Labour market distortions via taxation system of natural person

Any preferential treatment of income of certain population groups at setting their share on state costs results in harmful disproportions in consequence. Valid taxing conditions of traders and self-employed persons for the last three years in the Czech Republic, lead to labour market distor- tions. This paper gives evidence of extreme differences in tax burden of various income groups of self-employed persons compared to wage and capital yield taxation. Remarkable disparities are apparent both at lower and medium-high incomes and at peak incomes exceeding CZK 10 million per year. Presented calculations and figures confirm that particularly freelance occupations, consulting services as well as other trading professions are groundlessly favoured. Their bearers can tran- smit real costs on their clients and yet they are eligible to apply lump sum expenses ranging from 40 % to 60 % of income. Thus, they reduce their taxable income as well as basis of assessment for obligatory payments into insurance system in this way. Unlike them, some traders and people in position of employees cannot use such an optimization from practical reasons. This systemic distortion constitutes a groundless differentiation in a share of different citizens on financing of state expenditures. In a broader sense, it might even contradict constitutional order of the Czech Republic. At least, this situation harms significantly a willingness of citizens to take a share in solidarity system of financing state operation and its social system voluntarily. Diverse tax burden imposes a pressure on the labour market or more precisely leads to crow- ding-out of wage earners out of the labour market into the sphere of so called „švarzsystem” (evasion of labour law provisions by a conclusion of a commercial-contractual relationship). Secon- dary, but fundamental result is a distortion of macroeconomic statistics that provide documentary evidence for labour market development