«All reforms cost money – taxpayers’ money. This is why I would like to hear some convincing arguments from policy-makers that income will exceed expenses,» says associated professor of Stockholm School of Economics in Riga Arnis Sauka.
«Talk about Latvia’s relatively high labour burden on labour force has been continuing for quite some time. In this context, the reduction of PIT on labour force from 23% to 20%, even not in all cases as the reform suggests, seems like the right decision to help reduce the proportion of envelope wages. Minimal wages can be increased safely even under high presence of envelope wages. This initiative, I believe, is praiseworthy. It can serve as a good instrument for combating envelope wages,» says Prof. Sauka.
According to the professor, under the high level of envelope wages (approximately 18%, according to SSE Riga grey economy index last year) in Latvia, excessive differentiation should be avoided. «Applying larger taxes on large wages can potentially backfire and punish with larger taxes businesses that pay honest wages,» Sauka notes.
The professor believes policy-makers should rethink their planned tax reforms. «Minimal wages and non-taxable allowance should complement one another, as there is not much point in increasing minimal wages without first raising non-taxable minimum.»
«Considering the current demographic situation, it would not be bad to consider child benefits, especially for large families. In relation to this aspect, we see no large changes in tax reforms. Nevertheless, this matter is also very important in the context of improving the competitiveness of the country business environment. This is mentioned in nearly all studies I have participated in,» the professor added.
Non-declaration of income in Latvia remains very high, according to SSE Riga grey economy index data – even higher than the level of envelope wages, the professor says. «We welcome the idea to assess the introduction of a 0% tax on reinvested profits. Preservation of the micro-enterprise tax regime with added social fees is also the right way, we believe,» Sauka adds.
«Increase of capital tax and the resolution of matters in relation to capital increase are matters that should have been resolved a long time ago. Now it is finally being done, which is a good thing. Raising real estate tax – but only of real estate types are carefully classified based on their type and value. This is also a good step forward. I hope that everything here will be done honestly. But I think you will agree with me that we can expect a powerful lobby in relation to matters on different applicable rates,» the professor explains.
He agrees that VAT change should be approached responsibly: «More likely this should not be done at all,’ he says. ‘Finally, the cancellation of the solidarity tax, I believe, is logical. I think many would agree that we never should have adopted this tax in the first place. Everything that relates to pension benefits, I believe, is open to discussions. I still think application of tax on pensions is something anomalous. It don’t think it is logical,» he notes.
«I would like to mention two specific aspects in relation to the tax system’s reform» the professor concluded.
1.How will the tax reformation project differ from its original concept?
«I hope discussions will not result in the labour tax burden reducing by a mere 1% or less once all is said and done. Slight changes would have no real point, because that way it cannot be allowed to be called a tax reform. Exactly the opposite – such a reform, especially if it results in tax increase, would mean Excel tab approach to tax policy, which is something we had experienced in the past and which had not contributed to the development of the business environment or reduction of grey economy in the country. This is why I hope the final redaction of this project will not differ much from its original idea.»
2.Will the tax reform undergo changes shortly after it is realized?
«Inconsequential planning, especially in the tax policy, according to studies I have been presented with, is one of the biggest problems voiced by businessmen in Latvia. Even more so – I will say that the level of inconsequential planning noted in the past five to ten years is enough for the next two to three generations. This is why I hope policy-makers will assess their work carefully before introducing changes. Cooperation between policy-makers and different international organizations is welcome. It is also good to see that at least some measures in the context of the new tax system will have a transition period. Knowing and understanding game rules is vital for entrepreneurs and investors. Without this aspect, good business environment is unimaginable.»
«It is important to not only introduce the new tax system, but also develop mechanisms to ensure proper functioning. To evaluate what has been achieved, it is first necessary to set goals and the expected result from the tax reform. This is something that is being done now. In addition, it would be best to also predict different indirect results from the reform, such as results that depend on higher economic growth rates and other factors. In conclusion – all reforms cost money, specifically taxpayer money. This is why I would like to hear some convincing arguments from policy-makers that income will exceed expenses,» the professor addressed the government.