The business community may complain of high labour taxation in Serbia, but international comparisons suggest otherwise.
A frequently heard complaint in Serbia, both in the business community and among many ordinary people, is that taxes imposed on salaries of workers in Serbia are a huge burden. A common assertion is that incomes in Serbia are taxed at a far higher rate than in the rest of Europe.
That this perception is so firmly rooted is puzzling, given that several studies and international comparisons during the last few years have shown that the tax burden on wages and salaries in Serbia is around the European average.
Much the same model as Germany
The Serbian system of labour taxation is similar to the model used in many European countries, including Germany.
There is a general income tax, which in Serbia stands at 10 per cent. In addition, employers and employees pay three types of social insurance contributions – for pensions, healthcare and for the eventuality of unemployment.
The rates at which social insurance is paid, as well as the base for their calculation, are complex. However, we can provide an illustrative example for the purposes of analysis.
The average net salary in Serbia in August 2016 was 45,286 dinars [around €367]. The total in income tax and social contributions that would have to be paid to the state on top of this net salary would have been 28,929 dinars [around €234]. Consequently, from the employer’s point of view, the “gross salary”, or total costs of employing a worker on an “average” salary would have been 74,215 dinars [around €602].
Put another way, labour taxation – income tax and social insurance contributions – in Serbia represents 39 per cent of the gross salary costs to an employer hiring a worker on an average salary.
Tax ‘wedge’ still bellow EU average
Whether such a tax burden on wages is high or low is a relative question. To those who have to forego profits or earnings to pay tax, the level of taxation may always be too high.
However, the popular assertion that incomes in Serbia are taxed at an extraordinarily high level is untrue.
In mid-2013, the National Alliance for Local Economic Development, NALED, a local non-governmental association bringing together businesses and local governments with the aim of working towards the creation of a better business environment in Serbia, conducted a study, “The System of Labour Taxation and Possible Reforms,” comparing the level of labour taxation across Europe.
Given the difficulty of comparing levels of labour taxation across the world, international comparisons use the concept of the “tax wedge” on labour.
In the simplest terms, the tax wedge represents the share of taxes and social insurance contributions in the total costs [gross salary] of hiring a worker. In the case of an average Serbian salary, this is 39 per cent.
The NALED study found that, far from being abnormally high, the level of wage taxation, or tax wedge, on an average salary in Serbia was slightly below the EU average.
In the 15 “old” EU member states of Western Europe, the average tax wedge was 41.9 per cent. In the 10 Eastern European countries that joined the EU between 2004 and 2007 [Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia], the tax wedge stood at 41.3 per cent.
Labour taxation was lowest in Ireland and the UK, where the tax wedge stood at 25.9 per cent and 32.3 per cent respectively. By contrast, it was highest in Belgium, where it stood at 56 per cent, while in France and Germany, two of Europe’s key economies, the tax wedge stood at 50.2 per cent and 49.8 per cent respectively.
Looking at Serbia’s EU neighbours, Hungary had a much higher tax wedge on labour – 49.4 per cent – while Bulgaria’s was the lowest, at 33.6 per cent.
Failure to tax higher earners
A study with similar findings was commissioned by USAID’s Business Enabling Project, BEP, and produced by the Belgrade-based Centre for Liberal-Democratic Studies in 2012.
Curiously, despite such evidence, the idea that labour taxation in Serbia is extraordinarily high persists.
That the burden of taxation on wages is no more than the average in Europe does not, of course, imply that this burden cannot be reduced. Indeed, both studies provide interesting ideas for reforming the existing system.
What sets Serbia, as well as other East European countries, apart from the countries of Western Europe, is the low level of progress in the taxation of labour.
Put simply, whereas in the old EU member states workers on higher salaries are typically taxed at a higher rate, in Serbia and much of Eastern Europe, the rate at which incomes are taxed changes little as salaries rise.
Introducing a more progressive tax system and lowering the tax burden on lower salaries could, at once, increase the competitiveness of low-wage earners in Serbia and help reduce persistently high unemployment, while, not least, contribute to building a more equal society.
(Balkan Insight, BIRN, 27.10.2016)
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