How to compensate families for the VAT unification: to reduce tax in employed people or to increase allowances in the poorest ones?

Abstract

v. v. i., a Institut ekonomických studií, Fakulta sociálních věd, Univerzita Karlova v Praze 2 CERGE-EI, společné pracoviště Centra pro ekonomický výzkum a postgraduální vzdělání Univerzity Karlovy a Národohospodářského ústavu AVČR, v. v. i., Praha Summary Social and tax policies in the Czech Republic are interconnected in a number of dimensions including the redistribution and thus, they considerably participate in the measure of the redistribution. In the article presented here, we analyze particular interactions between social and tax policies with a regard to changes in the measure of the redistribution and with putting emphasize on planned changes in the value added tax (VAT) and policies aimed at supporting families and children. In the main part of the article, we estimate impacts of compensations for the VAT unification in families with children to be of 17.5% and evaluate an increase in the tax reduction by 150 CZK per child monthly since 2012 and possible alternatives. In this way, we present an extension and continuation of estimates of impacts of the VAT unification at 17.5% in IDAE studies at CERGE-EI, which will reduce realistic incomes of households on average by about 0.8%, i.e. 200 CZK monthly during a long-term period. According to our estimate, compensatory provisions of the government would reduce the proportion of households negatively affected by the VAT unification from 80 to 65% and the drop in realistic incomes would be essentially compensated in families with children (households with children would lose 35 CZK monthly on average). However, the increase in the tax reduction does not sufficiently compensate the poorest families, since it mainly helps families with employed parents. The main advantage of this mechanism is, however, the fact that it affects a great proportion of households with children in general. We furthermore analyze the increase in children´s allowances as an alternative form of the compensation of families with children. It would more positively affect the poorest families, but it exerts impacts on a lower percentage of families with children. A combination of the increase in the tax reduction per child by 120 CZK and increase in children´s allowances by 115 CZK makes it possible to combine advantages of the two compensatory mechanisms without changing costs paid from the state budget compared to the governmental proposal of the increase in the reduction in tax per child by 150 CZK. This combined proposal at least partially compensates 99% of all the families with children and sufficiently protects even the poorest families.