Slovakia Raises Income-Tax Rates to Boost Budget Revenue

Slovak lawmakers approved tax increases for individuals and companies, dismantling the previous system of a uniform 19 percent tax rate as the east euro-region country seeks to boost budget revenue.

Deputies voted 80-60 to back the government’s proposal to raise the corporate tax rate to 23 percent and impose a 25 percent top rate for income of individuals exceeding 2,867 euros ($3,749) per month. The changes are effective from next year.

The administration of Robert Fico, in power since April, relies on income-side measures rather than spending cuts to trim the budget deficit below the European Union’s limit next year. Dismantling the flat tax system, which helped the country attract investment by carmakers such as PSA Peugeot Citroen or Kia Motors Corp., worsens conditions for doing business and may backfire, economists such as Lubomir Korsnak Unicredit Bank’s unit in Bratislava said.

“It’s impossible to fix the budget without revenue-side measures,” Korsnak said. “Still, Slovakia will have higher taxes than its neighbors, with whom it competes for foreign investment. But tax is only one factor, the change isn’t a disaster.”

Tax increases for high earners and companies follow Fico’s pre-election pledges to limit the impact of fiscal consolidation on most citizens. As part of budget-saving measures, his administration has already pushed through special tax surcharges for banks and regulated telecommunication and energy companies.

The income-tax increases, which the opposition lawmakers claimed could lead to an outflow of investment, should boost revenue by 377 million euros, or 0.51 percent of economic output, in 2013 and a combined 961 million euros in the following two years, the Finance Ministry estimated.

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