1. What kind of progression ?

Income taxes, especially individual income tax, are commonly charged at graduated rates, which means that with the growth of income (profits), the tax rate also increases. We distinguish between full and scheduled progression. Full progression taxes all income at only one rate, depending on which bracket the taxpayer's marginal income falls in. The big disadvantage of this tariff is that when moving to a higher income bracket, the tax base is taxed significantly more than it would have been if the limit had not been crossed (see the table below). The result of such taxation might be extremely unfair, since after taxation the taxpayer who had a higher income might have a lower disposable income than the taxpayer who earned less and did not move to a higher bracket. Taxpayers are not motivated to engage in greater and more efficient activities, but, in case they are near the limit, they are motivated to tax avoidance (legal or illegal).

Table 1: Full progression (tariff and  example of calculation)

This injustice is corrected by scheduled progression, where every part of the increased income is taxed at a higher tax rate.

Scheduled progression is therefore used in tax systems today as a powerful instrument for the implementation of redistributive fiscal policy because after taxation, the differences in economic power between the rich and the poor should be reduced (not changed, as done by full progression in the example above).

2. Corporate tax and fiscal policy

Profit tax is a stable income of the vast majority of today's states and one of the persuasive arguments for its existence is that it covers taxation of the income of company members before the distribution of profits, both of the residents and non-residents; Also, it is a pleasant tax form for collecting revenue since it refers to a narrow number of taxpayers who are not voters in elections.

However, there are strong reasons against the existence of this tax: it causes numerous legal and economic distrotions and costs reducing the efficiency of investments and competitiveness of companies, and, we still do not know who bear the burden of corporate taxes: owners of corporations, management, employees or others in the economy (it is „fiscal illusion“ that its burden falls on the corporation, as explained by prof. Avi-Yonah).

Moreover, because it is the most subjective of all taxes, the results of research on the effects of the progressive income tax tariff cannot be interpreted straight forward, so the effects of these fiscal policy instruments cannot be clearly recognized.

3. Croatian example of progression in the corporate taxation

The corporate tax rate in Croatia, in addition to being fully progressive, refers in its definition to the amount of revenue and not to the realized taxable profit, as article 28 of the Profit tax prescribes :

„​The profit tax is paid based on the determined tax base at the rate of :

1. 10% if, during the taxation period, revenue has been generated up to EUR 1.000.000,00, or
2. 18% if, during the taxation period, revenue has been generated  higher than EUR 1.000.000,00.“

Since there are no other criteria by which the Law would refer to realized profit and thus more precisely define those taxpayers who (do not) apply a higher rate of full progression, it remains completely unclear why such a solution was resorted to. Different sectors, industries, and even taxpayers within the same branches of the economy, with regard to their specific circumstances, activities, investment cycles, status changes, market conditions, tax allowances, have completely different earnings (profits) that should be taxed, therefore, distinguished between applicable rates.

Determining income as the only criterion is a unique solution in the world, to the best of our knowledge, which completely negates the principles of horizontal and vertical equality and nudges taxpayers, whose incomes are at marginal values, to tax avoidance.

In addition to „regular“ profit taxation, there was also a deviation in the application of the EU windfall tax of the income in 2022: despite the clear objectives and vocabulary from European regulations, in Croatia it was applied to all taxpayers, not only those from the energy sector who got rich in the energy crisis. They were punished for the succsses, although they did not unduly take advantage of the crisis.

Such actions reduce the competitiveness of entrepreneurs and trust in public policies in Croatia. Ultimately, it decreases attractiveness for foreign investors.

For local companies that are close to the specified limit (and there are about 93% of such taxpayers in Croatia), this probably means tax planning and taking on the risk of proceedings and litigations and, on the other hand, substantial workload for tax audits and tax advisors.

Jasna Bogovac

Croatia