Senate of the Parliament of the Czech Republic

Petr Dubinsky

Upper House Passes Tax Cut Compromise

The Czech Republic inched close on Thursday to a record tax break the government says will help overcome economic pain from the coronavirus crisis but which opponents criticise for undermining the budget and helping mainly richer Czechs.

The Senate voted on Thursday to reduce taxes by about 100 billion crowns next year, or about 1.7% of gross domestic product, a reduction from a lower-house version that would have offered a roughly 130 billion tax cut. The tax reductions will be larger in 2022 than in 2021.

That means the Senate version will go for a re-vote in the lower house, where it stands a high chance of approval according to parties’ stated positions and consent given on Thursday by Finance Minister Alena Schillerova.

Central bank Governor Jiri Rusnok has said fiscal expansion would bring closer normalisation of monetary policy although no quick reaction was needed.

Critics have said the cut was a political move ahead of an election planned for October next year, but part of the opposition voted for the bill.

The Finance Ministry has argued the country, with government debt seen at 39.4% of GDP at end-2020, had enough fiscal space for stimulus.

The main part of the bill reduces the main personal income tax rate for employees to 15% from 20.1%, and raises the flat tax-deduction sum for every taxpayer by 3,000 crowns next year and another 3,000 in 2022.

Top wage earners will pay 23% on pre-tax income exceeding four times the average wage, or around 140,000 crowns ($6,436.78) per month. The bill also allows companies faster asset write-offs.

The loss of revenue will mainly impact the central state budget next year, raising the deficit so far planned at 320 billion crowns. A small part of the impact will be borne by regional and local budgets.

Prior to the tax cut, the government was planning an overall public sector deficit of 4.9% of gross domestic product next year, after 6.4% this year.