COMMENTARY: New Finance Minister, New Liberal Tax Policy

lalovac25 August 2014, LPJ Croatia Issue 97

As the Croatian government slowly gets back into the rhythm of governing after their summer holidays, the new Minister of Finance Boris Lalovac (SDP) has announced changes to Croatia’s tax policy aimed at reducing the tax burden to the average citizen, thereby promoting consumer confidence and consumption, which is diametrically opposed to his predecessor’s (Slavko Linic) repressive policy of imposing various direct and indirect taxes to the general public and businesses in order to fill the state budget coffers.

The primary policy changes are to raise the tax­-free part of Croatian employee’s monthly salaries from 2,200 kn to 2,600 kn and increase the threshold for applying the state’s highest income tax rate of 40% from 8,800 kn to 13,200 kn. Both measures are intended to reduce the high tax burden on citizens with the second measure aimed at specifically reducing the burden on the middle class.

Increasing Consumption

It is estimated that the measures would reduce state revenues by 2 billion kn (approx. €270 million).  The measures are intended to increase consumption which should compensate for the reduced revenue.
Even though the business community, including the Croatian Employers Association, support the changes and believed that the measure would increase the optimism of citizens and stimulate spending, they are also concerned about the proposal to simultaneously increase the present profit tax on reinvested profit.

There is also the concern that the government’s estimates that personal consumption will compensate for the budgetary gap are too optimistic, since it is unclear how much of citizens’ newly increased available income will be used to settle debts, as opposed to spending and economic growth stimulation…

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