FACTBOX-Main proposals for Czech tax and spending overhaul

...aimed at cutting the budget deficit to 3 percent of gross domestic product (GDP) next year.

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Topolanek has said [ID:nL26490240] his government would revamp taxes and social spending to prevent the 2008 state budget deficit doubling to 180 billion crowns ($8.59 billion) from this year's target level.

The target is to cut fiscal deficit further to 2.6 percent of GDP in 2009 and 2.3 percent in 2010, according to national methodology, from 4 percent seen this year. Officials say EU-harmonised numbers are about 0.2 percentage points higher.

The following are selected proposals presented by the government on Tuesday:

OVERALL SAVINGS AND REVENUE HIKES:

- To achieve the plan, the government needs to cut the deficits by 37.7 billion crowns in 2008, 40.8 billion in 2009 and 29.6 billion in 2010 versus the current outlook.

- The numbers include the net effect of tax and benefit changes and additional cuts in discretionary spending worth 5.3 billion crowns next year, 11.4 billion in 2009 and 16.8 billion in 2010.

INCOME TAXES:

- Flat 15 percent tax rate on all personal income from 2008 to replace the progressive tax brackets with 12 percent as the bottom rate for low-income earners and 32 percent as the top one for high-income earners;

- Personal income tax base to be broadened to include social security and health insurance contributions paid both by employees and employers for their workers. The portion paid by employers now is 35 percent on top of gross wages;

- 'Tax abatement', sum to be automatically deducted from taxes, will be raised to 24,840 crowns per year from 7,200 crowns;

- Changes will mean savings for high earners and low earners, with middle-income earners gaining only a few dozen crowns per month;

- Corporate income tax rate to fall to 22 percent next year, 20 percent in 2009 and 19 percent in 2010 from 24 percent now;

- Tax changes, on cash basis, will raise revenue by 9 billion crowns next year but cut revenue by 3.8 billion in 2009 and 28.2 billion in 2010;

- A cancellation of dividend, capital gains and property transfer taxes will be considered in the next reform stage for 2009 or 2010.

VALUE-ADDED TAX:

- Lower, preferential value-added tax (VAT) rate -- levied on essential living items such as foodstuffs and medicine and other selected goods and services -- to rise to 9 percent from current 5 percent [ID:nL17647670];

- Higher, base VAT rate to remain at 19 percent.

SOCIAL TRANSFERS:

- Plan sees saving 8.5 billion on social benefits next year, savings should rise by 2010;

- Savings of 9.2 billion in sickness benefits next year;

- Changes include cuts to parental contributions, child benefits, birth and funeral contributions and other welfare;

- Automatic indexing of benefits should be abolished.

($1=20.95 Czech Crown)

Keywords: CZECH REFORMS/