NEW TAX RAISES PRICES

AIM Zagreb, 11 January, 1998

"We are closer to the European Union now". This is the only favourable fact mentioned by Croatian vice-prime minister Borislav Skegro, after on the 1 January, the value-added tax had started to be implemented. But, the European Union has already announced that in the next ten years it will not even consider the possibility of reception of Croatia. On the contrary, Slovenia is among the first countries which will become its full-fledged members. Nevertheless, introduction of the value-added tax is planned in Slovenia for the beginning of 1999.

For a tax reform - which has already led to a big raise of prices, primarily of food products, and in this way caused profound disturbances on the Croatian economic and political scene - other reasons must exist as well. Independent analysts believe that the main motive is money, and not adjustment of the system to the practice of the countries of the European Union. The old system of the sales tax could not satisfy the needs of the permanently growing state budget. This became evident last year when income from taxes on gasoline, cigarettes, coffee and alcohol turned out to be smaller than expected. It was impossible to stick to the old mechanisms of taxation and at the same time continue to increase the enormous state expenditures.

Taxation changes had become inevitable as soon as it became clear that this year's "first peacetime" budget would not be an exception from the previous ones and that the end of the war did not necessarily mean the end of permanent growth of state expenditures. According to Jakov Sirotkovic, 55 to 60 per cent of the social product of the country is spent on social consumption. It is not a small and easy job to squeeze out from the citizens and the economy 5.5 or 6 out of every ten kunas earned in Croatia.

Theoretically, budgetary income could have been increased without introducing the new tax system by a simple increase of the existing sales tax. But such tax calculation would have yielded a very unfavourable political result. Because it would not have been sufficient just to increase the existing sales tax rates; it was necessary to change the structure of products which would be levied. It would have made no sense to increase the tax on sold gasoline or cigarettes at the moment when consumption of these products had started to decline. Increased tax rate would have quite certainly further reduced the number of buyers of these products. That is why it was necessary to levy a tax on other products which are constantly consumed by a large number of people and which will in the future be a sure source of tax income.

Which are these products? A long time ago, the main source of money for the state were taxes paid for salt, paraffin oil, matches, tobacco... At the time it was called "state monopoly". With the growth of the standard, the budget stop smelling of paraffin oil, and began smelling like gasoline, coffee, cognac and whiskey. Instead of tobacco, only cigarettes became interesting. As soon as gasoline, cigarettes and coffee ceased to bring as much as expected, Croatian tax-collectors realized that it was no longer funny. What else is consumed incessantly and on a massive scale? For what will everybody, willingly or unwillingly, have to pay taxes? When human vices failed them, they could always count on bread, milk, oil and sugar, meat, rice and drugs...

An open increase of taxes on these products majority of which has never been taxable, would revolt the public and would inflict irreparable political damage to the ruling Croat Democratic Community. That is why they played the old and known game: we are not raising taxes, but changing the taxation system. We are bringing Croatia closer to the European Union the members of which, without exception, have the value-added tax. In order to achieve this goal, the Croatian government introduced a novelty in the system, something that no other European country has: a unique tax rate for all products. Only in this way - it is claimed - the effect of the tax on the economy becomes "neutral". This means that all manufacturers, from the standpoint of the tax-payers, are the same; nobody is taxable neither more nor less than anybody else. But the value-added tax is nevertheless just a form of a sales tax. It is paid by consumers, which means that they have all become the same for the tax-collectors, regardless of whether they buy bread or luxurious products. Briefly, everybody will pay 22 per cent, as much as the Croatian state decided in order to collect enough money for its enormous expenditures.

The first ten days of implementation of the new tax system showed that the most pessimistic forecasts started to come true. Prices of everything went up by the percentage by which the value-added tax is higher than the previous sales tax. The price of bread, milk or, for example, children's food for which no tax was levied so far, went up by the whole 22 per cent. Prices of drugs have gone up by 17 per cent, which is the difference between the old and the new tax, etc. At the same time, however, reduction of prices of the commodities for which the tax used to be more than 22 per cent, is not going as smoothly. Or, like in the case of cars, the state found a way to take the difference through additional taxes, or the merchants and the manufacturers are also trying to make a profit. It is claimed that the overall prices have gone up by 6 per cent. But, the overall, average raise interests only the statisticians. The largest bill will be paid by masses of ordinary people who have lived very humbly so far: pensioners, those who live of their work and the unemployed.

While a part of the opposition (primarily the Istrian Democratic League) announces that it will call the government to account and demand removal of its vice prime minister Borislav Skegro from office, the government is not too excited. Everything that is happening for it is normal and regular. Even without warning by the opposition and the trade union, it knew what would happen after introduction of the value-added tax with a single, high rate for all products. The government had specially prepared for this moment. It increased salaries of public servants, and added 4.4 per cent to the pensioners. The rise of prices will cost them more, but that is exactly the goal. On the contrary, the budget would not collect the planned amount of money, which means that the whole operation would not have had any sense.

The only thing the government is anxious about is revival of high inflation. But not to such an extent that it would give up on the uniform high tax rate (which no country of the Eurtopean Union has, and they are all richer than Croatia) and settle down to lower taxation of food products. It introduced "popular bread" and "popular milk" instead; that is, the price of one of the 200 types of bread and one type of milk remained the same, and the difference is paid from the budget. At the same time, a barrage was opened at merchants whom (as the Bible says) the people have never liked anyway. The state media, time and time again and at great length, analyze why the price of beer has not gone down as much as it should have. Probably not even the Bavarians are that interested in this topic.

A special committee for protection of consumers was founded which is expected to point out to all the tricks of the merchants. INA (national oil industries) made a generous gesture and due to the value-added tax, lowered the price of fuel by 2 to 3 per cent. There is an attempt to prevent the already announced rise of prices of power supply and telephone. For the sake of preservation of stability, large state monopolistic enterprises should renounce a part of the profit they are constantly making. But, all these moves are just for a very short time. When the budget increases, that is when the state becomes more expensive, the price of everything else must go up. Nevertheless, the government announces that everything will calm down in the course of the year and that stability of prices will be re-established. On what foundations?

If it is true, as the authorities are hoping, that the economic activity in the country has intensified more than it is evident, the new tax system could get hold of a part of what is now hidden in the grey zone. It is much more difficult to evade taxes in the new system, because it is collected in a chain: everybody subtracts the already paid part and adds the rest to the uniform rate, so that nobody is alone in the process. In other words, nobody can "modify" their tax obligations. If budgetary income would increase in this way, it would be possible to alleviate the current pressure of taxes and still collect a sufficient sum of money. The problem is only that the current authorities cannot preserve power without constantly increasing budgetary expenditures. And that nobody has ever survived feeding on hope and the conditional, such as "if" and "if ifs and ands were pots and pans".

MILAN GAVROVIC