Consumption-Based Tax Reform in Croatia

Croatia is the first country in the world that fully accepted the consumption concept in the field of direct taxes in its alternative form - the prepayment approach, called interest adjusted income tax and interest adjusted profit tax too. In comparison with the European tax systems (and those of the transitional economies), which have the characteristics of the traditional tax systems influenced by the latest reform tendencies in the world, Croatian tax reform has accepted much more radically the efficiency as well as horizontal equity principles of the modern public finance theory. It has solved traditional (vertical) equity/efficieny trade off in favor of the latter, concerning especially saving and investment. Although some positive effects of the tax system here are ambiguous, its neutrality as well as the positive international implications must be admitted