Economists Critique Government’s Tax Plan as Underwhelming

Economists have poured cold water on the government’s proposed tax plan, labelling it underwhelming in light of the grand promises made. Despite the government’s assertions that these changes would create a fairer tax system, analysts suggest that the reality for low-income earners is starkly different.

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Tax plan: Government Claims of Reform

The Cypriot government has touted the upcoming tax overhaul as a ‘flagship project’ aimed at strengthening the middle class and supporting low-income households. Finance Minister Makis Keravnos describes the reform as having a significant social aspect, claiming it will provide relief for families, students, and large households. He emphasised that 55 per cent of employees would see no income tax.

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Legislative Timeline and Structure

It has been 22 years since the last major revision of the tax regime. The current reform consists of six bills that the government hopes to pass swiftly, aiming for implementation by January 1, 2026. With the state budget bill also requiring attention, Parliament faces a tight deadline to deliberate on these proposed changes.

Main Features of the Proposed Tax Reform

The proposed changes include several key adjustments:

• The tax-free threshold will increase from €19,500 to €20,500.
• Families will be eligible for tax credits: €1,000 per child (or €2,000 for single-parent households), €1,000 for full-time students, a €1,500 deduction for interest on loans or rent for primary residences, and €1,000 for energy upgrades or electric-vehicle purchases.
• To qualify for these benefits, families must have an annual income below €80,000, large families below €100,000, and single individuals below €40,000.
• Tax deductions will extend to insurance premiums for disability and home insurance against natural disasters, allowing deductions of up to €500 per year.
• The tax-exempt ceiling for retirement payments will rise significantly from €20,000 to €200,000.
• All individuals aged 25 and over residing in Cyprus will need to file an income tax return, regardless of their income status.
• The corporate tax rate will increase from 12.5 per cent to 15 per cent.

Concerns from Economists

Despite the government’s optimistic portrayal, economists are not convinced of the plan’s efficacy. Marios Christou, an economist from the University of Nicosia, argues that the proposals do not constitute a comprehensive tax reform. He points out that while income tax changes are notable, there is a lack of significant alteration to VAT and that low-income earners will see little benefit from the reforms.

Christou further critiques the focus on individual rather than family income, noting that someone earning €90,000 with an unemployed spouse would not gain any tax relief from the proposed changes.

Criticism of Tax Threshold Adjustments

Many experts, including Savvakis Savvides, express disappointment with the minor increase in the tax-free threshold, viewing the €1,000 rise as insufficient when adjusted for inflation over the past two decades. Savvides believes the threshold should realistically be set above €25,000 to account for economic changes.

Social Policy vs. Tax Reform

Critics like Savvides argue that the government’s attempt to intertwine social policy with tax reform is misguided. A straightforward tax regime should not be an instrument for social policy but should instead be clear and universally applicable. He describes the proposed changes as a “complex labyrinth” that introduces unnecessary complications under the guise of social justice.

Concerns About Political Accountability

Additionally, Savvides suggests that President Nikos Christodoulides may be using these amendments to deflect criticism regarding his failure to deliver on campaign promises, such as raising the tax threshold to €24,000. This raises questions about the administration’s commitment to genuine reform.

Economic Implications

As the government moves forward with its tax plans, economists caution that the proposed changes may not yield the intended economic benefits. The focus on middle-class relief, while neglecting the low-income demographic, could lead to greater economic disparities.

Ultimately, while the government presents the tax reform as a significant step toward a fairer system, the lack of comprehensive changes and the criticisms from leading economists suggest a more cautious interpretation of its impact.