Research :: Finished research :: 2001-2005
Progressiveness of income tax in Croatia in the 1995 to 1999 period

For: Ministry of Finance, Tax Administration

Project manager: Marina Kesner-Škreb, Institute of Public Finance

Researchers: Hrvoje Arbutina,Faculty of Law, Zagreb
  Marina Kesner-Škreb, Institute of Public Finance
  Danijela Kuliš, Institute of Public Finance
  Sanja Madžarević-Šujster, WOrld Bank, Office in Croatia


The objective of this research is to determine the level of and trends in the progressivity of income tax in Croatia during the 1995 to 1999 period. Progresivity in this case is 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 is greater than one. The results of the research show that the average income and surtax tax burden has fallen during the period under observation. In 1999, for all taxpayers, it amounted to only 9.46%, which is little, because the statutory rates for income tax came to 20% and 35% at the time, while surtax rates ranged between 6% and 18%. The measurement has shown that the income tax system is very progressive with respect to all taxpayers. In the 1995 to 1999 period, the coefficient of total income tax elasticity amounted to 1.94. Except in 1998, progressivity rose during the whole of the observation period. Progressiviy rose because of the increase in the basic personal allowance from 300 kuna in 1994 to 1,250 kuna 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. Bringing 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.

Project was made in Institute of Public Finance in December 2000 with financial support of Ministry of Finance of Republic of Croatia, Tax Administration - Central Office.

The Project is published in Financijska teorija i praksa, No. 2/2001

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