1 March 2025 - The reform fails to shift part of the tax burden from direct to indirect taxation
At a time when undeclared income from the black economy reaches up to 24% of GDP, the announced tax reform, which aspired to bridge the gap between the high and low income strata of society and crack down on tax evasion, seems to be struggling to meet its primary goals.
At Volt, we consider tax policy to be an extremely important tool for creating a competitive economy and strengthening social justice on the basis of each taxpayer participating in tax revenues according to their capabilities. Of course, we will await a more detailed study of the entire reform, however, we present some initial conclusions and thoughts.
First of all, regarding corporate taxation, we welcome the measures that equalize the tax treatment of companies, foreign and domestic. The overall package announced moves in this direction, while the abolition of deemed distribution helps to encourage the reinvestment of profits.
Regarding the taxation of individuals, according to what has been announced, the reform fails to shift part of the tax burden from direct to indirect taxation. The goal of supporting the middle class is achieved to some extent, despite the fact that the last scale for over 80,000 euros is worrying. At the same time, the use of the average income (28,356 per year) leaves half the population, who are paid less than approximately 23,000 per year, without any tax benefit.
All these fellow citizens are not even taxed, and have drowned in unfair indirect taxes. In Cyprus, indirect taxation reaches 14.2% of GDP, while direct taxation only 10.1%. Legal entities are burdened proportionally less than individuals, which makes it extremely unequal. At the same time, the ongoing deduction provided for incomes over 55 thousand euros for 17 (!) years, creates two-tiers of citizens and requires rationalisation of incentives.
More than half of the population will actually be in a worse position, if we take into account the increases in indirect taxes, the higher cost of living, the distorted prices of electricity and the unfavorable cost of housing and rents.
The Consumer Price Index has increased by 47% between 2002 and 2024, excluding the cost of electricity and housing, which resembles the worst form of taxation.
At Volt, we are studying the data in depth and will come back with a comprehensive proposal on tax reform.
The proposed tax reform, which increases revenues through indirect taxation and reduces direct taxation for individuals and businesses, worsens inequalities and may increase poverty, while not correcting distortions created by, for example, the absence of a progressive property tax, at least on idle properties. Raising consumption taxes is often an easy public policy choice, but it hurts people with low and middle incomes. For this, we need a better balance.