RESHAPING THE

PERSONAL INCOME TAX

IN SLOVENIA

13 June 2018, Ljubljana, Slovenia

Bert Brys

Head of the Personal and Property Tax Unit

Head of the Country Tax Policy Unit

OECD Centre for Tax Policy & Administration

1

OECD Tax Policy Reviews

• Slovenia 2018

• Costa Rica 2017

Fact-finding mission (Ljubljana, February)

Many stakeholders involved (administration, private sector, unions, academia)

2

"Reshaping the Personal Income Tax in

Slovenia", second OECD Tax Policy Review

Aim

• To prepare Slovenia for the ageing of its population by incentivising (younger and older) people to work longer through tax reform, to reduce unemployment which remains high, to « make work pay more », to put the funding of the welfare system on a more solid footing, and to strenghten the fairness of the tax system

Core elements

• Rebalance the tax mix away from employee SSC towards the PIT, recurrent taxes on immovable property & VAT base broadening

• Shift the funding of the pension and health system partly from SSCs to general taxation

Characteristics

• (At least) tax revenue neutral reform package

• The tax reform needs to go hand in hand with a broader set of reforms (of the pension and health care system) 3

Slovenia needs a comprehensive tax

reform

4

The population is ageing rapidly…

0

5

10

15

20

25

30

35

40

2015 2050

Source: OECD

Population aged 65+ (%)

5

… which will increase ageing-related

expenditure considerably…

0

10

20

30

40

50

60

Other primary expenditure Pension Long-term care Health

Source: OECD projections

Public expenditure (% of GDP)

Pension, long-term care, health: 2015: 17.9% of GDP 2040: 23.7% of GDP (+5.8 pp) 2050: 26.8% of GDP (+ 8.9 pp)

6

… and will put tax revenues under

pressure (-1.6% of GDP by 2040)

Change in revenues (%)

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

-12%

-10%

-8%

-6%

-4%

-2%

0%

2020 2030 2040

PIT SSC Employee SSC Employer

7

The participation rate of male and female

workers in the category of 25-54 is the

highest of the OECD

0

10

20

30

40

50

60

70

80

90

100

Labour force participation rate, people aged 25-54, 2017 (%)

Source: OECD

8

Older workers still leave the labour

market too soon

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

1000

2000

3000

4000

5000

6000

7000

8000

15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

EUR PIT Employee SSC Employer SSC Effective tax rate (%) Average personal tax rate (%)

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

Median PIT and SSCs by age

9

Increasing the retirement age could

lead to significant exchequer gains

10

The Slovenian tax and transfer system

strongly reduces inequalities…

0

0,1

0,2

0,3

0,4

0,5

0,6

Gini coefficient for disposable income Gini coefficient for market income

Source: OECD

Gini coefficients

11

The tax-to-GDP ratio in Slovenia is

relatively high

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Slovenia OECD average EU-28

Source: OECD; Trends in Taxation in the EU (2017)

Tax-to-GDP ratio (% of GDP)

12

The tax mix is titled towards consumption

taxes and SSCs

0

2

4

6

8

10

12

14

16

Taxes on goods and services Social security contributions Taxes on income, profits andcapital gains

Taxes on property

Slovenia OECD average EU average

Source: OECD; Trends in Taxation in the EU (2017)

Tax mix (% of GDP)

13

High SSCs revenues reflect high

employee SSC rates

0

10

20

30

40

50

60

Employer SSC Employee SSC

Source: OECD

SSC rates (%)

14

The top marginal tax rate that

employees have to pay is very high

0

10

20

30

40

50

60

70

Top marginal “all-in” tax rate (PIT and employee SSC), 2017 (%)

Source: OECD

15

It results in a very high and distortive tax

burden on labour income

05

101520253035404550

Singleno ch

67 (% AW)

Singleno ch

100 (% AW)

Singleno ch

167 (% AW)

Single2 ch

67 (% AW)

Married2 ch

100-0 (% AW)

Married2 ch

100-33 (%AW)  (2)

Married2 ch

100-67 (%AW)  (2)

Marriedno ch

100-33 (%AW)  (2)

Slovenia OECD-Average

Income tax plus employee and employer contributions less cash benefits

(% of average wage)

Source: OECD

1. Finance the welfare state (in particular pension and health funds) through SSCs

2. Maintain a strong link between SSCs made and benefits received

16

Core design principles of the welfare

system in Slovenia

1. Financing a welfare system mainly through SSCs in a setting of low and condensed wage distribution

2. Even in the presence of high rates, low incomes do not pay enough. Introduction of a minimum income base for SSCs. Results in very high employer SSCs

17

The welfare system in Slovenia is under

budgetary pressure

Employee wage earnings

(% of the AW)

40 45 50 55 60

Statutory employer SSC rate (%)

16.1 16.1 16.1 16.1 16.1

Additional employer SSC rate (%)

7.6 5.7 3.8 1.9 -

Effective employer SSC rate (%)

23.7 21.8 19.9 18 16.1

TACKLING THE CHALLENGES TO FINANCE

THE SOCIAL SECURITY SYSTEM

18

• Reduce employee SSCs significantly

• Broaden the SSCs base

• Diversify the financial resources dedicated to health care – HIIS focus on main activities - engage in a review of the funding needs for health

• Lower the minimum SSC income base

• Align the SSCs for regular employees and the self-employed

• Evaluate the link between SSCs paid and benefits received

19

Main recommendations

20

The SSC loss associated with an employee

SSC rate cut will be partly recovered through

the PIT system

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

21,1% 20,1% 19,1% 18,1% 17,1% 16,86%Simulated SSC Rates

SSC PIT

SSC loss and PIT gain from reducing the employee SSC rate (EUR million)

21

Higher incomes will gain more in EUR from a general cut

in employee SSC

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

1 2 3 4 5 6 7 8 9 10Disposable income deciles EUR

SSC at 22.1% SSC at 17.1%

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

Mean disposable income from employment (EUR)

22

Slovenia’s welfare system relies mainly on

funding through SSCs

0

20

40

60

80

100

120

UnitedStates

Chile Japan Finland Belgium Korea Estonia Slovenia Poland

Other domestic revenues Voluntary prepayment

Compulsory prepayment Social insurance contributions

Transfers from government domestic revenues

Financing sources of compulsory insurance by type of revenue, 2015

(or nearest year) (%)

Source: OECD

STRENGTHENING THE DESIGN OF THE PERSONAL

INCOME TAX

23

• Redesign the PIT rate schedule – Abolish the top PIT rate & bracket

– Increase the PIT rates in the second, third and fourth tax bracket

• Broaden the PIT base

• Redesign the provisions that provide support for children

• Reduce tax disparities between different business legal forms – Abolish the flat-rate regime or, at least, make it

less generous 24

Main recommendations

25

Abolishing the top PIT rate does not cost

much revenue

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

-16

-14

-12

-10

-8

-6

-4

-2

0

50% 49% 48% 47% 46% 45% 44% 43% 42% 41% 40% 39%New top PIT rate band

Estimated PIT revenue loss from various reductions of top 50% PIT rate (EUR million)

26

The bottom PIT rate hits at a relatively

high income level

0

10

20

30

40

50

60

70

80

90

100

Source: OECD

Income level where the bottom PIT rate hits first (% of the AW)

27

The effectiveness of the PIT is

enhanced by an employee SSC rate cut

PIT rate bracket increases of:

1% 2% 3% 4% 5%

First 43 85 128 170 213

Second 26 51 77 103 128

Third 8 17 25 34 42

Fourth 1 3 4 6 7

Total 78 156 234 313 391

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

Cumulative PIT revenues from selected PIT rate increases,

with a 16.86% employee SSC

28

Small reductions in tax allowances/ exemptions

would increase PIT revenues significantly

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

0

50

100

150

200

250

300

350

5% 10% 15% 20% 25%

Reduction in total allowances

Estimated PIT revenue associated with reducing allowances (EUR million)

BROADEN THE VAT BASE &

INCREASE RECURRENT TAXES ON IMMOVABLE

PROPERTY

29

30

Indirect taxes: Maintain the 22%

standard VAT rate

0

5

10

15

20

25

30

Source: OECD

VAT rate (%)

31

Broaden the VAT base

Removing reduced VAT rates on…

Revenue gains

EUR million % of total tax

revenues

All reduced VAT rates 686.7 4.84%

Books

Admission to shows 9.4 0.07%

Books

Admission to shows

Newspapers and periodicals

27.3 0.19%

Hotel accommodation Restaurant food 67.5 0.48%

Passenger transport 16.7 0.12%

Source: OECD consumption tax microsimulation models

32

Capital incomes are highly concentrated

in the very top of the distribution

Capital income distribution - percentiles 1 to 90, by type, 2016 (EUR million)

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

EUR millions

Capital Income Percentile

Other interest such as loans Interest on deposits in banks Dividends Capital gains

33

METRs do not increase with income

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Bank Deposits Shares: taxed asdividends

Shares: taxed ascapital gains

Private Pensions:deductible

contributions

Residential property:equity financed;owner-occupied

Residentialproperty:equity

financed;rented

Low income (67%AW) Average income (100%AW) High income (500%AW)

Source: OECD

METRs (%)

34

EUR 18 million can be raised for each 5 pp

increase of the capital income tax rate

Source: Authors’ calculations based on Ministry of Finance of Slovenia tax records microdata

Estimated capital income tax from increasing the capital income tax rate by 5 pp,

10 pp and 15 pp (EUR million)

18 37

55

0

20

40

60

80

100

120

140

160

5 pp 10 pp 15 pp

Current capital income Additional capital income from rate changes

35

Revise the tax treatment of immovable

property

% of GDP EUR billion

Additional revenues

(EUR million)

Current situation

(2015)

0.5 0.19

Scenarios

1.1* 0.48 280

2.5** 1.08 890

3.1** 1.34 1 150

*OECD average in 2015

**OECD best performers

Recurrent taxes on immovable property

36

Take the opportunity of the current property tax

reform to reform the financing of municipalities

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 2015 2016

Personal income tax Taxes on property Other tax revenues Non-tax revenues Transfers

Source: Ministry of Finance of Slovenia

Local governments revenues (% of GDP)

Thank you for your attention

Bert Brys, Ph.D. Senior Tax Economist

Head of the Country Tax Policy Team

Head of the Personal and Property Taxes Unit

Centre for Tax Policy and Administration

2, rue André Pascal - 75775 Paris Cedex 16 Tel: +33 1 45 24 19 27 – Fax: +33 1 44 30 63 51

Bert.Brys@oecd.org || www.oecd.org/tax 37

ANNEX

38

39

The relatively high PIT rates increase

the labour tax burden significantly

0

10

20

30

40

50

60

50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

%

average central income tax (% of total labour costs)

employee SSC (% of total labour costs)

employer SSC (% of total labour costs)

net personal average tax rate (% of gross wage earnings)average tax wedge (sum of the components)

Average tax wedge decomposition by level of gross earnings expressed as a % of

the AW, single taxpayer without children

Source: OECD

40

Cash benefits reduce the net personal

average tax rate for families with children

Average tax wedge decomposition by level of gross earnings expressed as a % of

the AW, one-earner married couple with two children (%)

-30

-20

-10

0

10

20

30

40

50

50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

average central income tax (% of total labour costs)employee SSC (% of total labour costs)employer SSC (% of total labour costs)net personal average tax rate (% of gross wage earnings)average tax wedge (sum of the components)cash benefits (% of total labour costs)

Source: OECD

41

Public debt can be reduced further

0

50

100

150

200

250

300

350

400

450

500

0

10

20

30

40

50

60

70

80

90

EUR billion % of GDP

General government gross debt (left axis) Gross foreign debt - liabilities (right axis)

Source: IMF; Ministry of Finance of Slovenia

Debt

42

The last tax reform (2006-07) had

significant impacts on the deficit and debt

-5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015

Impact on government deficit Impact on government debt

Source: Ministry of Finance of Slovenia

Government deficit and debt (% of GDP)