Economy and Finance Minister Nikos Christodoulakis is launching a series of meetings next week with a view to finalizing the long-awaited overhaul of income tax rates for individuals and companies.

According to official sources, the government has scaled down its planned ambitious tax breaks in view of the need to stick to its budgetary commitments within the framework of the European Union’s fiscal Stability Pact. The change in plans has been largely induced by the likely prospect of a lower growth rate for the economy than originally projected due to the global recession, thereby reducing the government’s revenue-collecting potential.

Another constraining factor the government now has to deal with is the prospect of early elections next year, which will place increased demands on the budget.

According to sources, the tax-free lowest income bracket for wage earners and pensioners as of fiscal 2003 will be raised from 8,400 euros to around 9,500-10,000 euros, which is about 2,000 euros lower than originally indicated by officials. Large families, with four children or more, will enjoy a much higher bracket, around 40,000-45,000 euros, estimated to result in a revenue loss of 24 million euros. The measure, designed to boost the country’s low birthrate which, among other things, bodes ill for the long-term viability of the social security system, may also apply to families with three children, but this will be decided after more careful study.

The income tax rate scale will be simplified by the reduction of rates from five to three: The lowest rate after the tax-exempt bracket will be raised from 5 to 15 percent, but the two rates after that have not been decided. The general idea is for rates to come down, in line with the government’s announced intention of providing incentives for work and production, and the highest rate of 42.5 percent is likely to come down to 40 or even 38 percent.

To offset the revenue loss from such reductions, the Finance Ministry is favoring the abolition of the current tax break granted for family expenses (on the provision of receipts), which amounted to 132 euros at best. The ownership of cars over 2,000cc, swimming pools, aircraft, yachts and other luxury items will be maintained as evidence of a certain level of income.

A reduction, as anticipated, in company taxes does not seem on the cards, except for firms carrying out new investments and creating jobs; at present, the standard rate is 35 percent, for employment-boosters, 32.5 percent, and for firms merging, 25 percent.

The ministry has not yet decided whether to put up the standard rate of VAT from 18 to 19 percent to recoup some of the revenue losses from lower income tax, as, apart from its regressive nature, the measure is potentially inflationary.

The measures are likely to be announced by Prime Minister Costas Simitis at the annual keynote economic speech marking the opening of Thessaloniki International Fair early next month.

A further package of tax measures, projected to be announced after municipal elections in October, will concern real estate and is considered likely to include a postponement of the imposition of VAT on new buildings, and the creation of an electronic real-estate archive with a view to introducing a single “possession” tax in future. Christodoulakis has said that the so-called “objective” real-estate prices, announced for tax purposes by the Finance Ministry according to area every two years, will not be put up in March next year.