Transaction tax may be the last ingredient that will poison the Slovak economy

Transaction tax, from which the government wants to raise 574 million euros in 2025 against the total state budget revenues of 27.6 billion euros, may seem like a negligible item and a drop in the ocean. In reality, however, it may be the last straw, when the cup of patience of entrepreneurs will finally run over and the Slovak economy will suffer fundamental damage.

Poisoned mushrooms in the economic cauldron

The Slovak economy can be compared to a long-cooked goulash in a big cauldron. To the quality ingredients of 20 years ago - the reforms of the Dzurinda government led by the flat tax - successive governments have gradually added various inedible mushrooms in ever greater quantities. The transaction tax may be the last ingredient that will poison the whole economy for a long time. It is not idle scaremongering, but a real threat. The Slovak economy today really needs little to create a problem of major proportions and fundamental damage, which would have unprecedented consequences. And these will be very difficult and time-consuming to remedy.

Falling dramatically behind the region

Let's look at the facts. Slovakia's economic growth slowed to 0.9 per cent in the first quarter, the slowest pace in two years. While Poland is growing at 3.7 per cent and the Czech Republic at 2.2 per cent, we are lagging behind even the EU (1.6 per cent) and eurozone (1.5 per cent) averages. We are no longer catching up with the EU, but the Union is running away from us.

Yet in a single decade (2000-2010) we have gone from 48% to 73% in the standard of living measured in GDP per capita in purchasing power parity. If this development had continued, we would now be above 100%, i.e. we would be one of the richer countries in the Union. And the reality? Successive governments have started to pour more and more sand into the Slovak economy and progress has stalled. We are stagnating at around 75 per cent of the EU average. This is the third lowest in the region after Bulgaria and Latvia. In that time, we have been overtaken by Poland, Romania, Estonia, Lithuania, Croatia and Hungary. If we use current prices, we would rank last, 11th in the whole region, in the "pace" of catching up.

Business conditions have deteriorated intolerably

In Slovakia, we have long been moving towards a shrinking grey economy and increasing tax collection. Now, however, we are turning around and destroying what used to work. Various lobbyists are pushing for exemptions, which are acting as new holes in the hull of the ship called Slovakia. One day it is a lower income tax for companies with a turnover of up to EUR 100 000, then a reduced 5% tax for social enterprises, which some companies immediately start to abuse for the cheaper sale of commercial services, and another day it is an exemption from transaction tax, but only for certain organisations. Where there was originally one tax rate, there are now many. And with them come more opportunities for tax evasion.  And all this without the state technologically taking the identification of possible tax evasion to a new level and systematising controls.

We have the highest tax for companies in the region, the second highest tax-tax burden on labour in the Union, high surcharges for weekend and night work, and a lot of expenses that the state forces companies into (recreation and sports vouchers). This is a cocktail that makes companies sick to their stomachs. We can see this in the figures for new investment, which have fallen to zero in the last two years, and in the reluctance of companies doing business here to invest. Then there is the nonsensical transaction tax, which may be the last straw that finally overflows the cup of patience.

Companies are logically asking: does it make sense to do business here at all? And some of them are clearly answering by moving part of their activities outside Slovakia.

Many citizens may, of course, say that as long as they are not personally affected by these measures and only business people are affected, that is fine. It is just important to remember the basic equation here, namely that companies will employ and increase wages if they have good business conditions. Otherwise, the path of redundancies and pay cuts is being taken, so that businesses can cope with both the period of consolidation of public finances and the possible downturn in the economy, which may affect demand for their products.

Up to a fifth of the economy in the grey zone

The transaction tax is so badly set up that it explicitly encourages the disallowance of additional taxes because of the shift to cash transactions. It is not just that the state will not collect enough on this tax, but simultaneously its income tax and VAT collections will fall. The classic "what I don't control, I can't manage" applies here. We are talking, in particular, about the grey economy, which was estimated at just over 14% in 2023, then grew and may well reach 20% this year. A fifth of the entire economy will be in the grey zone, from which the state will not collect a penny in tax.

Yet there are solutions. It is a combination of higher taxes on consumption and property, the abolition of various tax exemptions and multiple tax rates, and an overall reduction in the tax-tax burden on labour. All this in parallel with a boost to corporate spending on research and development. Here, Slovakia is now at the very tail of the EU, with only Lithuania, Latvia and Malta behind us. Without companies innovating here, we may forever remain an assembly plant with the lowest wages in the region.

These measures must go hand in hand with other necessary reforms in the social and health sectors, as well as in other areas administered by the state. If the state provides good public services and distributes public funds for the development of Slovakia, the discipline of everyone to pay taxes will improve, because we will know what we are getting for them.

Legislative risks

The icing on the cake of the currently approved amendment to the transaction tax are the warnings of judges and lawyers that with legislation whose intention is not clear and obvious, there is a logical risk of litigation and the risk of further financial losses for the state. Today, however, it is not enough to fix or abolish the tax; the government must change much more in the conditions for doing business. Otherwise, we run the risk that this poisoned stew will give us all stomach aches for a very long time.