Government proposes tax changes to ease bargaining deadlock

In spring 2004, negotiations over new sectoral pay agreements are deadlocked in Slovenia, with trade unions taking industrial action in support of demands for increased wages for the lowest-paid workers. The government has attempted to ease the situation by offering (in addition to raising the level of general income tax relief) to increase the monthly pay threshold above which employers have to pay a special payroll tax, the 'tax on paid-out pay', on their employees' wages. This tax cut for employers should make it possible for them to increase employees' starting take-home pay. However, the government has made this offer to the social partners conditional on them concluding a new private sector pay policy agreement, including adjustment of pay to inflation.

In the tripartite social agreement for 2003-5 (SI0307101F), the government agreed to trade union demands for changes in the tax legislation. The social partners and the government agreed that certain changes to existing fiscal legislation were required and that new legislation should be adopted in order to ensure a more just division of the fiscal burden and the use of insufficiently exploited fiscal resources. These changes concern the 1993 Law on Personal Income Tax (LPIT) and the 1996 Law on Tax on Paid-Out Pay (LTPOP) (see below).

The social agreement stated that a new LPIT would be prepared with the aim of raising the level of general income tax relief for all taxpayers and therefore lightening the burden, particularly on those in the lower income brackets, and ensuring more equal and transparent taxation of income. It would provide for a gradual increase in non-taxable earnings to the level of the basic amount of minimum income in 2005, 2006 and 2007. The social partners would examine the possibilities of introducing an extraordinary reduction in tax obligations for people in the lowest income brackets in 2004. The new LPIT would also make severance payments arising from termination of contracts of employment non-taxable income from 2004. The new LPIT was to be adopted after the social partners reach a consensus on the basic starting points to be taken into account in its preparation.

In November 2003, the Slovenian government adopted a programme aimed at the country's entry into the EU's Exchange Rate Mechanism 2 (ERM 2) at the end of 2004, and the subsequent introduction of the euro single currency, possibly in 2007. Because of the anticipated government measures concerning ERM 2 entry and their effects on poor people and low-paid employees, there was considerable debate about how to protect these groups by amending the existing LPIT. Such changes to the LPIT proved controversial (SI0312102F).

In the 2003-5 social agreement, the social partners and the government also agreed also that it was necessary to examine the possibility of abolishing the LTPOP, in relation to the more complete taxation of property and other sources of tax. Nevertheless, the lower threshold of taxation on paid-out pay would increase in 2005 by the inflation level in 2003 and 2004 (or to SIT 150,000 a month). Taking into account the public financial situation, in September 2003 the possibility was also to be examined of raising the lower threshold of taxation on paid-out pay for 2004.

'Tax on paid-out pay'

The LTPOP determines that the 'tax on paid-out pay' is to be levied on legal and physical persons that pay out wages and are, according to the relevant laws, liable to to make contributions for pension and disability insurance, compulsory health insurance, maternity and unemployment insurance. The tax is calculated and paid out of gross pay. There is no 'tax on paid-out pay' payable by the employer if the monthly gross pay of an employee is up to SIT 130,000 (EUR 544). The rate of the tax is then: 3.8% on gross monthly pay from SIT 130,001 (EUR 544) to SIT 400,000 (EUR 1,674); 7.8% on pay from SIT 400,001 (EUR 1,674) to SIT 750,000 (EUR 3,138); and 14.8% on pay over SIT 750,000 (EUR 3,138). The tax is calculated at the time of payment of (monthly) pay and paid six days after the payment date. The tax is calculated before the company's profit statement and forms part of the revenue of the state budget.

Employers have had to pay the 'tax on paid-out pay' since the second half of the 1996. At that time, because of continuous complaints from employers over the burden of social security contributions, the government lowered these from 42% to 38% of pay. However, at the same time the government introduced the tax on paid-out pay, presenting it as temporary and transitional measure. Soon after its introduction, employers began to maintain that this tax is a heavier burden for them than the social security contributions were before the government lowered them. However, the Ministry of Finance (Ministrstvo za finance, MF) maintained that the state simply had no other source from which to replace the revenues from this tax.

According to data from the tax authorities there were 704,553 employed persons on average every month in 2002. Out of this number: 215,558 had monthly gross pay lower than SIT 130,000, the level below which no tax on paid-out pay is levied. On average: 429,439 employees per month had monthly gross pay between SIT 130,001 and SIT 400,000, subject to tax on paid-out pay of 3.8%; 47,635 employees had gross monthly pay between SIT 400,001 and SIT 750,000, subject to tax on paid-out pay of 7.8%; and 11,922 employees had gross monthly pay of over SIT 750,000, subject to tax on paid-out pay of 13.8%. In October 2003, the pay of 23% of employees was exempted from this tax. The average monthly gross pay in 2003 was SIT 253,200 (EUR 1,059).

Intervention to ease deadlock in sectoral negotiations

As mentioned above, the 2003-5 social agreement provided that the lower threshold for application of the tax on paid-out pay would increase in 2005 by the inflation level in 2003 and 2004 (or to the amount of SIT 150,000). Taking into account the public financial situation, in September 2003 the possibility was also to be examined of raising the lower threshold for 2004.

However, early 2004 has seen conflict between trade unions and employers over the revision of the pay terms of sectoral collective agreements. On 25 February, seven industry sector trade unions affiliated to the Union of Free Trade Unions of Slovenia (Zveza svobodnih sindikatov Slovenije, ZSSS)(SI0210102F) held a one-hour general warning strike aimed at the main employers' organisations - the Chamber of Commerce and Industry of Slovenia (Gospodarska zbornica Slovenije, GZS), of which membership is obligatory, and the Slovenian Employers' Association (Zdruzenje delodajalcev Slovenije, ZDS)(SI0211102F). Trade unions claim that GZS and ZDS have been delaying negotiations over new sectoral pay agreements (SI0403101F). They are specifically demanding better pay for the worst paid workers, with an increase in starting pay rates,

Following the warning strike, the government sought to ease the deadlock in the negotiations over sectoral collective agreements offering to increase the lower pay threshold for the application of the tax on paid-out pay from SIT 130,000 to SIT 165,000 a month (in addition to raising the level of general income tax relief). The proposed change would cut this tax on employers by a greater amount and earlier than determined in the 2003-5 social agreement, and make it possible for them to increase employees' take-home starting pay by SIT 5,000 (EUR 21) a month. However, the government made this offer to the social partners on the condition that a new overall pay policy agreement, including adjustment of pay to inflation, was concluded (SI0404102N).

According to the Delo newspaper (on 3 March 2004) the intention of the government is that a new pay policy agreement for the private sector should include a basic rise in pay of an equal sum for all employees, as the trade unions propose. In the labour-intensive sectors, wages would rise by at least 3.4% of paybill, or SIT 5,000 (EUR 21) a month equally for all employees. As a result of sectoral negotiations, pay would then rise in line with the economic situation of each sector, while observing the limit set in the 2003-5 social agreement - ie that pay should lag behind productivity growth by one percentage point. In this way, the pay rise would benefit employees with lower pay considerably more than those with higher pay.

Commentary

All trade unions accepted the government's proposal enthusiastically. At a meeting with the social partners, Anton Rop, the Prime Minister, said that similar measures had been taken in some other countries, such as Ireland, Austria and France. However, Miro Sotlar, vice-president of the GZS employers' organisation, stated that both Ireland and Austria has abandoned this flat-rate pay rise method and gone over to proportional pay rises. He added that flat-rate increases could cause higher unemployment in the long run. (Stefan Skledar, Institute of Macroeconomic Analysis and Development, IMAD)