WHERE THE MONEY GOES: Why citizens do not feel the record growth in collected taxes?

Written by: Faruk Hadžić/FB

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Last year, according to the Indirect Taxation Authority of BiH data, 990 million KM more in net indirect taxes were collected. Indirect taxes are consumption taxes, most notably VAT and excise duties. At the level of the Federation of BiH, according to the Tax Administration of FBiH data, 485.7 million KM more was collected last year than in 2020. 

The key question is where this money ends up and why citizens do not feel the record growth in collected taxes.

I have stated several times in my comments that the problem in Bosnia and Herzegovina has never been money, but rather the priorities of distribution. Fiscal or tax policy, as an instrument of economic policy, has two functions: the function of collecting our money through taxes and the function of distributing what is collected. The problem lies in this second function and the priorities of how this money is distributed. 

This year 2022, precisely because of record tax collections, may be an opportunity to reduce the tax burden on the economy and workers, an opportunity we are unlikely to have again in the coming period, as the significant increase in consumption tax revenues came due to inflation. Given that the FBiH has received hundreds of millions of KM more through revenues, most of this money should be returned to the economy and, for at least a few years, public sector wage growth should be frozen. If even half of the revenue from VAT growth were directed towards reducing taxes and contributions, the economy and workers would receive a strong boost, and the FBiH would suffer no losses, as it would only be returning to the economy half of what it collected through additional growth. Workers would have higher wages, employers lower taxes, and emigration would be partially slowed down. However…

We will certainly not see this scenario for one very simple reason. As a state, we have not set annual economic goals. If we had clearly set goals, then we would use the instruments of fiscal policy and income policy to implement proposals and ideas like this one. As it is, we have an economy that is on autopilot and will move forward on its own, but at an insufficient speed and along an unknown path. 

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Faruk Hadžić is a lecturer at the University of SSST and a macroeconomic analyst