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Ceturtdiena 02.04.2020 | Name days: Imgarde, Irmgarde

Tax burden in Latvia proposed to be increased from 31.4% to 35% of GDP

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Inna Šteinbuka, FDP, Latvia, tax policy, OECDThe tax reform has not resulted in more rapid climb of budget revenue. This is why the Fiscal Discipline Council (FDP) believes tax revenue increase is one of the most important criteria for the improvement of the tax system, as explained by FDP chairperson Inna Šteinbuka on Monday, 17 February.

According to FDP, as a result of the 2018 tax reform roughly EUR 245 million was not collected for the state budget in 2018 and nearly EUR 400 million in 2019, which is respectively 0.8% and 1.3% of GDP. From now on, according to FDP, it is necessary to secure moderate tax burden growth.

To improve the tax system, FDP offers four primary criteria the government should take into account – reach a general increase of tax revenue in percentage of GDP, reduce the tax burden for labour force and especially low-income groups, abolish inefficient tax benefits, as well as fair competition in the business environment, equality for tax payment requirements and equal social protection for all employed.

FDP has concluded that the short-term goal of the tax system may be to increase Latvia’s tax burden to 33-35% of GDP.

The medium-term goal may be to come close to and maintain the tax burden below the average EU index, which was 40.4% of GDP 2018.

To avoid worsening the tax climate and competitiveness, Latvia has no need to reach those 40%, said Šteinbuka.

Latvia’s current tax burden is 31.4% of GDP based on Eurostat data, whereas according to Finance Ministry’s assessment shows it at 28.29%, as reported by Šteinbuka.

FDP also wants to coordinate efforts with Lithuania and Estonia when working on the tax system to avoid tax arbitrariness possibilities.

Šteinbuka says GDP believes it is necessary to continue reducing the tax burden for labour force, distributing it to capital, consumption and environment taxes, thereby continuing inequality reduction and increasing competitiveness.

FDP also believe it is necessary to study the usefulness of tax benefits and avoid new benefits and exceptions when developing a new tax policy.

FDP proposes continuing measures to reduce the number of people employed in micro enterprises to ensure fair competition, fair tax payment and better social security for employees.

Šteinbuka says FDP’s study of the 2018 tax reform concludes that the reform has had positive aspects – unchanged tax rates in the past three years, equalized tax rates for capital and capital growth, reduced tax gap for low-wage recipients, improved corporate profits, as well as reduced VAT gap (10% of GDP).

Read also: Eurostat: Latvia’s GDP growth reportedly below average in EU in Q4 2019

But there are negative aspects of the reform – tax revenue before GDP has reduced, the tax gap for lower wages remains higher than that of Lithuania and Estonia (tax gap for low wage recipients in Latvia was 39.7% in 2019 and 34.5% in Lithuania and Estonia), the hope for more rapid economic growth has not realized and grey economy remains high – around 20%.

Šteinbuka also says the reform has resulted in the tax burden transferring from capital to consumption even though the goal of the reform was transferring the burden from labour force to capital and consumption.

She also stressed that Latvia’s tax reform was approved by OECD in its tax comparison study, putting Latvia’s tax system on 3rd place.

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