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Friday 24.11.2017 | Name days: Velta, Velda

Reducing VAT for food by 10 % would lessen tax burden on low - income groups

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After analysing the ways of reducing the tax burden on low-income population and making Latvia’s taxation policy more progressive, one of the possible solutions proposed was to reduce the rate of value added tax (VAT) by 10% on food, as mentioned in Riga School of Economics (RSE) and Baltic International Centre for Economic Policy Studies (BICEPS) research on the tax policy in Latvia.

Today, during the presentation, the executive director of BICEPS, Alfs Vanags, told that reduced VAT rates on food would, first of all, ease the tax burden on the population with low incomes; thereby, the principle of social justice is taken into consideration. Secondly, as regards tax revenues, the country would face less damage, compared tothe changes in taxation policy proposed by Ministry of Finance (MF). BICEPS also mentions higher tax rates on automobiles as an additional alternative to ensure the progressivity of taxes.

A.Vanags also acknowledged that, although the government supports increasing the progressivity of taxation policy, not all suggestions mentioned in the MF’s guidelines for tax policy can be evaluated as positive and would bring the expected outcome. «By removing reduced VAT rates and reducing the personal income tax (PIT) rate to 21%, a reverse effect – an increase of regress – will be obtained,» A. Vanags pointed out.

It was concluded in the research that MF propositions – the increase of the tax rate on real estate and untaxed minimum of PIT – could further the progressivity of tax system, however, in general, thegovernment’s announced guidelines on taxation policy can be characterized as rather regressive. BICEPS estimates that by putting them into effect, tax revenues could decrease by almost 4%.

On assessing the possibility to reduce VAT on food to 10%, the member of the board of political alliance Par labu Latviju (For Better Latvia), Andris Šķēle, admitted that 10% rate of VAT for all food products is an unrealistic goal; nevertheless, he mentioned that this rate could be applied to bread or some dairy produce.

At the same time, the co-chairman of party alliance Vienotība, Aigars Štokenbergs, was of the opinion that the reduction of the tax burden has its positive aspects; however, in this case, government would not be able to provide funding for schools, police, and other institutions.

While, the analyst of DnB Nord bank, Pēteris Strautiņš, emphasized that PIT should be kept the same as it is at the moment, otherwise, Latvia’s international competitiveness would be undermined. He also stressed out that, when compared with other EU countries, the PIT rate of 26% is not so high. P. Strautiņš also expressed belief that it is necessary to raise the untaxed minimum, as well as, impose higher tax rates on real estate and automobiles.


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