Abstract
After the breakup of former Yugoslavia Croatia, Serbia and Slovenia followed different income tax reform trajectories that could explain currently different levels of income inequality in these countries. Our paper analyzes redistributive effects of introducing progressive tax systems, like the ones currently implemented in Slovenia and Croatia, in the Serbian context. Using microsimulation modeling and Survey on Income and Living Conditions data for 2017 our results suggest that implementation of both Croatian and Slovenian tax system would yield lower levels of income inequality and poverty if applied in Serbia. Slovenian system achieves larger decrease in inequality due to higher tax burden on the top incomes and brings significant increase in tax revenues. Croatian tax schedule achieves stronger decrease in poverty as more generous personal allowance exempt higher portions of low incomes from labour taxes.
Highlights
This paper investigates the relationship between income inequality and different personal income tax (PIT) regimes that these three countries adopted after the dissolution of Yugoslavia
Our results indicate that the redistributive capacity of the Slovenian income tax system is largest among the three countries with Serbia being the least able to reduce inequality with tax instruments and Croatia falling between the two
When this is coupled with lowest pre-fiscal income inequality in Slovenia and highest in Serbia the result is that Slovenia has one of the lowest inequalities of disposable income in Europe, Serbia one of the highest, while Croatia is at the average EU level of income inequality
Summary
What is interesting from the political economy perspective is that this proposal was never advocated by the European Union actors in the process of accession nor by the World Bank or the International Monetary Fund, two institutions that are often regarded as proponents of the liberal economic and social reforms Their role in this area in transition countries has been quite different. Most importantly, proponents argued that flax tax would enhance incentives for working (labour supply), saving, investing and taking risks (entrepreneurship) and in the end boost competitiveness of the country This was mostly theoretical reasoning as no evidence existed that introduction of the flat tax would bring these positive effects. Serbia embraced flat tax policy from the start of its post-2000s transition to a market economy without any serious considerations about the effects of such an option on inequality
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