A recipe for a lower labor tax burden

One of the recommendations that persisted in NALED’s Grey Book for the longest time, being included in the publication for six years in a row, is the reduction of labor tax and contributions. Employers believe that the “freed” funds could be used for creating new jobs and investments.

In this situation, fiscal consolidation could be achieved either by reducing the public expenses, or by enhancing some other source of income. The businesses believe that our administration is too expensive, and that reduction of expenses is absolutely required. Certain progress could be achieved by rationalizing the work of institutions with overlapping jurisdictions, without compromising the quality of services.

A somewhat different approach was implemented in Germany in 2007, which increased the VAT rate from 16% to 19%, to ease the burden to businesses. Bearing in mind the share of labor tax in the national GDP, consolidation could be achieved even with a much smaller increase of the VAT rate.

A third type of approach could be the introduction of progressive taxation. There is even an idea of entirely eliminating the tax for the so-called minimum wage, to stimulate a positive effect of massive transitioning from unregistered employment to legal flows. A counter-measure for preventing abuse would be a limited period of earning a minimum wage, while afterwards the employer would need to increase the workers’ salaries and pay higher taxes.

We decided to go one step at a time, and convince the state to start from the lowest salaries. Given that high tax burden is one of the reasons many businesses and entrepreneurs start off from the shadow zone, we proposed a tax exemption for new businesses, for a period of at least one year. The Government of Serbia accepted this initiative and the exemption will come into effect in October 2018. Taking the example of a minimum wage, the owner or employer would have savings of up to RSD 250,000 per employee. We believe the measure will be very successful and enable us to advocate its further extension.

I would personally like the state to define the industries with highest potential for contribution to GDP growth. Mining currently generates 2% of GDP, but there is room to extend it to 5%. Similar potential is noted for agriculture, textile and metal-processing industry. Bearing in mind that the average salaries in these industries are not high, the state would not be too affected by a measure reducing tax and contributions in these industries.