Tax cheating grows

RIGA - Last year the share of the shadow economy in the Latvian private sector amounted to 38.1 percent of gross domestic product, which is 1.5 percent more than in 2009, according to the study ‘Baltic Grey Economy Index for 2009 and 2010,’ carried out by Stockholm School of Economics in Riga lecturers Arnis Sauka and Talis Putnins, reports Nozare.lv. In 2010, Latvia’s shadow economy share in the private sector was the highest among the Baltic States. The share of the shadow economy in Estonia’s private sector amounted to 19.4 percent, in Lithuania’s private sector - 18.8 percent.

Latvia also had the largest proportion of companies that did not declare their income - 33.7 percent, followed by Lithuania - 16.6 percent, and Estonia 11.4 percent. 14.6 percent of Latvian businesses concealed the number of their employees last year, compared to 9.7 percent of Estonian businesses, and 7.9 percent of Lithuanian businesses.
35.5 percent of companies in Latvia paid under-the-table salaries, compared to 19.6 percent of companies in Estonia, and 15.8 percent of companies in Lithuania. Latvian businesses paid 10.8 percent of their companies’ income on bribes, Lithuanian business - 9.3 percent, Estonian - 5.6 percent.

Despite Latvia’s high gray market statistics, 2011 budget consolidation measures will increase the shadow economy by 5 to 10 percent, or by tens of millions of lats, the head of the Latvian Federation of Food Enterprises, Uldis Ronis, claims. Ronis pointed out that illegal liquor and gasoline constitute a significant part of the shadow economy. If the excise tax on liquor and gasoline increases, the demand on the gray market will only grow. Budget revenue, however, will go down.
On Feb. 21, Latvia’s ruling coalition reached agreement on the 50 million lats (71.4 million euros) budget consolidation measures, most of which will be carried out by increasing tax proceeds. Excise tax on liquor, cigarettes and gasoline will be increased.

The government’s decision will change the “rules of the game,” and the demand for illegal liquor will increase, which will cause 4 million lats in losses for the state budget. If the excise tax on liquor remained as before, the budget revenue would increase by 3 million lats. Therefore, this “reckless decision” will cost the state 7 million lats, said Ronis.
It is safe to assume that the government will have to combat increasing inflation due to its recent decisions to hike several taxes. In addition, raw materials and goods also become more expensive on the world’s markets. All these factors will have a negative impact on the food producers and production costs, said Ronis.