Stance of CIVITAX group on the proposed tax reform

Starting from January 2019, the Ministry of Finance shall abolish the flat-rate tax system and shall introduce the progressive tax system. According to the reform, the recipients whose monthly income surpasses the gross amount threshold of 90.000 denars shall pay additional 8% of personal income tax, in addition to the existing rate of 10%, for the amount of income above the projected threshold. The capital income will be taxed with 15%.

CIVITAX Group believes that the progressive taxation is one of the instruments for reducing social inequality. Hence, CIVITAX Group deems the proposed solution acceptable. Concurrently, however, CIVITAX Group believes that the progressive income tax ought to be implemented solely after the following issues have been addressed:

1. Need of prioritization and refraining from rash instant solutions.
2. Societal consensus on the spending of public money.
3. Other issues regarding the reform that the Ministry is obligated to address or discuss thoroughly.

Elaboration on these three aspects follows.

NEED OF PRIORITIZATION AND REFRAINING FROM RASH INSTANT SOLUTIONS

1. The publication of the proposed tax reform was perceived as a rash solution, owing to the fact that stakeholders’ expected enough space for quality public debate, without imposing the reform’s skeleton as default, especially under conditions of Government’s commitment to consultative process and public debate regarding any issue of public interest.
2. Under conditions of still captured state and non-reformed administration, the Government ought to refrain from imposing successfulness measuring parameters since it deceives the citizens, makes the Government unaccountable and prone to making rash decisions that are not in line with the long-term goals of the citizens of the Republic of Macedonia.
3. Under conditions of Government’s announcement on redeeming municipalities’ debts and under conditions of irresponsible spending of tax payers’ money (travel expenses, restaurant expenses, abuse of tax money for personal gain, additional uncontrolled state administration jobs), the Government ought to demonstrate determination, dedication and a concrete plan for tackling the irresponsible spending of public money, before planning and implementing additional obligations for the citizens.
4. Synonyms are oftentimes used to stigmatize or to attract sympathies without defining the terms for the sake of providing quality debate free of populistic noise. At least the following terms should be precisely defined in the case of the Republic of Macedonia and to serve the tax purposes: middle class, righteous tax, fair taxation.

CIVITAX Group invites the Government to a series of public debates for crystalizing the aforementioned issues.

5. The manner of rash decision-making discredits the ENER system too, and without debates and participation followed by credible survey it cannot ask for support and national consensus. CIVITAX Group urges the Government to upload the draft Law on Personal Income to the ENER system and to leave sufficient debate space of at least 3 months before it has entered in a parliamentary procedure.
6. The Government hasn’t conducted a survey which will unambiguously show that the flat-rate tax is the fundamental reason for population’s income inequality. In this regard, the income tax, as a contributor to the income differences, is not even mentioned. The data show that the gross operating surplus of companies has increased disproportionately than employees’ funds, thus the inequality generators cannot be sought in the personal income only. Therefore, the topic of inequality has bigger dimensions and the Government should, at least, not ignore it and should give an ear to the point that the progressive income tax is potentially the first reform in terms of more all-embracing fight with inequality. CIVITAX Group urges the government to draft, or support the drafting of, a study on the reasons for the income inequality and evaluation of the effects from potential solutions.

SOCIETAL CONSENSUS ON THE SPENDING OF PUBLIC MONEY

7. The Government must work on the expense side of the budget, greater responsibility and accountability, greater punishments for high corruption abuse and de-slaving the state. CIVITAX Group expect(ed)s a clear plan, dedication and action in this regard prior to imposing major changes in the system, such as the tax reform.
8. The Government must work on decreasing its role on the markers in order to provide efficient allocation of funds on the part of economic operators. Various subsidies can only be short-term and they must not be permanent option because by doing so market economy’s efficiency is disrupted, inefficient market operators are favored, operators that can face the market forces are discriminated and therefore both the efficient and inefficient operators end unsuccessfully. CIVITAX Group urges the Government to unambiguously present its stance on the subsidies, particularly the ones that require large budget funds, before resorting to additional tax obligations.
9. The Government must reduce the number of regulatory bodies and other first-line budget users that do not perform the function they exist for and it must consolidate public sector’s size. The Government must reduce the state apparatus and must increase public administration’s efficiency to the level of laying off the ones who cannot gain the required skills and knowledge in order to meet citizens’ needs.

OTHER ISSUES REGARDING THE REFORM THAT THE MINISTRY IS OBLIGATED TO ADDRESS OR DISCUSS THOROUGHLY

10. According to the data published by the Ministry of Finance, the tax burden of the wealthiest 1% is 20,1%, while the tax burden of the wealthiest 0,1% is 12,9%. Still, the Ministry, in the spirit of well-founded and quality economy analysis and deprivation of the public debate from populistic tones, ought to point out that these low percentages are not caused by the income tax, but by the right of not paying social contributions when the salary surpasses the amount of 16 average gross salaries. The introduction of a progressive tax under conditions of such possibility will leave the space for abuse of the possibility that the tax burden over the amount of 16 average salaries amounts to 10%, that is, 18 % pursuant to the reform. With the introduction of the progressive tax, CIVITAX Group demands removal of the threshold for not paying social contributions.
11. According to various surveys, the grey economy’s magnitude in Macedonia is 25-30% of the formal economy and there are 10-15% non-registered workers. 18% of workers have pointed out to cases in which they had been given a portion of their salary in an envelope (in cash), cases of non-registered workers or workers registered part-time but work full-time.
12. Regarding the previous item, the low tax morale in Macedonia and the proneness to seeking alternative ways of paying lower tax is a generally known fact.

Therefore, CIVITAX Group urges the Government to conduct analysis on how progressive taxation is related to, and how it will affect, the grey economy and to unambiguously show how it will fight against grey economy prior to imposing additional taxes.

13. Government’s economic growth plan prescribes high-paying jobs with the aim to incent the creation of such jobs. Progressive taxation runs counter to this measure. The public debate ought to address this issue as well, while the Ministry ought to provide an answer as to whether the contradictoriness of certain policies and measures undertaken by the Government won’t pose further uncertainty for economic agents.
14. Last but not least, the tax reform is supposed to be neutral when it comes to job creation. Under conditions of high unemployment, the announced progressive taxation might reflect negatively over the creation of high-paying jobs, especially in the IT, finance and insurance, specialist health sectors and so on, sectors whose employees are highly competitive on the global market.

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Overall, CIVITAX Group accepts the proposed tax reform solution, however, at the same time urges the Ministry of Finance and the Government of the RM to provide enough space and open well-founded debate of expert nature and wide consultative process to which they committed when assumed office in June 2017. CIVITAX Group urges the Ministry of Finance and the Government of the RM to refrain from application of reforms, policies and measures by means of presenting the stakeholders and the public with a fait accompli, without providing a forum that will hear the opinions of all factors in the process.

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ABOUT CIVITAX

As a group for fiscal issues in the civic and academic sector as well as natural persons, CIVITAX aims to raise initiatives, analyze and survey and advocate fiscal issues in the widest sense of the word that concern the civil society organizations, academic institutions and natural persons as well as to advocate the right of legal certainty in this field as a human right.

Founding members of the group:

1. 1. Center for Economic Analyses – CEA
   Finance Think
   3. Tax Policy Center
   4. Institute of Social Sciences and Humanities – Skopje
   5. Institute for Democracy ‘Societas Civilis’ Skopje
   6. Foundation Open Society – Macedonia
   7. Transparency International Macedonia
   8. Helsinki Committee for Human Rights of the Republic of Macedonia
   9. Institute of Communication Studies
   10. Eurothink – Centre for European Strategies
   11. Center for Change Management
   12. European Policy Institute – EPI
   13. Verica Hadzi Vasileva-Markovska
   14. Krsto Nestorov

More on CIVITAX principles and policies here.

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