Czech Prime Minister Petr Nečas unveiled a new tax proposal which would increase the lower VAT rate from 14 to 15 percent. Under this plan, inflation would increase by just 0.3 percentage points and average household spending would go up by just CZK 80. The original plan to increase both VAT rates by 1 percent to 15 and 21 percent, respectively, would raise inflation by 0.8 percent and monthly household spending by CZK 190. However this new proposal, put forward by Nečas in a bid to reach an agreement with the opposition inside the senior coalition Civic Democratic Party (ODS), would also shave CZK 10bn off the government’s 2013 budget.
Economists warn that regardless of the extent of the VAT increase, any tax change will freeze the economy even more. “It has been shown that tax increases freeze consumer demand,” Markéta Šichtařová, an analyst at Next Finance told ČTK. “It is basically the same whether the VAT will be at 19, 20 or 21 percent. The margin will adjust to it and so will clients with some delay. Uncertainty caused by the tax changes, however, has an extraordinarily negative impact on the economy.” While VAT was increased from 10 to 14 percent last year, the shortfall in VAT collection from January to September 2012 amounted to nearly CZK 30bn, according to Miroslav Ševčík, the dean at Prague’s University of Economics.
