A Divisive Issue
The first discussions about introducing a flat tax in Slovenia erupted early in the electoral campaign of September 2004, when then leader of the opposition and current Slovenian Prime Minister, Janez Jansa, called for the simplification of the current progressive tax system that is, in his view, too cumbersome and overburdened with exemptions and deductions. The introduction of a flat tax, Mr Jansa argued, would not just increase the efficiency of the tax system; it would - by lowering the corporate tax rate - also act as a boost to the national economy, not to mention the fact that the loopholes used by the rich to pay less tax would also be removed. Although the centre-left liberal democrats (LDS) felt at the time that they could only profit from the tax debate, by interalia blasting Mr Jansa's proposals as yet another right-wing ploy to put more money into the pockets of the rich, the tax issues did not resonate all that well with the electorate and the LDS lost the October election. When in February the government dispatched its council of economic advisors to Slovakia to study the effects of the flat tax introduction in this central European country, the thing started getting serious. On their return, the economists emphasized that flat tax enabled the Slovakian economy to grow much faster than its competitors and proposed that the Slovenian tax system be reformed. Their suggestions were included in the government's reform plan, which was presented in October, stating that the introduction of flat tax would serve as a framework for all other reforms. Immediately, Slovenian trade unions declared that the measure is unacceptable as it would aggravate the social situation of low income workers, pensioners and the jobless. On the other hand, Mr Joze P. Damijan, the president of the government reform committee and the chief architect of the reforms, responded that the government would not let anyone's income deteriorate, a reason for which the committee had proposed "a system of unchanged net wages". Unions doubt these assurances: in their view and in the view of many economists, a transition to a flat tax rate (for VAT, and personal and corporate income) would not make it possible for the real net wages to remain the same. Unions explain that retail prices would rise if the current 8.5% VAT rate, which applies also to food, increased to 20%. This would mean a weaker purchasing power, in which case "trade unions will demand higher wages," union leaders warned. Whether that will help the government make Slovenia more competitive in the world market is unknown, but certainly wage increases do not belong to competitiveness-boosting measures.