Are tax allowances of individuals only a tool of tax optimization?

This paper focuses on the tax allowances of individuals, which are one of the fiscal tools by which the government achieves the allocation of private funds to the areas preferred by the state. In the Czech Republic they are primarily aimed at housing policy, pension policy, and philanthropy. The question is the extent to which tax allowances can influence the preferences of taxpayers. In the context of individual tax burden, they often come to the forefront in pre-election periods and are a relevant topic in politics.  

As a result of cancelling the personal pay-as-you-earn progressive tax and introducing a uniform tax rate of 15% in 2008, the effect of tax allowances was considerably reduced. After this year, there was a decline in the number of taxpayers claiming tax allowances in their tax returns. Tax support in the form of tax allowances is becoming ineffective, while lowering the tax rate primarily for taxpayers with lower incomes. On the other hand, there is an increase in the total sum of claimed tax deductions, and thus a rise in lost revenues for the state budget.  This particularly involves taxpayers with higher incomes who can achieve a significantly lower final tax —tax allowances from the tax base are an important tool for their tax optimization. The construction of individual income tax gets into conflict with tax fairness, administrative simplicity and fiscal efficiency. The aim of this paper is to evaluate the effect of individual tax allowances in the form of non-taxable parts of the tax base for different income groups, graded according to the tax base.  We will further assess whether these tax allowances fulfill the fiscal functions for which they were introduced and the extent to which taxpayers use them. 

Methodically, the research is based on the analysis of secondary statistical data from the Financial Administration of the Czech Republic and results from aggregated tax returns filed for the period 2000 – 2014. The data is statistically analyzed and compared with the primary research ‘The effect of tax allowances on the taxpayers in the Czech Republic’, which was conducted through using a questionnaire under the Student Grant Competition of the Silesian University in Opava in 2016.