With next summer's general election looming, both the Social Democratic Party (ČSSD) and the senior opposition Civic Democrats (ODS) have unveiled tax reform proposals in a move to make taxes a key issue in the election.

"Taxes are the main topic," says Helena Horská, an economist at Raiffeisenbank. "It's a very important issue."

The parties claim their bills would decrease taxes and leave workers with more money in their pockets.

But many business and economic experts say the tax system needs a complete overhaul to improve the business environment and the abysmal state of the country's public finances.

Analysts are almost uniform in the opinion that the ČSSD proposal offers nothing more than cosmetic changes. The ODS bill is much more ambitious, but there's doubt about whether it will live up to all of its many promises.

The proposals

The Social Democrats' bill, which is awaiting debate in the Senate, would decrease income tax for people in the lowest tax bracket from 15 percent to 12 percent. The second-lowest tax bracket would fall from 20 percent to 19 percent starting in 2006.

People in the highest income bracket, or those making more than 30,000 Kč ($1,200) a month, won't receive tax relief. Corporate income tax would also fall to 24 percent, and a series of deductions would push the effective tax rate below 20 percent, according the party.

Petr Dufek, head of investment research at ČSOB, who recently gave a conference analyzing the competing tax bills, says the ČSSD plan doesn't offer any radical changes.

"This is just a change of a few parameters," he says. "The system as a whole will remain intact."

By contrast, the ODS proposal, which the party introduced the last weekend of November, offers broad sweeping reforms, according to analysts. It includes a 15 percent flat tax for income, VAT and corporate taxes, a partially privatized pension system — the current system is publicly funded — and a guaranteed gross monthly income of 6,000 Kč for every citizen.

Leaders from the ODS have said the proposal would save the average person 2,000 Kč a month compared with the ČSSD proposal. Analysts have praised the fact that it would improve the country's business environment by simplifying the tax system, which in theory would increase foreign investment and decrease tax evasion.

Going broke

The most attractive part of the proposal, however, is that it would decrease public spending by encouraging people to work instead of living off social benefits, Dufek says. That's because it would eliminate social welfare benefits for people who are not physically or mentally disabled.

The current system has been criticized for creating a generous safety net that increases government expenditures, which are keeping the country in the red despite increasing tax revenue.

The budget deficit for 2005 is expected to reach 55 billion Kč.

By eliminating many welfare benefits, the ODS proposal would decrease expenditures, something analysts say the country desperately needs.

"The government should reconsider its expenses," Dufek says. "The current social welfare system is not motivating."

Not for free

When it comes to tax systems, the devil is always in the details. The ODS proposal is no exception. Analysts point to many problems, chief among them the concern that such a drastic tax reduction would increase the budget gap.

While the ODS and other flat tax proponents argue it will lower the deficit by encouraging more people to pay taxes, Pavel Mertlík, chief economist at Raiffeisenbank, is not so sure. He has projected that the 15 percent flat rate could actually lead to a 180 billion Kč budget deficit in the first year of its implementation.

The ODS also hasn't specified which welfare benefits would be eliminated. Even the party's pledge to save people 2,000 Kč isn't as straightforward as it sounds, says Dufek.

Dufek says that the party's plan to partially privatize pensions means the state would only guarantee 25 percent of an individual's salary, compared with 40 percent now.