Flat tax rate on the cards

The government is seriously considering introducing a single, 25 percent income-tax band as part of its broader effort to boost the economy. The rate would be the same for both individual and corporate earnings, and would be introduced on January 1, 2007, applicable to incomes earned in 2006. Should the government go ahead with the reform, which appears likely, it will be announced by Prime Minister Costas Karamanlis in early September at the Thessaloniki International Fair, where premiers traditionally announce the government's policy for the following year. Under the present system, annual income up to 11,000 euros is tax-exempt, while the portion of the income between 11,000 and 13,000 euros is taxed at 15 percent, between 13,000 and 23,000 at 30 percent and above 23,000 euros at 40 percent. According to sources, introduction of the flat rate will be accompanied by a rise in the tax-exempt portion of the income to 13,000 euros. The government, meanwhile, has already begun decreasing corporate taxes, from 35 percent to 25 percent. It was Economy and Finance Minister Giorgos Alogoskoufis who suggested the flat tax, but he kept the idea under wraps from the time New Democracy came in office, in March 2004, because of the deteriorating fiscal situation, with the budget deficit increasingly out of hand. The government has not yet succeeded in reigning in the deficit, as revenue has fallen well short of published targets for 2005, but has committed itself to bring the deficit below 3 percent of GDP - the European Union's ostensible upper limit - in 2006, compared to a still-provisional 6.7 percent deficit in 2004. The difficulty of the task has not daunted Alogoskoufis, who believes the time is right for the flat rate despite the lighter tax burden it would impose on individuals and companies. Any lost revenue, he believes, would be regained via an overall increase in income. Prime Minister Costas Karamanlis is said to have endorsed Alogoskoufis's proposal, which would be a radical departure from the previous system and in line with reforms at such market-friendly Eastern European countries as Slovakia, which has a flat rate of 19 percent. Karamanlis, worried that the first phase of reforms he belatedly introduced risks losing momentum, believes the flat rate would provide a key element that will ensure a more vibrant economy. The income tax reform will be coupled with the introduction of value-added tax on buildings whose building permit is issued after January 1, 2006.