## 1. Sustained Higher Growth is Needed for Income Convergence ## Source details **Canonical URL:** [1. Sustained Higher Growth is Needed for Income Convergence](https://www.imf.org/-/media/files/publications/cr/2019/1svnea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1svnea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1svnea2019002.pdf.json) --- ### Introduction — case for reform and growth - Slovenia recovered since the 2012–13 banking crisis with growth above the euro area average. - Income inequality: GINI index at 0.24 versus OECD average of 0.32. - Income level remains below the EU average; accelerating income convergence requires sustained strong growth. - Ageing is estimated to reduce productivity growth by about 0.5 percentage points during 2014–35. - Slovenia faces one of the highest increases in age-related public spending in the medium- to long-term, creating pressure for more efficient tax and social security systems. ### Key fiscal and revenue statistics - 2016 tax-to-GDP ratio: 36.6 percent (between OECD average of 34.3 and EU average of 38.9 percent). - Excluding social security contributions (SSC), Slovenia’s tax ratio: 22 percent of GDP. - SSC raise an additional 14.8 percent of GDP, making Slovenia the 6th heaviest SSC-burdened economy in the EU. - Consumption tax revenues in 2016: 14.3 percent of GDP. - SSC in 2016: 14.5 percent of GDP. - Taxes on income, profits, and capital gains (natural and legal persons) in 2016: 6.8 percent of GDP (OECD average: 11.3 percent of GDP). - Recurrent immovable property tax revenues: 0.6 percent of GDP (OECD average: 1.9 percent of GDP). - Slovenia is ranked 23 in property tax collections in EU-28. - Environmental taxes (excises): Slovenia is a top revenue performer among OECD member states. ### Impact of ageing and productivity - Rapid ageing reduces the size of the productive labor force and productivity growth. - Projections indicate substantial future age-related spending increases, underscoring the need for growth to preserve fiscal sustainability. ### Model-based finding - Model simulations show that shifting the tax burden from labor to consumption would increase Slovenia’s output level by 0.5 percent in the medium- to long-term. ### VAT structure and performance - Total revenue forgone from Slovenia’s expansive list of 22 reduced VAT rate supplies is 1.85 percent of GDP (2017). - In 2016, indirect taxes raised revenues equal to 14.7 percent of GDP. - VAT contributed 8.2 percent of GDP. - Slovenia’s standard VAT rate is 22 percent. - Reduced VAT rate is 9.5 percent on the 22 listed goods and services. - Increasing the standard VAT rate above 22 percent is described as unrealistic because globally there are only 11 countries out of 160 VAT-raising jurisdictions with higher VAT rates. - Austria’s standard VAT rate is 20 percent, which makes cross-border shopping avoidance attractive. - Slovenia ranks about 10th place among EU-28 countries according to VAT gap studies by MoF. - An extensive application of the reduced VAT rate is noted as neither good social nor tax policy; multiple rates increase risk of non-compliance and tax evasion and may require a higher standard rate. ### Policy recommendation on VAT - Narrow down the range of 22 reduced-rate (9.5 percent) goods and services to create revenue gains instead of raising the standard VAT rate. ### Property tax - Current property taxes are raised on reinstated pre-2014 legislation after attempts to introduce a market value-based real estate tax were held unconstitutional in 2014. - Revenues from property tax show no buoyancy, raising no more than 0.5 percent of GDP. - Revenues from the transfer tax on immovable property transactions add another 0.2 percent of GDP. - Consideration: A value-based property tax would raise revenue potential, buoyancy and transparency. - Noted issues: considerable differences in tax burden between municipalities and within municipalities for different groups of real estate; regime is neither transparent nor equitable. - Progress: improvements in land registration systems and valuation methodologies will support introduction of a new property tax. ### Capital gains tax - Capital gains attract a flat withholding tax at 25 percent on all income from capital. - Taper relief provisions reduce the 25 percent rate for every completed five-year period of ownership, to 0 percent after 20 years. - Primary residences are CGT exempt. - Assessment: Taper relief undermines the fairness principle of taxation and is very beneficial to high-income households. - Best practice suggestions: - Treat short-term capital gains realized within one year of acquisition as ordinary revenue taxed at the applicable marginal PIT rate or tax them at the flat proportional rate of the DIT. - Accommodate inflationary gain element by indexing asset value for inflation, or by gradually reducing the inclusion of gain by a certain percentage for each year of holding the asset. ### Simulation of tax reform impact (GIMF-based) - Reform design parameters: - Cut in the rate of social security contribution by about 5 percentage points offset with increased collections from consumption tax. - This tax rebalancing would reduce labor tax by about 1.2 percent of GDP in 2017. - To achieve ex-ante revenue neutrality: - Increased effective collections from the consumption tax by about 1 percent of GDP. - Other lump-sum tax increase by about 0.2 percent of GDP (e.g., reducing tax expenditures and broadening tax base). - Model: IMF’s Global Integrated Monetary and Fiscal model (GIMF) used to simulate general equilibrium effects; calibrated for Slovenia. - Revenue coverage assumption: 70 percent of the income tax decline is covered by consumption taxes; the rest is financed by lump-sum taxes approximating effects of inheritance or property taxes. - Fiscal stance: Deficit-to-GDP target kept unchanged; small deviations average out and debt-to-GDP remains roughly unchanged. ### Simulation results and macroeconomic effects - Permanent increase in Slovenia’s output level by 0.5 percent in the medium- to long-term from shifting tax burden from labor to consumption. - Mechanism: Lower labor taxation increases private consumption and aggregate labor, raising real output; depreciation of real effective exchange rate supports exports and discourages imports; long-run equilibrium with higher labor input, higher capital stock, and higher net foreign assets. - Short- and medium-term dynamics: - Consumption would decline marginally in a couple of years after the reform when consumption tax is increased, then rebound to a higher level in the medium term. - Temporary consumption decline would reduce tax collections and contribute to a marginally higher deficit, with government debt rising by less than 0.1 percentage point. - In the medium- to long-term, fiscal revenue would be higher and government debt lower by about 0.15 percentage point. - Timing and complementarities: - Positive effects are largest in the medium- and long-term and are reached gradually. - Timing should consider the position in an economic cycle and other public spending reforms. - The current economic recovery with a positive output gap is noted as a good opportunity to consider such a reform. - Amplification and mitigation: Positive impact can be amplified and short-term adverse impact minimized when combined with other growth-enhancing structural reforms (reforming state-owned enterprises; enhancing labor market flexibility and labor quality for younger and elder workers; improving product and service markets). ### SME taxation — key points and regime options - SMEs are diverse; small and micro enterprises constitute between 85–95 percent of business taxpayers but contribute mostly small tax revenue. - SME taxation should be treated as a special case and coherently include business income taxpayers below the VAT registration threshold. - Rationale for special SME treatment: preserve employment, increase horizontal and vertical equity, enhance economic efficiency, support tax morale, and improve government accountability and transparency. Regime options described: - Indicator-based patent tax regime: - Substitutes for income tax and social contributions for micro or sole traders. - Fixed fee across activities; simple; no bookkeeping required; regressive; encourages formalization but may hinder growth due to compliance burdens when migrating. - Presumptive taxation based on indicators: - Uses physical indicators or financial information as proxy income indicators. - Little bookkeeping; potential complexity and cross-sector incomparability; may create distortions versus general regime. - Turnover-based SME taxation: - Available to firms under the VAT registration threshold. - Flat tax of say 3-5 percent on gross receipts in lieu of income taxation. - Effective tax rate varies inversely with profit margins; requires simple bookkeeping (record sales). - Cash-flow based presumptive tax: - Single-entry bookkeeping; offsets gross receipts against total expenditures/costs with immediate expensing of capital expenditure. - Replaces income tax and achieves equal effective tax rates across sectors. Tax design and avoidance challenges: - Presumptive regimes encourage splitting of businesses to benefit from lower effective rates. - Lower SME regime burdens relative to wage tax can induce conversion of employees into independent contractors. - Low compliance standards in SME regimes complicate verification of tax facts and provide opportunities to remain in the shadow economy. ### VAT registration threshold and SME tax regime - Use a well-considered VAT registration threshold as the cutoff turnover threshold for the SME tax regime to ensure medium-sized businesses are subject to the general tax regime. - Clarify the thresholds between micro and small businesses when only turnover is the criterion for differentiation. - Firms requiring VAT registration (as turnover exceeds the VAT registration threshold) should attract the general income tax. - Reordering thresholds will facilitate migration into the general regime. ### Treatment of professional services - Exclude any professional service from the SME regime. - Exclusion allows for streamlined and synchronized VAT returns, CIT filing, and tax payment obligations. ### Tax administration: audits, filing support, and SME assistance - Provide special audit and tax filing support by the tax administration to SMEs to shore up trust and tax morale. - Conduct risk-based tax audits of presumptive taxpayers, addressing abuse by large taxpayers. - Implement SME assistance and advisory programs focused on improving SMEs bookkeeping standards to encourage compliance. *Prepared by Michal Andrle, Larry Qiang Cui, Martin Grote, and Jens Reinke. January 29, 2019.* ### 1. Sustained Higher Growth is Needed for Income Convergence ______________________ 2 ### 1. Sustained Higher Growth is Needed for Income Convergence ### Introduction — case for reform and growth - Slovenia recovered since the 2012–13 banking crisis with growth above the euro area average. - Income inequality: GINI index at 0.24 versus OECD average of 0.32. - Income level remains below the EU average; accelerating income convergence requires sustained strong growth. - Ageing is estimated to reduce productivity growth by about 0.5 percentage points during 2014–35. - Slovenia faces one of the highest increases in age-related public spending in the medium- to long-term, creating pressure for more efficient tax and social security systems. ### Key fiscal and revenue statistics - 2016 tax-to-GDP ratio: 36.6 percent (between OECD average of 34.3 and EU average of 38.9 percent). - Excluding social security contributions (SSC), Slovenia’s tax ratio: 22 percent of GDP. - SSC raise an additional 14.8 percent of GDP, making Slovenia the 6th heaviest SSC-burdened economy in the EU. - Consumption tax revenues in 2016: 14.3 percent of GDP. - SSC in 2016: 14.5 percent of GDP. - Taxes on income, profits, and capital gains (natural and legal persons) in 2016: 6.8 percent of GDP (OECD average: 11.3 percent of GDP). - Recurrent immovable property tax revenues: 0.6 percent of GDP (OECD average: 1.9 percent of GDP). - Slovenia is ranked 23 in property tax collections in EU-28. - Environmental taxes (excises): Slovenia is a top revenue performer among OECD member states. ### Impact of ageing and productivity - Rapid ageing reduces the size of the productive labor force and productivity growth. - Projections indicate substantial future age-related spending increases, underscoring the need for growth to preserve fiscal sustainability. ### Model-based finding - Model simulations show that shifting the tax burden from labor to consumption would increase Slovenia’s output level by 0.5 percent in the medium- to long-term. ### Source attribution *Prepared by Michal Andrle, Larry Qiang Cui, Martin Grote, and Jens Reinke. January 29, 2019.* ### 17. The applicability of reduced VAT rates should be narrowed. Despite its high headline ### 17. The applicability of reduced VAT rates should be narrowed. Despite its high headline ### VAT structure and performance - Total revenue forgone from Slovenia’s expansive list of 22 reduced VAT rate supplies is 1.85 percent of GDP (2017). - In 2016, indirect taxes raised revenues equal to 14.7 percent of GDP. - VAT contributed 8.2 percent of GDP. - Slovenia’s standard VAT rate is 22 percent. - Reduced VAT rate is 9.5 percent on the 22 listed goods and services. - Increasing the standard VAT rate above 22 percent is described as unrealistic because globally there are only 11 countries out of 160 VAT-raising jurisdictions with higher VAT rates. - Austria’s standard VAT rate is 20 percent, which makes cross-border shopping avoidance attractive. - Slovenia ranks about 10th place among EU-28 countries according to VAT gap studies by MoF. - An extensive application of the reduced VAT rate is noted as neither good social nor tax policy; multiple rates increase risk of non-compliance and tax evasion and may require a higher standard rate. ### Policy recommendation on VAT - Narrow down the range of 22 reduced-rate (9.5 percent) goods and services to create revenue gains instead of raising the standard VAT rate. ### Property tax - Current property taxes are raised on reinstated pre-2014 legislation after attempts to introduce a market value-based real estate tax were held unconstitutional in 2014. - Revenues from property tax show no buoyancy, raising no more than 0.5 percent of GDP. - Revenues from the transfer tax on immovable property transactions add another 0.2 percent of GDP. - Consideration: A value-based property tax would raise revenue potential, buoyancy and transparency. - Noted issues: considerable differences in tax burden between municipalities and within municipalities for different groups of real estate; regime is neither transparent nor equitable. - Progress: improvements in land registration systems and valuation methodologies will support introduction of a new property tax. ### Capital gains tax - Capital gains attract a flat withholding tax at 25 percent on all income from capital. - Taper relief provisions reduce the 25 percent rate for every completed five-year period of ownership, to 0 percent after 20 years. - Primary residences are CGT exempt. - Assessment: Taper relief undermines the fairness principle of taxation and is very beneficial to high-income households. - Best practice suggestions: - Treat short-term capital gains realized within one year of acquisition as ordinary revenue taxed at the applicable marginal PIT rate or tax them at the flat proportional rate of the DIT. - Accommodate inflationary gain element by indexing asset value for inflation, or by gradually reducing the inclusion of gain by a certain percentage for each year of holding the asset. ### Simulation of tax reform impact (GIMF-based) - Reform design parameters: - Cut in the rate of social security contribution by about 5 percentage points offset with increased collections from consumption tax. - This tax rebalancing would reduce labor tax by about 1.2 percent of GDP in 2017. - To achieve ex-ante revenue neutrality: - Increased effective collections from the consumption tax by about 1 percent of GDP. - Other lump-sum tax increase by about 0.2 percent of GDP (e.g., reducing tax expenditures and broadening tax base). - Model: IMF’s Global Integrated Monetary and Fiscal model (GIMF) used to simulate general equilibrium effects; calibrated for Slovenia. - Revenue coverage assumption: 70 percent of the income tax decline is covered by consumption taxes; the rest is financed by lump-sum taxes approximating effects of inheritance or property taxes. - Fiscal stance: Deficit-to-GDP target kept unchanged; small deviations average out and debt-to-GDP remains roughly unchanged. ### Simulation results and macroeconomic effects - Permanent increase in Slovenia’s output level by 0.5 percent in the medium- to long-term from shifting tax burden from labor to consumption. - Mechanism: Lower labor taxation increases private consumption and aggregate labor, raising real output; depreciation of real effective exchange rate supports exports and discourages imports; long-run equilibrium with higher labor input, higher capital stock, and higher net foreign assets. - Short- and medium-term dynamics: - Consumption would decline marginally in a couple of years after the reform when consumption tax is increased, then rebound to a higher level in the medium term. - Temporary consumption decline would reduce tax collections and contribute to a marginally higher deficit, with government debt rising by less than 0.1 percentage point. - In the medium- to long-term, fiscal revenue would be higher and government debt lower by about 0.15 percentage point. - Timing and complementarities: - Positive effects are largest in the medium- and long-term and are reached gradually. - Timing should consider the position in an economic cycle and other public spending reforms. - The current economic recovery with a positive output gap is noted as a good opportunity to consider such a reform. - Amplification and mitigation: Positive impact can be amplified and short-term adverse impact minimized when combined with other growth-enhancing structural reforms (reforming state-owned enterprises; enhancing labor market flexibility and labor quality for younger and elder workers; improving product and service markets). ### SME taxation (Annex II) — key points and regime options - SMEs are diverse; small and micro enterprises constitute between 85–95 percent of business taxpayers but contribute mostly small tax revenue. - SME taxation should be treated as a special case and coherently include business income taxpayers below the VAT registration threshold. - Rationale for special SME treatment: preserve employment, increase horizontal and vertical equity, enhance economic efficiency, support tax morale, and improve government accountability and transparency. Regime options described: - Indicator-based patent tax regime: - Substitutes for income tax and social contributions for micro or sole traders. - Fixed fee across activities; simple; no bookkeeping required; regressive; encourages formalization but may hinder growth due to compliance burdens when migrating. - Presumptive taxation based on indicators: - Uses physical indicators or financial information as proxy income indicators. - Little bookkeeping; potential complexity and cross-sector incomparability; may create distortions versus general regime. - Turnover-based SME taxation: - Available to firms under the VAT registration threshold. - Flat tax of say 3-5 percent on gross receipts in lieu of income taxation. - Effective tax rate varies inversely with profit margins; requires simple bookkeeping (record sales). - Cash-flow based presumptive tax: - Single-entry bookkeeping; offsets gross receipts against total expenditures/costs with immediate expensing of capital expenditure. - Replaces income tax and achieves equal effective tax rates across sectors. Tax design and avoidance challenges: - Presumptive regimes encourage splitting of businesses to benefit from lower effective rates. - Lower SME regime burdens relative to wage tax can induce conversion of employees into independent contractors. - Low compliance standards in SME regimes complicate verification of tax facts and provide opportunities to remain in the shadow economy. *Source: Republic of Slovenia — International Monetary Fund (extracted content).* ### 8. Tax policy advice for correcting slippage and leakage from the general tax system— ### 8. Tax policy advice for correcting slippage and leakage from the general tax system— ### VAT registration threshold and SME tax regime - Use a well-considered VAT registration threshold as the cutoff turnover threshold for the SME tax regime to ensure medium-sized businesses are subject to the general tax regime. - Clarify the thresholds between micro and small businesses when only turnover is the criterion for differentiation. - Firms requiring VAT registration (as turnover exceeds the VAT registration threshold) should attract the general income tax. - Reordering thresholds will facilitate migration into the general regime. ### Treatment of professional services - Exclude any professional service from the SME regime. - Exclusion allows for streamlined and synchronized VAT returns, CIT filing, and tax payment obligations. ### Tax administration: audits, filing support, and SME assistance - Provide special audit and tax filing support by the tax administration to SMEs to shore up trust and tax morale. - Conduct risk-based tax audits of presumptive taxpayers, addressing abuse by large taxpayers. - Implement SME assistance and advisory programs focused on improving SMEs bookkeeping standards to encourage compliance. *Republic of Slovenia — International Monetary Fund* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1svnea2019002.pdf_