The Tax System in the Czech Republic: Is There a Need for Reform?

Abstract

The paper by Ivan Matalík and Michal Slavík examines the problems and prospects of the Czech tax system in the context of the growing integration of the country with the European Union. The paper briefly outlines the evolution of the system since it was set up in the early Nineties. At that stage, the main concern was that of designing tax rules compatible with a market economy. Several factors now call for a reform of the Czech tax system. First of all, there is a need to reverse the decline of revenues and reduce the current fiscal imbalances. The authors stress that this action should be complemented by tighter spending control. The reform should also aim at rationalising the funding of the different levels of government and at limiting the role of off-budget funds. There is also a need to adjust the tax system to the increasing openness of the economy, which is limiting the government’s control of tax bases. Taxation has become one of the main factors affecting the competitiveness of the country. In this context, the burden of taxation on labour should be reduced. At present this burden discourages work in the regular economy. The complexity of the tax system, which depends on several incremental changes introduced in legislation over the last decade should also be tackled. Simplification would reduce administration costs and close opportunities to avoid taxation. Finally, tax reform should also aim at strengthening automatic stabilisers.