Tax policy reform for sustainable economic growth in Serbia

Abstract

In the last two decades, the Serbian economy posted an average growth rate of 3.8 percent, which was above the average growth rate in the EU, Central and Eastern Europe (CEE) 1 and the Western Balkans 2 . Together with sharp decline in population, this has led to some economic convergence in terms of the GDP per capita, although the gap to the EU and CEE countries remains significant (57 and 42 percent respectively). To achieve full economic convergence with the European countries, Serbian economy needs to post long run growth rates of 4-6 percent per year, in a sustainable manner, which primarily refers to a more fair distribution of growth dividend (reduction of economic inequality) and limiting negative environmental footprint. In this sense, the reform of tax policy can make a contribution to the sustainable growth of the Serbian economy, through: i) a slight reduction in the overall tax burden, primarily through a significant cut in labour taxes, which may be financed by means of broadening the environmental taxes base, increase in consumption taxes and reducing unproductive public expenditures, ii) moderately increasing the progressivity of the personal income tax, recurring property tax and inheritance tax, and iii) broadening the environmental taxes base (with the focus on energy and pollution taxes) and introducing the tax incentives for households to switch to green energy sources.