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17. 4. 2020

The system of consumption taxation showcases a country’s public finance system. It does not only show how much functional compromise is found in the country between “free-to-choose” economic freedom of the individual, and seeking resources to eliminate negative externalities resulting from the consumption of taxable substances. Taxing consumption also allows lowering the taxation of labor and capital.

The tax wedge in the Czech Republic in 2018 was 43.7. A tax wedge measures the difference between the cost of labor and the take-home pay of the worker, expressed as a percentage of the cost of labor. Put in simpler terms, it is the difference between wages before and after taxes. The formula for calculating a tax wedge is ((PIT + social security contributions of the employee and employer)- family benefits) ÷ total labor cost). A tax wedge of 43.7 means that the average single Czech worker takes home just 56.3% of what their employer paid.

As the tax wedge increases, workers tend to have less incentive to seek legitimate, taxpaying work as they receive a decrease in the take-home pay. If PIT were to increase in the Czech Republic, in this case (as a result of the elimination of excise taxes) we can expect to see the tax wedge grow larger, which could lead to an increase in people seeking illegitimate (non-tax paying) work.

Taxation on Consumption in the Czech Republic: Alcohol, Beer, and Wine – Šárka Prát, April 2020

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