Euro Blogging: Tax Reform in the Czech Republic

(Editor’s note: President Scott A. Hodge and staff attorney Chris Atkins are currently traveling through Prague, Paris and London for the Tax Foundation’s annual 2005 European Tax Delegation with Congressional tax staffers. During the next few days they’ll be blogging from the road about their various meetings with European tax authorities.)

In the Czech Republic, Petr Mach, the Executive Director of the Center for Economics and Politics and an advisor to the Social Democratic Party, wants to reform the Czech tax system.

Mach wants to change the current system, which levies different rates on personal income, corporate income, and consumption, to levy a single rate of 15 percent on income and consumption. His proposal would also eliminate all special tax breaks and deductions.

The latter part of his plan—eliminating all special tax breaks for corporations—will be his toughest selling point. Many companies—especially foreign companies that invest in the Czech Republic—currently benefit from an effective Czech corporate tax rate of zero due to special incentives. Mach insists that it’s unfair to maintain higher levels of tax on some industries to subsidize others, and believes that a flat tax system will be fairer for many domestic Czech industries.

The similarities between the Czech and U.S. tax reform debate are striking. The geography may be different, but the issues are virtually identical. The economics of tax reform seem irreconcilable with the politics of tax reform. The Czechs, however, may be feeling more pressure from their regional neighbors that have adopted flat taxes, such as Slovakia, Russia, and some of the Baltic states. It may take similar international competition, like the recent German initiative to lower corporate tax rates, to get comparable movement in the U.S.