1. Tax Reform in Croatia
Mark Gallagher

2. HUP Who is HUP? The flat earthers? What does HUP want?
What is the deal with HUP?

3. Growth without jobs

4. Tax burden Unit Tax as % of GDP Number of countries in sample OECD 38%23
Transition countries
30% 24
Developing countries
17% 67
Croatia
41% 1
Comparator countries
33% 11
Euro zone countries
42% Na

5. PIT rates around the world
Income tax rate
Croatia
45.0
World
Average 33
Maximum 65
Minimum 2
Median 35
Standard Deviation 12
Observations
114

6. PIT rate structure Zero rate on Kn 19,000 per year
15%, 25%, 35%, and 45%
Localities can piggyback on PIT.
Total top marginal PIT rate in Zagreb approaches 60%.
More or less normal dependent deducaitons
Reliefs for location in special zones
Company reliefs for SMEs.

7. Income distribution before and after PIT
before and after tax
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
< 2,400
2,800
3,300
3,800
4,650
5,700
7,000
9,000
13,000
> 13,000
Before-tax monthly income
Before tax
After tax

8. CIT
Number of countries
Croatia
Tax rate

9. Top PIT/CIT rates
Number of countries
Croatia

10. Social contributions tax
Employer
Employee
Combined
Albania
11.2%
30.7%
41.9%
Azerbaijan
22.0%
3.0%
25.0%
BiH: RS --
34.3%
BiH: Fed.
11.5%
32.0%
43.5%
Bulgaria
29.9%
12.8%
42.8%
Croatia
17.2%
20.0%
37.2%
Czech Rep
35.0%
12.5%
47.5%
Estonia
33.5%
1.0%
34.5%
Hungary
13.5%
47.0%
Kazakhstan
23.0%
Latvia
24.1%
9.0%
33.1%
Lithuania
28.0%
31.0%
Macedonia
32.5%
Moldova
27.0%
2.0%
29.0%
Montenegro
16.1%
36.1%
Poland
20.7%
18.7%
39.4%
Romania
46.8%
17.0%
63.8%
Russia
Serbia
17.9%
35.8%
Slovenia
31.6%
62.6%
Ukraine
37.7%
40.7%
Uzbekistan
2.5%
Average
26.4%
15.4%
38.7%
Social contributions

11. PIT and CIT rates
Croatia
PIT/CIT rates ratio

12. Tax administration cost %
Revenue productivity
VAT
Profit tax
Income tax
Tax administration cost %
Albania
0.35
0.07
0.04
3.04
Croatia
0.64
0.11
0.74
0.84
Czech Republic
0.24
0.15
0.17
2.08
Estonia
0.52
0.05
0.28
Hungary
0.36
0.13
0.14
1.35
Latvia
0.41
0.10
0.25
Lithuania
0.45
0.16
Poland
0.08
0.95
Russia
0.39
0.18
0.27
Slovak Rep.
1.46
Ukraine
0.53
Group Average
0.40
World Average
0.31
1.12

13. Tax wedge and unemployment
In 29 OECD and Eurpoean Countries
GDP per capita
Unemployment rate
Tax Wedge
Residual
($1,995)
Croatia
5,002
16.1
45.5
5.3
average
25,117 7 38

14. Causality? Dependent Variable: UNEMPLOYMENT Variable Coefficient
Std. Error
t-Statistic
Prob. C
0.0016
GDPPC
4.48E-05
0.0019
WEDGE
0.0128
R-squared
    Mean dependent var
Adjusted R-squared
    S.D. dependent var

15. Conclusion
The direct tax system discriminates against labor, encouraging growth based on capital-intensive (or labor-saving) investment rather than labor-using investment and is not in all cases EU compliant.

16. HUP proposal 1
Simplify the personal income tax rate structure by imposing only a rate of 15% on intermediate income earners, and a marginal rate of 25% on the higher income earners.
Increase the personal deduction to Kn 51,840.
Eliminate all special and family deductions from personal income tax.
Include income from capital and property in the personal income tax base..

17. HUP Proposal 2
Allow for a simplified personal income tax for entrepreneurs and other independent income earners.
Tax income from small-scale agriculture and tourism the same way that other small entrepreneurs and independent income earners would be taxed.
Reduce the overall social contributions rate on wages from 37.2% to about 30% while raising the maximum income base from an annual salary of Kn 458,000 to Kn 600,000.

18. HUP Proposal 3
Eliminate all special incentives for corporate taxpayers that are now included in the investment incentives law and that had been article 27 in the corporate income tax law.
Eliminate incentives for areas of special concern
Eliminate incentives for employment.
Eliminate the tax-exempt status for companies operating in free zones.

19. HUP Proposal 4
Reduce the VAT rate from 22% to 20%, and abolish all intermediate rates.
Eliminate the zero-rate VAT treatment, except for exports.
Increase excises on petroleum derivatives and tobacco products.

20. Consider
R&D
Health sector wider reforms
Property tax and new IGFR

21. Impact on distribution

22. Impact in market

23. Potential job creation
Economic growth
15,506
Linear model
mean expectation
19,278
low expectation
11,177
Elasticity model
34,754
20,997
Total mean
34,784
50,260
Total low
26,683
36,503

24. Where are we now Interlocutors say it is stuck.
Maybe HUP just wants a flashy show for its efforts
Next year is elections, but this confuses and confounds
USAID is backing off?