Slovakia scraps 19% flat tax, hikes rate for the rich

Slovakia on Tuesday scrapped its trademark 19 percent flat tax, replacing it with higher taxes on the rich, politicians and corporations as of 2013 amid trying economic times in Europe. Controlled by Prime Minister Robert Fico's left-of-centre political allies, parliament raised income tax for corporations to 23 percent and hiked income tax for individuals earning more than 3,300 euros ($4,300) a month to 25 percent. The 19 percent tax rate will still apply to incomes under this level, however. All senior politicians including the president, ministers and members of parliament will also pay an extra five percent tax on their salaries as part of Fico's package of measures aimed at boosting revenue and slashing the deficit. Introduced in 2004, Slovakia's 19-percent flat tax is widely regarded as having fuelled the economic success of the ex-communist state by attracting foreign investment, primarily in the auto and electronics sectors. Although the country is tipped by the European Commission to have the fastest-growing economy in the 17-nation eurozone this year, with an estimated expansion of 2.6 percent, the forecast falls short of the 3.3 percent rate posted last year, and the 2010 level of 4.2 percent. Slovakia's export-driven economy is host to several global electronics plants and car factories. Slovakia has modern auto plants run by Germany's Volkswagen, South Korea's Kia and France's PSA Peugeot Citroen and its economy is heavily dependent on exports to the rest of Europe, notably to Germany. In power since April, Fico is struggling to cut this year's estimated public deficit of 4.6 of gross domestic product (GDP) to below the eurozone's three percent ceiling by 2013. In addition to raising taxes, Fico has drawn up an austerity package that includes a higher levy on banks and changes to the pension system. Finance Minister Peter Kazimir has vowed deeper spending cuts in 2013 to offset an unexpected 250-million euro gap caused by falling tax revenue and a slowing economy as the government faced its largest-ever labour action, with teachers demanding a 10 percent pay hike. Slovakia joined the European Union in 2004 and adopted the euro in 2009 during Fico's first term as prime minister.