Name and Shame: Croatia finding its way out of tax evasion anarchy

Croatian finance minister Slavko Linic

The concepts of “paying taxes” and “mandatory employer contributions to pension/superannuation funds” that form a large part of good corporate and general citizenship in western democracies have eluded the Croatian income earners on a grand scale, it seems.

While the majority of corporate or individual citizens in the West complain about the taxes, they pay them nevertheless. Those who dodge or try to dodge paying taxes, or part of them, mainly get caught in the end. Tax evasion though still remains a big problem for western governments, but not as big as the Croatian one appears.

Dictionaries usually define tax avoidance as the arrangement of one’s financial affairs so that one only pays the minimum amount of tax required by law. Paying minimum tax therefore would still be within the law and this has been rattling western governments for quite some years. Indeed, the 2011 OECD Tax and Crime conference would suggest that governments are serious about attacking tax evasion in many respects, including whole-government international cooperation, which could also mean targeting the lack of transparency of offshore bank accounts that have provided tax-havens for many at the expense of lost revenues for governments.

In most western democracies, people have come to understand that one’s actions can either be within the law, or outside of it – legal or illegal. This is how civilised societies have functioned for centuries. It would seem that in their efforts to secure tax revenue to a fuller degree, western governments are entering the realms of creating new legal concepts when it comes to tax evasion: acceptable legality and unacceptable legality.

Recently, February 2012, the Croatian government (finance minister Slavko Linic) has identified some 42 billion Croatian Kunas owed to the government in unpaid taxes.

That is a whopping 35% of the country’s government’s annual budget for 2012!

Obviously there’s something very wrong with citizen behavior when it comes to paying taxes and other dues to the government in Croatia. Croatia has all required legislation covering taxation obligations and amendments are passed as required.

One would not be far from wrong in concluding that the concepts of legal and illegal when it comes to paying taxes haven’t featured strongly as obligatory conformity in citizen’s psyche of Croatia, and most likely in all former communist countries. The nurturing of obedient citizenship mainly revolved around building the myth of communist/socialist righteousness, which included the expectation that the government, or someone else “but not me”, will provide for a good life.

Croatia’s finance minister Linic has recently stated: “We live in a country where there is no conscience that taxes must be paid, and am, therefore, not surprised that we have 42 billion Kunas of unpaid tax dues”.

While those who owe tax to the government will be given favourable conditions to pay their dues in accordance with the law, and as part of the government’s support of business, those companies that cannot pay their dues even when the interest on tax debt is written off, will have their operations blocked and bankruptcies or insolvencies will ensue.

Linic said that that among tax debtors there are 131,000 legal entities, 261, 000 self-employed and 1.3 million individuals.

Now given that the number of employed people in Croatia has dropped below 1.4 million in late 2011 it would seem that among individual tax debtors are a great number of unemployed or retirees. The latter being the sector that in one way, or another, relies on government handouts and assistance.

Among the unemployed and the retirees are many who have lost their jobs due to companies going bankrupt in the past decade or so, to make matters worse many had discovered upon losing their job that their employers had not been paying taxes and, therefore, the pension funds were depleted alarmingly. A recipe for poverty.

The increase in reliance on government assistance is the problem in Croatia as with all countries where unemployment tides are running higher and higher.

Ludwig von Mises, Austrian economist and philosopher who, fearing Nazi takeover, fled to New York in 1940, wrote in “Bureaucracy” (1944, 1962) that a system in which a majority of the population is dependent on the government dole leads to an unstable political and economic situation, since a majority of the population then has a vested interest in increasing the power of government to redistribute wealth. Indeed the truth in his words is visible across Europe and beyond.

In Croatia, finance minister has announced that the ministry of finance will publish the names of those who do not pay taxes on the ministry’s internet portal.

There’s talk of changing the law so that certain privacy aspects do not apply to those who do not pay their taxation dues.

Such a “name and shame” move would not be much different from the one where OECD countries are considering the lifting of privacy on offshore bank accounts used to evade taxes.

However, public humiliation, while a draconian method, may only work where taxation ethics and morality of the public are developed and operate at significant levels across the society. Whether that is the case in Croatia, a former communist country riddled with corruption on large and small scales, is a question that stares one in the face. But something needs to be done; governments need to secure revenue to sustain life and Croatia, in particular, needs to rid itself of the widespread carelessness, or lack of vigour, in pursuing those who dodge their tax dues. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)