Project description:
The objective of this research was to determine the level of and trends in the progressivity of income tax in Croatia during the 1995 to 1999 period. Progressivity in this case was measured by the average tax rate, and by tax elasticity. An income tax system is progressive when the average tax rate rises with income, or when tax elasticity has a value higher than 1. The results of the research showed that the average income and surtax tax burden had fallen during the period under observation. In 1999, for all taxpayers, it amounted to only 9.46%, which is low, because the statutory rates for income tax amounted to 20% and 35% at the time, while surtax rates ranged between 6% and 18%. The measurement has shown that the income tax system was very progressive with respect to all taxpayers. In the 1995 to 1999 period, the coefficient of total income tax elasticity amounted to 1.94.
With the exception of 1998, progressivity rose during the entire observation period because of:
- the increase in basic personal allowance from 300 HRK in 1994 to 1,250 HRK in 2000,
- the reduction of the lower marginal tax rate from 25% to 20% in 1997, and
- the progressive rise of the coefficient for personal allowances for dependents at the beginning of 1999.
Introduction of social security contributions into the analysis increases the tax burden, but reduces the progressivity of the system, because contributions burden all levels of income almost proportionally with a single rate. There is no unambiguously defined optimal progressivity. Every society decides about the progressivity of the tax system in its political process. However, greater equity, i.e., greater progressivity, inevitably also entails a reduction in the efficiency of the tax system.