles of Economics, Philadelphia (etc.), The Dryden Press, 1998.
In all the examples in this table those who have larger incomes also pay the most tax.
But the percentages of their incomes set aside for taxation differ a great deal. Thus in
the first case the tax is proportional, because all the taxpayers pay the same
percentage of their income. In the second case, the tax is called regressive because
the rich, although paying larger amounts of tax, actually pay smaller percentages of
their income. In the third case, the tax is progressive, since the rich pay a greater
percentage of their income in the form of tax. Which is of these cases is most
equitable? To this question, the tax profession has no answer. Justice, like beauty, is
in the eye of the beholder.
Which tax is efficient?
The objective of a good tax system is to distort or alter as little as possible the
economic decisions of persons and firms as compared with the decisions they would
have made if the taxes were not collected at all (an entirely hypothetical condition).
The less a tax affects the decisions of enterprises about production, or the decisions of
consumers about purchasing, the more we say it is efficient. But how can a high
degree of tax efficiency be ensured in practice? This is achieved in the following ways
in practice:
a) expanding the taxable base by abolishing tax exemptions and tax incentives for
individual taxpayers,
b) reducing the number of tax rates,
c) lowering the level of tax rates.
1.2. TAXES IN CROATIA
THE TAXES OF WHICH THE CROATIAN TAX SYSTEM IS COMPOSED
The Croatian taxation system is based on a set of direct and indirect taxes, as shown
in the following table.
Basic direct taxes
Corporate income tax
Personal income tax
Surtax (on personal income tax)
Basic indirect taxes
Value added tax
Excise taxes
Real estate transaction tax
A whole group of local (county, city and commune) taxes, customs duties and social
security contributions are considered other taxes.
TAX REVENUES OF VARIOUS LEVELS OF GOVERNMENT
Central government
County taxes
Commune and city taxes
taxes
Corporate income tax
Inheritance and gifts tax
Surtax (on personal income tax)
Valued added tax
Motor vehicle tax
Sales tax
Excise taxes
Boat tax
Second home tax
Slot machine tax
Trading name tax
Public land use tax
The taxes that are divided between the central government and the units of local
government are as follows 2 :
- personal income tax is shared between the central government, the commune, the
city and the county.
- real estate transactions tax is shared between the central government, the
commune or the city.
The communes or cities can introduce the payment of surtax (levied on personal
income tax).
HOW MUCH TAX REVENUES CONTRIBUTE TO THE TREASURY
Taxes are the most productive budgetary revenue. Of the HRK 126 billion that in
2007 constituted the total revenue of the of consolidated general government budget,
HRK 110 billion came from taxes and social security contributions. They brought
87% of overall budgetary resources into the budget. Other revenue accounted for
only 13% of the budget.
Most of all taxes was contributed by value added tax (34.1%) and social security
contributions (33.6%). Next come excise taxes (11.0%), personal income tax (9.0%),
corporate income tax (8.0%) and customs duties (1.5%). The revenue from local
taxes, real estate transactions tax and other forms of taxation is very small.
2
Determined by Act on Financing Local and Regional Entities (NN 117/93, 69/97, 33/00, 73/00,
127/00, 59/01, 107/01, 117/01, 150/02, 147/03, 132/06 and 73/08 and the Constitutional Court decision
NN 26/07).
2007
110,595
100.0
Taxes and contributions
Personal income tax
9,938
9.0
Corporate income tax
8,825
8.0
Real estate tax
1,155
1.0
Value added tax
37,748
34.1
Other consumption taxes
1,575
1.4
Excise taxes
12,169
11.0
Customs duties
1,641
1.5
Other taxes
341
0.3
Social security contributions
37,203
33.6
Source: Ministry of Finance, Republic of Croatia, Annual Report for 2007, Zagreb, 2008.
HOW THE LEVEL OF TAXATION HAS CHANGED OVER TIME
Fiscal 2007 in Croatia took in HRK 110 billion of all kinds of tax and contributions at
all levels of government. But how has the level of taxation changed over time?
From 1994 to 1997 the level of taxation in Croatia moved in the range of from 43 to
44% of GDP. A sudden jump appeared in 1998, when VAT started being
implemented, and the tax collected suddenly grew to almost 47% of GDP. After 1998,
however, the overall tax burden started to decease, and in 2007 came to 40.2% of
GDP.
Total taxes in GDP in Croatia1994-2007
48
46
%
44
42
40
38
36
19
94
19 .
95
19 .
96
19 .
97
19 .
98
19 .
99
20 .
00
20 .
01
20 .
02
20 .
03
20 .
04
20 .
05
20 .
06
20 .
07
.
34
Source: Ministry of Finance, Republic of Croatia, Annual Report for 2007, Zagreb, 2008.
“OUR” TAXES AND “THEIRS”
What is the difference between the burden with which given taxes squeeze the
Croatian taxpayer, and the burdens of the taxes that squeeze people abroad? The total
tax burden in Croatia has been approaching that of the OECD and the EU countries.
In 2007 in Croatia, 40.2% of everything that is produced for a year went in the form
of taxes and contributions into the treasury, from which public services are financed.
In 2006 in the OECD countries, the average tax burden amounted to 36%, and in the
EU15 to 40% of GDP.
STATUTARY TAX RATES IN SOME COUNTRIES IN 2008
Country
Corporate income Personal income tax
Value added tax
tax
Range of rates Number of
Basic rate (%)
Basic rate (%)
(%)
rates
Austria
25
0-50
4
20
Germany
15
0-45
5
19
23-43
5
20
Italy
27,5
Czech R.
21
15
1
19
Hungary
16
18 and 36
2
20
Poland
19
0-40
4
22
Slovenia
22
16-41
3
20
15-45
4
22
Croatia
20
Source: IBFD, European Tax Handbook 2008, Amsterdam, 2008.