Taxes and the need to reform the system are set to become the center point of the economy and politics in the months ahead as political parties warm up for the next general election.

"Taxes will surely play a significant part in the pre-election campaign," according to Prime Minister Jiří Paroubek. Meanwhile, opposition leader Mirek Topolánek argues, "Cleaning the [current] messy tax system should create grounds to further boost the economy."

On one side of the debate, the Social Democrats (ČSSD) declare it's time to drop the level of taxation in this country and lower the tax burden on people. At the same time, the Civic Democrats (ODS) count on introducing a flat 15 percent income tax that would not only lower the tax burden but also make the tax system less complicated and more transparent.

The significance of the tax issue increased dramatically after the recent general elections in Germany. Despite a comfortable lead in the pre-election campaign, the coalition of the Christian Democratic Union (CDU) and the Christian Social Union (CSU) won a narrow victory over the ruling Social Democratic Party led by Chancellor Gerhard Schröder. Analysts contend that one of the reasons for the last-minute decline in votes for CDU/CSU was fear of a proposed flat tax.

The German elections provided a valuable lesson to the ČSSD, whose representatives admitted that the next general elections here could become a battle for two different tax systems. "The experience in Germany has confirmed that people do care about taxes, and so different systems as presented by the ČSSD and the ODS could well become decisive to their voting," said Finance Minister Bohuslav Sobotka.

Tax jungle

The ČSSD has already cut taxes in anticipation of the election. Earlier this summer, the Cabinet agreed to cut income taxes. A 4,000 Kč ($160) tax cut was enacted for people earning under 30,000 Kč, and the lowest income tax rate will drop from the current 15 percent to 12 percent. The lower rate will apply to people earning up to 121,000 Kč per year, instead of the current 109,200 Kč. Tax deductibles were also modified to provide tax relief.

Unhappy with the level of the cuts, the ODS is pursuing a flat 15 percent income tax, insisting that it is the only tool capable of simplifying current tax legislation.

"The flat tax should help reduce the tax burden and also clean up the tax jungle here," said ODS shadow Finance Minister Vlastimil Tlustý.

Calls for dropping taxes in this country are coming from all sides.

This year, the government expects to collect about 407 billion Kč in taxes, some 20 billion Kč more than originally planned. That's because for every 100 Kč turned out in the economy, the government gets 38.50 Kč. Sobotka said the rise in overall tax yield over the past five years was a result of improved tax collection and companies earning bigger profits.

However, business analysts say the government failed to honor its promises to the public when increasing the overall tax quota. The tax quota measures total contributions by households and businesses to the state in form of taxes and insurance payments.

"The tax quota should be stabilized because an increase in excise taxes and shifts in value-added tax were to be offset by a cut in direct taxes, should the government stick to what they said," Patria Finance chief economist David Marek pointed out. He added that the tax quota this year will be the highest in history.

The overcomplicated tax system in this country also raises the concern of many analysts. In fact, the biggest contribution of a flat tax would be to bring about the simplification of the tax system, said Komerční banka chief economist Kamil Janáček. "The lower rate of the flat tax [15 percent] is not as attractive as the simplification of the tax system that it would bring about," Janáček said.

At present, tax regulations cover 44,000 pages as opposed to 10,000 pages in early 1990s, Janáček said. The income tax section alone contains over 90 exceptions.