Reduce Direct Taxes

11. November 2011. / Uncategorized


Firstly, there needs to be a shift in the collective bargaining process. For now,  it has been driven by the public sector trade unions, which are much more powerful  than their private  sector  counterparts.  The  resulting wage leadership by the public sector – with high and often unjustified wage increases – has hurt Serbia’s export competitiveness and private sector growth.

Secondly,  there  should be an effort  to  reduce excessive  legislative  rigidities  in  the Serbian  labour market. This  in particular concerns  the calculation of severance benefits, which are based on the entire working history of an individual, rather than on their record with  the  last employer. Serbia  is very atypical  in  this  respect  compared  to  its  regional peers,  and  this  is  a  reason why older  people  have  scarce  opportunities  in  the  labour market. Another  important  rigidity  is  the  length of  fixed-term  contracts, which, at 1 year, is lower in Serbia than in much of Eastern Europe. Furthermore, there have been attempts to unduly broaden collective bargaining agreements to firms that were not party to the negotiations. An important rigidity are various mandatory allowances and rules (relating to holidays, business trips, meals etc.), which could be usefully streamlined.

Thirdly, taxation of labour, especially via social contributions, should be analyzed with a view to increasing incentives for employment. This could take  the  form of a  revenue-neutral  reform envisioning a  reduction  in direct  taxes.  In Serbia,  the high social contributions have particularly  reduced  scope  for hiring  low-income workers, especially the young, who badly need experience to begin their careers. Young workers are potentially the most dynamic – and hence productive  – elements of any economy, and a  failure  to  involve them in the labour market severely dampens growth potential.



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