UPDATE 1-Czech coalition agrees flat income tax as vote looms

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By Jan Korselt

Leaders of the Czech centre-right coalition agreed on Tuesday on a flat 15 percent personal income tax and other fiscal measures to satisfy backbenchers who had threatened to sink the reform package in a parliamentary vote.

The centre-right government wants to rebalance taxes and cut social benefits to narrow the new EU member's fiscal deficit, which, despite fast economic growth, has ballooned and pushed the adoption of the euro into the next decade.

The cabinet has said it will seek an early election if its plan fails, and disagreements over the extent of the reforms had raised tension in the shaky administration, which has just 100 seats in the 200-member lower house.

But Prime Minister Mirek Topolanek, head of the right-wing Civic Democrats (ODS) said after meeting the heads of two junior government parties that they had agreed a compromise on taxes and healthcare payments that should please all sides and allow the reform package to sail through parliament.

"I believe we have solved even the last remaining partial issues which had prevented us from stating that we had an agreement," Topolanek told reporters. "I believe nothing prevents all the coalition deputies from voting in favour."

The originally agreed version of the government package cuts benefits to parents on leave and other handouts.

It raises sales tax on food and other basic items and unifies all personal income tax brackets at 15 percent next year, from up to 32 percent now, although it also makes the tax applicable to a wider income base.

Tuesday's agreement also calls for a further cut in the personal income tax, to 12.5 percent, from 2009.

The corporate tax should also fall slightly faster than previously agreed, to 21 percent next year from 24 percent, and eventually to 19 percent in 2010.

The government aims to cut the budget deficit to 3.2 percent of GDP in 2008 and, along with further measures to be introduced later, to 2.5 percent in 2010, from 4 percent seen this year.

In an initial vote on the reforms in June, the cabinet won the backing of two opposition deputies, and Topolanek said he expected them to support the government again in the final vote seen late this week or next.

Political analysts have said they expected the coalition to agree on the reforms in the end to avoid the threat of a government collapse.

If it introduces a flat personal income tax, the Czech Republic will join Slovakia, Romania, Estonia, and other ex-communist states that have cut taxes in recent years to discourage evasion, boost industry and effective incomes and close the gaping wealth gap with richer EU states. (Additional reporting by Jan Lopatka)

Keywords: CZECH POLITICS/REFORM

[PRAGUE/Reuters/Finance.cz]