INCOME VS. CONSUMPTION-BASED CONCEPT OF DIRECT TAXATION: ETERNAL DEBATE IN CROATIA

Croatia marked more than 20 years from the big tax reform in 1994, which set up foundations of market economy tax system. At the time, Croatia was the only country consistently implementing consumption-based taxation i.e. interest-adjusted personal and corporate income tax. Such tax system triggered the numerous debates among Croatian (and international) tax experts. Special contribution to such tax system and debates was implementation of the Allowance for Corporate Equity, i.e. “protective interest” (term used in Croatia). Main motive and goal of this paper is to explore current tax experts’ attitudes toward integral model of consumption-based direct taxation that was in force in Croatia between 1994-2000, and does those attitudes reflect current layout of the Croatian tax system. In the paper, we present the results of a broad expert opinion survey about the Croatian tax system with special emphasis on elements contributing to consumption- versus income-based concept debate. The paper explores determinants of experts’ policy related to personal values regarding redistribution issues and beliefs on how the tax policy affects the economy. The research focuses on several questions/statements i.e. dichotomous dependent variables for which (non)- taxation presents the main precondition for the existence of consumption or income-based system of direct taxation. Such statements refer to introduction or abolishment of taxation of dividends, financial capital gains and interests and introduction or abolishment of protective interest. From their perspective, robust econometric models are constructed with relevant socio-economic and demographic independent variables. The results imply that there are no consistent and significant expert attitudes toward different concepts of taxation. Accordingly, the results are in line with the existence of the current hybrid system i.e. system with elements of income- and consumption-based system of direct taxation. Regression results indicate that consumption-based elements of direct taxation are influenced by attitudes towards equity, neutrality, and efficiency as well as, to a lesser extent, by some demographic variables (employment sector and education).