Bosnia and Herzegovina: Selected Issues

This Selected Issues paper revisits labor tax wedge issues in Bosnia and Herzegovina (BiH) in light of recent changes to minimum wages and social security contribution (SSC) rates. Using detailed information, it provides estimates of average and income-specific labor tax wedges in both the Federation of BiH (FBiH) and Republika Srpska (RS). These suggest that the effective tax wedge may be lower than suggested by conventional measures—particularly in (FBiH), where nontaxable employment benefits and preferential income tax treatments encourage tax-saving arbitrage. Reforms toward a more efficient, progressive and transparent system are necessary to boost fiscal and growth outcomes. The standard tax wedge in BiH—driven primarily by SSC—is among the highest in Europe but falls significantly when non-taxable allowances are considered. According to both methodologies, RS is in the middle in comparison with the region and has a lower tax wedge than the EU average. There is significant scope for simplification, base broadening and greater progressivity, which could pave the way for future headline SSC rate cuts.