Wednesday, March 11, 2009

Czech vs American tax returns

Many people have to file their
Czech 2008 tax returns.
by the end of March. Try to click the link above (and the green button "Stáhni") and open the PDF file.

Tax returns may be a bureaucratic nightmare but I found the current Czech system acceptable. After a decade of experience with the U.S. tax returns, I believe that the current Czech system is superior.

Some details are nicer: for example, the tax return is pink and all the boxes where the taxpayer may be writing something are white. This subtle feature makes the form much more comprehensible than e.g. the U.S. Form 1040 and the relatively small proportion of the white color on the page makes you more optimistic that the work expecting you is finite.

There are more substantial differences, too. Only when I had completed 50% of the tax return, I learned that Czechia actually has a flat tax already! A month ago, I thought that it was just being dreamed about by the people in the Civic Democratic Party.

It means that you calculate your super gross income (see below) and multiply the result by 0.15 (fifteen percent tax). It's not yet the final result. To get it, you subtract CZK 24,840 (over USD 1,000) from your tax. I only learned about this additional nice detail - which reduces the tax duty to 70% for average employees - when 75% of my tax return had been completed. ;-)

Of course, this additional detail makes the tax effectively progressive, at least for the lower income groups. But it's still flat as you approach infinity. Equally importantly, the calculation is damn easy. No tables are needed and the incentive to invent manipulations and to redistribute the income and lower the tax are reduced (together with the time needed for this counterproductive activity).

By the way, those 15% are calculated from the so-called super gross income ("superhrubá mzda"). That's the gross income plus all social/health insurance/medicare fees paid by the employer which pretty much always equals 1.35 times the gross salary (26% social insurance, including retirement savings and unemployment stuff, and 9% for health insurance). Because of this multiplicative factor, the tax rate would normally be called 15% x 1.35 = 20.25% of the gross income which is slightly higher.

As long as the finance minister cares about the total revenue only, it probably doesn't matter whether he says that the tax rate is 20.25% from the gross income or 15% from the super gross income. However, 15% surely sounds better than 20%.

Equally importantly, I actually find the super gross income to be a more pedagogical base amount because the people are led to realize that a certain substantial portion of their super gross salary is being paid for the social achievements and they are likely to avoid the naive conclusions that more expensive social/health system is always better. Well, it costs something, too. But these extra expenses were paid by the employers in such a way that most people didn't even realize that something had to be paid for that from their pockets, too.

I am afraid that as measured by the amount of redistribution, especially from away from the wealthy taxpayers, the U.S. may have already surpassed Czechia and similar countries and it may surpass them dramatically in the years to come.