The Impacts of the 2015 Reform of Direct Taxation: Evaluation with a TAXBEN Model

The Czech Parliament approved a wide-ranging reform of direct taxes in 2011. Absent other legislative changes, the reform will come into force on January 1, 2015. We evaluate its impacts on the tax burdens and the average and marginal tax rates in a representative sample of Czech individuals and households. The main impact of the reform is a reduction in the average tax rates for the self-employed in the 5th through 10th income deciles, most frequently by 4.4 percentage points. The variation in the change in the average tax rates among the self-employed in low incomes deciles is large and varies between minus 5 to plus 5 percentage points. The reform would reduce the taxes for most employees only slightly but it would increase the average tax rate by up to 5 percentage points for employees with earnings exceeding four times the average wage. The effective marginal tax rates faced by the self-employed would drop most commonly by either 4.4 or 10-11 percentage points, while the effective marginal tax rates faced by employees would remain unchanged. The impacts on the households are highly heterogeneous depending on the share of income from self-employment in the household's total income. The reform would reduce the budget revenues by approximately CZK 19 billion.

Keywords: Czech Republic, tax reform, impact evaluation, TAXBEN model