Taxes on income vs. value added tax in small open economy

In this paper we are presenting an analysis of shift of tax burden from income onto consumption. The analyzed consumption tax is value added tax, while destination principle is applied. The result of analysis is finding that the contemporary tax policy in the Czech Republic is suboptimal from the point of view of tax burden distribution between production factors and consumption. Theoretical findings are confirmed by analysis of data from European countries. Every percentage above the EU27 average of consumption taxes share on total tax quota results into increase of GDP growth by 0,04% to 0,05% p.a. The Czech political “elite“ determines the fiscal policy to be popular and recent surveys confirmed Czechs’ dislike towards consumption taxes, especially value added tax. Therefore the huge cost of the Czech tax system – high taxation of wages and low value added tax – can be viewed also as agency cost.