A stronger role for PIT in Slovenia would allow a significant reduction in employee SSCs in the order of 5 percentage points. Such a reform would encourage greater workforce participation among workers who are not currently active in the labour market, including low-income, low-skilled and older workers.
A cut in employee SSCs would require redesigning the PIT rate schedule in order to balance the budget. First, the top PIT bracket could be abolished. The current top PIT rate of 50% is too high, in particular in combination with the high employee SSCs. The combined employee SSC and top PIT rate in Slovenia is 61%, which is the highest in the OECD. Few taxpayers pay the top PIT rate as it is introduced at a high income level; abolishing the 50% top PIT rate bracket would, therefore, only have a small impact on PIT revenues.
Second, the tax rates in the second, third and fourth tax bracket (respectively 27%, 34% and 39%) could be increased to help finance the cut in employee SSCs. The increase in the PIT rates would depend on the size of the reduction in employee SSCs. The PIT rate in the bottom bracket (16%) could be kept unchanged in order to maximise the impact of the cut in employee SSCs on low-income workers. The PIT rates in the third and fourth bracket could be increased more than the rate in the second bracket. However, the PIT rate in the fourth bracket (i.e. the new top PIT rate) should not be higher than 45%.
To compensate for the high tax burden on labour income, Slovenia has generous tax provisions that lower the tax burden particularly for families with children as they benefit from both child tax allowances and child cash benefits. The design and interaction of these provisions is complex and could be reformed.
Scope exists to broaden the PIT base. The PIT base is narrow as a result of exemptions and special tax provisions. First, tax provisions in Slovenia take the form of tax allowances, which give a larger tax reduction to higher incomes. This is not aligned with best practice in the OECD, where tax credits are more widely used as they provide the same benefit to all taxpayers irrespective of their income and marginal tax rates. Second, broadening the tax base could be achieved by abolishing the tax exemption for the reimbursement of home-to-work travel expenses, meals during work and by taxing performance bonuses and annual bonuses as regular income under the PIT.
The SSC base could be broadened by limiting the number of different contribution rates and bases, and aligning the treatment of different types of incomes. A cut in employee SSCs would also imply that self-employed SSCs, which are high by international standards, are reduced.
High tax burdens on labour income and high tax compliance costs reduce the incentives for entrepreneurship. In response, Slovenia has introduced an alternative “flat-rate” tax regime for self-employed entrepreneurs. However, the design of this regime induces entrepreneurs to conceal their income and discourages businesses from growing. The flat-rate regime is very generous in that it allows a deduction of “presumptive costs” equal to 80% of income, which is significantly higher than the actual costs incurred by most businesses. This approach not only results in low PIT liability but also reduces the SSC base. The flat-rate regime needs to be reformed or abolished.
Self-employed who do not opt for the generous flat-rate regime have a tax-induced incentive to incorporate in order to transform highly taxed labour income into low-taxed capital income. The tax burden on labour and capital income needs to be more closely aligned by lowering the tax burden on labour income and increasing the tax burden on capital income.
The financing of the health system needs to be strengthened. A wide range of measures are available. An in-depth evaluation of the efficiency of the health and welfare systems should be undertaken. Such an evaluation would be welcome along-side the introduction of measures that would allow the Health Insurance Institute of Slovenia (HIIS) to focus on its core activities and to put its financing on a more sustainable footing in light of the challenges linked to the ageing of society.
