Adoption of a differentiated tax-free allowance in Latvia is a solution meant to reduce income inequality and promote tax progressiveness in Latvia. It will also help relieve the burden off small wage recipients. It will motivate people to declare their income and get involved in the labour market, believes Finance Ministry.
During work on Latvia’s budget for 2016, the government formed a sub-committee for budget and tax matters of the National Council for Trilateral Cooperation for the first time. Throughout multiple meetings of this sub-committee, members of the government discussed different proposals for the 2016 budget project with the government’s social partners. These meetings had one specific goal – to find solutions in order to reduce income inequality. Proposals provide of a gradual introduction of a differentiated tax-free allowance by 2020. At the same time, it is planned to increase monthly tax-free allowance from EUR 75 to EUR 85 in 2016. At the beginning of 2016, small wage recipients will be able to get back overpaid tax amounts by submitting their income declaration to the State Revenue Service. The amount will be re-calculated using differentiated tax-free allowance. For small wage recipients (up to EUR 380 per month) the tax-free allowance will be EUR 120 per month in 2016. For people who are paid EUR 380 – EUR 1,000 per month, tax-free allowance will remain EUR 85, as reported by Finance Ministry.
Income declaration procedure will not be complicated. Residents can use Latvija.lv portal to register with electronic declaration system and use automatic income declaration process. People who are unable to submit their declaration electronically will still be able to submit it in paper form in any SRS office in Latvia.
In some European countries, like Lithuania, Romania and Slovakia, a differentiated tax-free allowance is already instituted. Sweden, Belgium and Slovenia also use a differentiated tax-free allowance. But these countries also use progressive PIT rates.
Tax-free allowance in Latvia is one of the lowest in the EU and the lowest among all Baltic States: EUR 75 in Latvia, EUR 166 in Lithuania and EUR 154 in Estonia. None of the EU countries have tax-free allowances smaller than benefits for dependants.
There have been claims that benefits for dependants should be increased even more in order to provide adequate support to families with children. It should be noted that even now Latvian taxpayers with low wages and multiple dependants are unable to use PIT benefits to their full extent. This is because their tax-free allowance is smaller than PIT benefit amount. According to estimates of Latvian Finance Ministry, 32.4% of tax payers have dependants. Income of these people does not exceed EUR 360. Approximately 36.9% of all tax-payers who have dependants cannot use PIT benefits, because their wage is smaller than PIT benefit amount.