The OECD’s Tax Policy Review for Slovenia was issued on 3 September 2018. The OECD review considers that Slovenia must rebalance the tax mix away from employee social security contributions and towards personal income tax, value added tax (VAT) and recurrent taxes on immovable property. The reform should be budget neutral and should encourage younger people to enter the labour market as well as encouraging older workers to continue in the labour market for a longer time.

The personal income tax raises only 14% of total tax revenue in Slovenia while the OECD average is around 25%. Social security contributions currently raise around 40% of the tax revenue in Slovenia compared to an OECD average of 26%. If Slovenia can broaden the tax base for the personal income tax it can rebalance the tax mix away from social security contributions. In the absence of reforms the combination of high social security contribution rates and progressive income tax rates places a high burden on income from labour and reduces incentives for employers to hire workers or for individuals to participate in the labour market.

Slovenia could also take advantage of the increased opportunities for information exchange with other countries to shift the tax mix more towards taxing income from capital by reviewing the way capital income is currently taxed.

An additional opportunity to fund a cut in social security contribution rates is provided by the possibility of raising more tax revenue through VAT or through recurrent tax on immovable property. By broadening the VAT base more revenue can be generated from the VAT and local authorities can strengthen the role of recurrent tax on immovable property in their financing mix.

The OECD review considers that by restructuring the tax mix the social security contribution rate could be reduced by around five percentage points. This could encourage greater participation n the workforce by low income groups and by older workers.

The OECD also considers that the current top rate of personal income tax is too high at 50% especially when considered in combination with the high employee social security contributions. The combination of the top rate of personal income tax and the high rate of social security contributions gives a combined rate of 61% which is the highest rate in the OECD. However as relatively few individuals pay the top rate of income tax the abolition of the top rate would only have a small negative impact on revenue from personal income tax.

To compensate for abolition of the top income tax rate the tax rates in the lower brackets could be increased. There is also scope to broaden the tax base for the personal income tax which is currently narrow as a result of exemptions and special tax provisions. Tax allowances are given which allow a larger tax reduction to higher incomes (as tax is saved at higher rates). The OECD prefers the use of tax credits which provide the same benefit to all taxpayers whatever their income levels.

Slovenia’s flat tax regime for self-employed entrepreneurs should be redesigned to ensure that there is no incentive for entrepreneurs to conceal their income. Also the current design discourages businesses from growing. In calculating taxable profits the flat tax regime uses presumptive costs that can be significantly higher than actual costs incurred by businesses and this reduces the base for the personal income tax and social security contributions. The OECD therefore considers that the regime should be reformed or abolished.