Income Tax Progressivity in Croatia (1995-2002)

The aim of this paper is first to determine how progressive the income tax is in Croatia and second, to examine if progressivity has changed during the period from 1995 to 2002. The reason for addressing this question is that conventional wisdom in Croatia is that the overall tax burden is unfairly distributed, i.e. that the system is not progressive enough. Due to data constraints, the progressivity of the overall tax system cannot be assessed, so the paper investigates only the progressivity of the income tax. The effective average tax rate and the tax elasticity were used to measure the progressivity of income tax. The results show that in the period from 1995 to 2002 in Croatia the average income tax burden has fallen from 11.9 percent to 7.7 percent. Contrary to common beliefs, progressivity measured by overall tax elasticity shows that the income tax system is very progressive throughout the whole period. The average arc elasticity of income tax for all taxpayers amounts to 1.98 in the observed period, and reaches 2.08 in 2002. The introduction of social security contributions (like pension and health fund contributions) into the analysis increased the tax burden, but reduced the progressivity of the system, since contributions fall almost proportionally on all income levels with a single rate. Optimal tax progressivity cannot be simply defined. Every society should determine the politically acceptable size of tax progressivity keeping in mind that more progressivity means less efficiency.