Tax cuts versus high-tech concept

According to a government proposal, the corporate tax rate will decrease to 19 percent from 24 percent over the next three years. Traditionally, low taxes are something that most politicians are willing to spend their political capital on. We’re, however, convinced that politicians should focus on creating a tax environment that facilitates a company’s operations. It should be a strategy that establishes a tax system focusing on company investment, cooperation between schools and businesses, and the creation of conditions for top experts to do their work. Let’s call such an approach a high-tech concept. It should comprise elements that increase motivation to modernize a company’s operations.

Not so long ago, U. S.-based software company Red Hat, which specializes in open-source programs, announced its intention to build a technology center in Brno, South Moravia. It will attract talented individuals and will produce dozens of excellent programmers. The center will be built near the Faculty of Informatics at Brno’s Masaryk University (MU). It will be a textbook case of a school-business joint venture where everyone benefits and is one of many examples where the existence of a university with excellent students has a far greater influence on a company than the country’s level of taxation.

Less optimistic, however, are the newest statistics from Eurostat, the European Union’s statistical arm. According to them, only 53 percent of overall investment into research and development (R&D) was financed by companies in the Czech Republic; the remainder was drawn directly from our taxes. This figure is 67 percent financed by the business sector in Germany, 69 percent in Finland and 75 percent in Japan. For this reason, we’re calling for a high-tech concept like the one that was started in Japan after World War II; a similar plan created a modern country from the formerly agrarian Ireland in the 1990s, and another one made Finland the most competitive economy in the world.
A more complex approach One of the best studies on this topic was carried out by Nick Bloom of Stanford University in California. Bloom tested the effect of tax motivation on investment into R&D in nine of the most developed countries during 19 years. Over the short-term, a 10 percent reduction of costs through tax relief increases investment by 1 percent; over the longterm, however, such stimulus leads to an increase of investment into R&D by 10 percent, he said.

 There should be more such stimuli. Fiscal policy then takes on a new dimension. In addition to R&D, it’s also important for us to motivate schools and companies to work together. Here as well, the possibility exists of administratively undemanding tax support. It’s just as necessary to introduce, for example, ceilings on social security and health insurance contributions, something that exists in all developed countries. That this country has no ceilings makes the employment of top experts expensive for companies.

Nevertheless, during the past two years, international companies opened more than 40 technology and development centers. In Prague, by the motorway to Brno, computer company Sun Microsystems has its headquarters. Software giant Microsoft, which is a little bit further out, expanded in January to include the European Center for the Support of Mobile Technologies. In this country, U. S.-based conglomerate Honeywell International is perfecting its global center for the support of aviation production. All these firms aren’t doing business here primarily because of the tax rates.

 Our high-tech concept ties into this. Decreasing taxes isn’t as important as encouraging companies to put more money into R&D and encouraging cooperation with schools. Employing top workers and remunerating them well is also important. We want the government to adopt measures that will increase the motivation of these entities to implement and develop these activities in the Czech Republic. It’s clear that support structures such as tax breaks won’t save the day. Without R&D, no firm can succeed in a competitive environment. Cooperation with schools is an important step toward having high quality R&D and toward acquiring the best work force possible. Nevertheless, a bonus element for carrying out such activity will increase the willingness of companies to take risks and to actually do R&D as well as to increase cooperation with schools.

Decreasing company taxes, therefore, doesn’t take first place in the high-tech concept. A system that motivates companies to invest into R&D, to cooperate with schools and to employ top experts will help us gain a competitive advantage and attain a higher standard of living. If we look at the issue with a politician’s eyes, then there’s significant risk that a caricature of a tax reform will be created. This encourages a smarter approach focusing on compromise, and our high-tech concept -if we begin to call it that-could come to pass.