Tax policy and employment: the case of the Czech Republic

• Published in: South-east Europe review for labour and social affairs 2009, Vol.12 (2), p.219-228
• Main Authors: Švihlíková, Ilona, Janíčko, Pavel
• Format: Article
• Language: English
• Subjects: Czech Republic; Direct taxes; Economic crisis; Employment; Entrepreneurship; Income taxes; Labor; Labor costs; Labour costs; Personal income taxes; Politics / Political Sciences; Progressive taxation; State income tax; Supply side economics; Tax burden; Tax systems; Taxation
• ISSN: 1435-2869
• DOI: 10.5771/1435-2869-2009-2-219

This article explores the reduction of the tax burden as an integral part of the armoury of supply-side, neo-liberal economists and right-wing political parties. Within a labour market perspective, it looks at the role of a tax-cutting philosophy in addressing the issue of high labour costs and low levels of flexibility, while improving the entrepreneurial environment. In a situation in which the linkages between economic growth and employment creation have been becoming weaker, the article argues that such approaches are simplistic and misleading. The replacement of progressive taxation with flat-rated systems has taken place in the Czech Republic despite labour costs, like elsewhere in central and eastern Europe, being lower than the EU average. The result has not been an increase in entrepreneurial activity, while tax cutting, in the context of the reduction of overall wages, has led to a drop in aggregate demand – especially dangerous in a situation of economic recession since it has a knock-on effect on the ability of governments to respond to economic crises.