Czech money via Miloslav Hamřík from Pixabay

The Czech Republic is preparing a plan to drastically cut employees’ income tax rate

Income tax would be calculated on gross wages instead of super-gross wages, the biggest change in over a decade

The Czech government is preparing a tax reform that will benefit 4.5 million employees. Instead of paying 15% of the super-gross wage, employees would pay the same percentage of gross wage, which is lower.

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The cabinet will discuss the idea on August 11 and plans to bring the proposal to the Chamber of Deputies in September. It would be the largest change to the tax system in 13 years.

“Of course we will abolish the super-gross wage. You will definitely see this in the payroll, because there is a need to reduce the tax burden on employees. It would be good to return to 15%,” Prime Minister Andrej Babiš (ANO) said in a weekly video he posted on Facebook.

He told public broadcaster Czech Television (ČT) that he wants employees to get more money so they are not afraid to spend more. This would help to stimulate the economy. “So the total abolition of the super-gross wage, I would like to enforce that. I am talking about it with the [finance] minister.”

Currently, employees pay an income tax of 15% of the super-gross wage, which is the gross wage plus social and health insurance contributions paid by the employer. The effective tax rate is about 20% of the gross wage.

Under the proposed change, taxes would fall by hundreds of crowns a month for employees in lower income brackets, and by several thousand crowns for people with higher incomes. For example, a worker with a gross salary of 36,000 CZK would save over 1,800 CZK a month, and a manager with an income of 80,000 CZK would save 4,000 CZK, according to calculations by ČT.

Finance Minister Alena Schillerová (for ANO) said that the proposed reform makes sense, but pointed out that it would cost the state budget around 90 billion CZK.

Minister of Labor and Social Affairs Jana Maláčová (ČSSD) said that so far the government has helped the self employed with payments to cover lost income. “I would like the government to help employees as well. So we have an agreement that in the next few weeks the finance minister will propose the abolition of the super-gross wage,” she said.

A similar proposal was previously promoted by the Civic Democrats (ODS) in 2011 under the government of then-prime minister Petr Nečas, but even though it was approved, it was canceled before it could take effect in 2015.

Christian Democrat (KDU-ČSL) chairman Marian Jurečka, who supports the current proposal, pointed out that the change in 2015 was blocked by the then-finance minister Babiš.

The current proposal to abolish the super-gross wage has support in the Chamber of Deputies, the lower house of Czech Parliament.

ODS First Deputy Chairman Zbyněk Stanjura characterized the proposal as “great news” for the taxpayer. He told news server iDnes.cz that the ODS had been calling for a drastic tax cut for five years, and that he was disappointed that after years of ANO opposing it, now they were presenting it as their own idea. “It doesn’t matter, the result is important, so hopefully he won’t change his mind again,” Stanjura said.

Some politicians are skeptical. “The government periodically says it will cancel or not cancel it; this is about the fourth time during the election period that they have made a turn. So until I see the proposal, I will not believe it,” Mikuláš Ferjenčík (Pirates), deputy chairman of the Budget Committee of the Chamber of Deputies, said.

Věra Kovářová, vice president of the movement Mayors and Independents (STAN), questioned how the government would make up the shortfall in income.

The concept of the super-gross wage tax was introduced in 2008 by the government of Mirek Topolánek (ODS).

Last year, the state received almost 430 billion CZK in personal and corporate income tax. Social security premiums added another 122 billion.

This year’s budget deficit has tripled due to the coronavirus pandemic and related measures. The government first pushed for a deficit increase from the original 40 billion CZK to 200 billion CZK, and later to 300 billion CZK.

In mid-July, President Miloš Zeman signed an amendment that increases the deficit to 500 billion CZK In connection with this, the Chamber of Deputies asked the government to draw up a concept for the consolidation of public finances from 2021 to 2027. The government is to submit it by September 30.

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