European Trade Union Institute, ETUI.

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11 September 2018

Slovenia: the tax reform to make work pay more still on the agenda?

In recent years, a reform of the personal income tax has been a feature of political debates. The main direction chosen by the outgoing government was based on conventional ideas and recommendations formulated by the OECD and the European Commission. However, the elections in June 2018 led to a fragmented hung parliament with nine parties, so it is unclear whether the planned reform will stay on the agenda.

In its National Reform Program 2018, the previous government had announced a reform of the tax system, to be developed in close cooperation with the OECD. It had planned to coordinate its reform programme within a broader policy of reducing the tax burden on labour. The basic idea was to work with an OECD review, carried out in cooperation with relevant ministries. This review had to analyse key elements of the tax system which could lead to a reduction in the tax burden in order to stabilise the public budget while preserving social security entitlements. The policy announced was in line with recommendations formulated by the European Commission.

In June 2018 the OECD published a detailed report with recommendations for reform of personal income tax in Slovenia. The report recommends tax reforms that go hand in hand with a broader set of reforms of the pension and the health care system. According to the authors, the country needs a comprehensive tax reform that rebalances the tax mix away from employee social security contributions towards personal income tax. The reform has to be (at least) revenue neutral. Its aim should be to: prepare the country for the ageing of its population by incentivising (younger and older) people to work longer through tax reform; to reduce the currently high level of unemployment; to ‘make work pay more’; to put the funding of the welfare system on a more solid footing; and to make the tax system more fair.

However, with the change in the political landscape following the election, the key question is now whether the emerging new coalition will follow the track suggested by the OECD. For the five parties involved in coalition talks, health care is the top priority and their overriding concern is to preserve the existing rights covered by the national health insurance. In a draft agreement, the incoming government announced an increase in premiums to cover in full all of the services which now have to be partly covered by patients. Nevertheless, the draft agreement retains the ambition of a tax reform that would reduce labour taxes, impose a tax on property and change tax laws for small and medium sized companies. The aim is to preserve economic growth by lowering the taxes for employees who are most productive and vital for development.

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