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The hidden side of Latvia’s ‘Success’ story

Oct 31, 2012
By Inga Springe, ReBaltica

The hidden side of Latvia’s ‘Success’ story
Average income per family for top 10% and 90% of Latvia's society

Latvia is a land of extremes. In a country where 42 percent of children live at risk of poverty and
social exclusion, the state can afford to pay 142,000 euros in paternity benefits for one child,
and 200,000 euros in unemployment benefits. The Latvian system of taxes and benefits supports
its rich more than the poor, leading to the highest income inequality in the EU. Re:Baltica
investigates - how did Latvia get there?

Social worker Ieva Apfelberga (36) with her husband, who works as a teacher, and their four
children live in a rented three-room apartment in Cesvaine. Politician Inese Slesere and her
husband, businessman Ainars Slesers, and their four sons live in a large apartment in the
wealthy “quiet center” of Riga, and are also building a house in the expensive seaside town of
Jurmala. Both are large families and both pay taxes. But the tax system built up over many years
in Latvia is much more favorable to the wealthy Slesers family than it is to the Apfelbergs.

The most recent examples are the changes to the law which were adopted in September, which
will provide a 50 percent real estate tax discount to large families. At first glance the idea seems
very good, but looking at it more deeply, the Slesers will be the biggest winners.

According to Re:Baltica’s calculations, Slesere pays an average of 600 lats (854 euros) in real
estate tax per year for her 250 square meter apartment in the center of Riga. If Apfelberga owned
her rented apartment, she would pay 13 lats. This means that Slesere, on receiving the discount,
would save 300 lats, but Apfelberga - about 6 lats. This comparison is a hypothetical example,
since the Apfelbergs’ apartment is owned by her husband’s firm. They couldn’t buy their own
apartment. “Even in the good years no bank wanted to give us a loan, because we have three
children,” says Apfelberga.

Here, skeptics could object that there are very few large families in Latvia as wealthy as the
Slesers, which is true. But these wealthy exceptions will receive a large chunk of the overall
money planned for the tax discount. The Ministry of Finance has calculated that the average large
family will save 5 lats per year on real estate tax. This means that one Slesers family
would “take” the norm for 60 average large Latvian families. The Slesers family won’t get as
much this time because, after pressure from economists and journalists while this article was
being drafted, the Ministry of Finance changed its initial intentions and determined a tax discount
ceiling - 110 lats. This kind of thing happens very rarely in Latvia.

The Latvian benefits system overall works largely in favor of the wealthy, allowing them to
receive huge benefits, while people on small incomes receive the minimum benefit. This is
different than the tax and benefit systems in Europe, America and other economically developed
countries, where social security means assistance for people in difficult circumstances and
support for the needy.

Meanwhile, Latvia is taking it to extremes: in a country where 42 percent of children are living at
risk of poverty and social exclusion, the third highest indicator in the EU, the state can afford to
pay out a “paternity benefit” of 110,000 lats for one child.

No real taxes on dividends, capital gains and real estate allowed the wealthy to avoid significant
tax payments for years, while the needy section of society paid the full amount. Many of the
needy, unable to survive from payday to payday, left the country. In the last 20 years, about

200,000 people abandoned Latvia and only one in five of them concede that they could return
within the next five years.

While Latvia’s power elite presents Latvia as a success story in the battle against the economic
crisis, the numbers show something different. More and more residents of Latvia are getting
poorer. Since 2004, the number of people living in poverty in Latvia has increased by 158 percent.

The economic policy centre BICEPS’ calculations show that the average income of the bottom 90
percent of households is 425 lats, while the most wealthy one percent of households can spend on
average seven times more – 3,018 lats a month.

Since 2005, when Eurostat comparative data first became available, Latvia has always been
among the European Union states with the largest difference in incomes between the poorer and
the richer segments of society. The GINI coefficient measures this income inequality, and the
latest data show that we are in first place by this measure.

Vjaceslavs Dombrovskis, a researcher at the Stockholm School of Economics and now a
politician (Reform Party), analyzed data on motor vehicle registrations in Latvia in 2010 and
demonstrated that inequality or the GINI coefficient in 2009 was even greater than as shown by
traditional indicators – 55 percent (Eurostat – 37 percent) (The larger the sum, the greater the
inequality).

It is true that during a crisis the numbers of poor increase in all countries. But statistics show that
income inequality in Latvia was increasing even when the economy was booming. During this
time, the top end of society and the middle class benefited more than the poor.

“We’ve talked about the fact that we haven’t felt the crisis. Our income has been pretty much
the same all the time,” relates social worker Ieva Apfelberga from the small city Cesvaine. With
husband Maris, who works in the local “Grasi” Children’s Home and at the Cesvaine Music and
Art School, they together earn an average of 500 lats per month. This means that each family
member receives 80 lats on average, and that Ieva could even register herself for the status of a
poor person to receive state benefits. But as a social worker who has to grant benefits to local
people, Ieva won’t do this. It would be “unethical. I’m not the worst off,” explains Ieva. She talks
about some of her colleagues who are raising three children by themselves and who also won’t
apply for benefits.

During the crisis the difference in incomes between Ieva Apfelberga and the richest segment
became smaller, because the incomes of the wealthy fell by almost one-third, while those of the
poor fell by nine percent. One must add, however, that during the period from 2004 to 2008, the
household incomes of the rich rose two and half times, while the incomes of the poor rose slightly
more than two times.

The incomes of the wealthiest Latvians declined more rapidly due to the diminishing
opportunities of earning from investment funds and due to the real estate bubble bursting. But the
experience of the U.S. economy shows that rich people tend to recover more quickly from a crisis
than the needy. And there are already signs of this happening in Latvia too.

The economy is slowly recovering, and conditions will get easier for many residents, but not for
all. With the current tax policy, more money will stay in the wallets of families like that of the
business entrepreneur Slesers than that of the social worker Ieva Apfelberga.

“We have a middle class, which feels sufficiently solid, there’s the prosperous class and the poor.
Something else is worrying – that the difference between the first and the bottom ten percent [in
terms of income] is 70-80 percent,” noted the former DNB Bank President Andris Ozolins this
summer in an interview on Latvijas Radio. His view was that “There is a lack of a sensible Social
Democratic position in Latvia, and it’s surprising that it’s not the government that’s talking about
it, but the International Monetary Fund.”

As a result of pressure from international lenders, the government did express a desire to protect
people with lower incomes during the crisis, but these ideas didn’t translate into government
actions.

A good example is the Tax Strategy for 2011-2015 developed by the Ministry of Finance. In this
document from 2010, the Ministry indicated that a large proportion of residents were unable to
pay for “even the basic necessities, which (…) creates a perception in society that the tax system
is unjust and inequitable.” Therefore, officials called for more “social justice” and “to reduce
taxes on low wages and increase taxes on luxury properties”.

The Ministry proposed four changes to the taxation legislation to enable this to happen. Using
special simulation models, economist Alfs Vanags and his colleagues from BICEPS showed
that the proposed tax changes would again increase the burden on people with low wages. At the
moment the government is still following its plan.

How did Latvia get here?

Because it benefits the rich. In 2006, the commentator on economics for the Diena newspaper and
now the DNB Bank economist, Peteris Strautins wrote: the ideology which was promulgated in
the Soviet times - that everybody pays the same taxes equally - is convenient for the power elite
in Latvia.

The seeds of inequality already appeared in Latvia during the restoration of independence in
the ‘90s with the beginning of privatization. Estonia was the only one of the Baltic States which
allowed its companies to be privatized through money purchases or investment. As a result, the
companies ended up in the hands of foreign investors who introduced industrial innovations and
opened up new markets. From 1993-1995, 366 million dollars of foreign investment flooded into
Estonia, while for Latvia it was 143 million and Lithuania - 42 million.

Due to the interests of various economic groups, privatization in Latvia dragged on, right up
until 1998, putting the brakes on entrepreneurial development. Those who succeeded in the
privatization battle were those who were close to ministries in various fields. Academics point
out that delayed privatization leads to the creation of so-called oligarchs. As a result, a large part
of society’s common property ends up in the hands of just a few people. Fair competition gets
restricted.

During the period of privatization Latvia ended up with two very visible oligarchs. Nearly all of
the largest state food companies ended up in the care of former Ministry of Agriculture employee
Andris Skele. There were also fierce battles in the lucrative bank and transit areas, from which
Latvia got its second most visible oligarch - Aivars Lembergs. Business ties were very closely
intertwined with politics. Skele created his own party – the People’s Party, and Lembergs his own
- the Greens and Farmers Union.

Meanwhile, Parex Bank expanded in the banking sector and was a significant source of funding
for a number of political parties, through which the bank realized its interests.

The close ties of Parex with politics became obvious during the bank’s takeover by the
government after the bank crashed in November 2008. Despite the Latvian bank regulator’s
numerous requests to place restrictions on the withdrawal of funds from Parex, the government
led by Ivars Godmanis (LFP/LW) rejected them. As a result, 294 million lats (418 million euros)
disappeared from the bank in less than a month.

Later it also transpired that the Parex takeover agreement, which in Godmanis’ words
was “beneficial” to the state, allowed the bank’s former owners and their relatives to continue to
receive interest from investments.

This was 4.7 million lats in 2010, from a bank which was already owned by the state. These
interest payments continue to be made.

Some of the most influential economists in Russia, Sergei Guriev and his colleague Andrei
Rachinsky, explain that the development of oligarchs also has a positive side. As businessmen,
the oligarchs were interested in a developing, organized country so they could continue to earn.
During the period when Skele was prime minister, Latvia moved strongly in the direction of
joining NATO and the EU, and toward the development of a stable currency. The World Bank
Economist Karlis Smits says that this is when the so-called “first generation” reforms were
implemented.

Around the beginning of 2000 there was another turning point when “the second generation”
reforms were emerging – for a more open economy and more competition, which for the old
economic guard meant a certain loss of their slice of the “cake.” As a result, the oligarchs were
using their influence to keep others from the “cake,” including making decisions that were
benefiting them, such as adjusting the tax system to their advantage.

Latvia is the only Baltic nation where, for an extended period, one didn’t have to pay taxes from
capital gains and dividends. The most popular excuse at the time was that these taxes would
scare away foreign investment. This argument continues to be used in the adoption of various
government decisions. Economists say that this is not true.

“Those who could take out these dividends from companies at that time weren’t a part of the
economic elite who created value,” says former Diena commentator Peteris Strautins. “For
example, Normunds Bergs [who works in the information technology field] is very rich, but he
didn’t take out billions from his businesses in dividends, whereas people who had simply grabbed
shares, who earn directly due to their strategic placement, are the ones who take out millions
irrespective of company profits.”

One of the people who earned from his “strategic placement” was Aivars Lembergs. Re:Baltica
calculated: in the last ten years Lembergs earned 14.8 million lats from dividends and bank
deposits. If the dividend tax which was introduced during the crisis had been introduced ten year
earlier, Lembergs would have had to pay nearly 1.5 million lats in taxes. This amount would have
paid the annual wages for 250 teachers.

Politicians who didn’t have companies like Lembergs did, that earned dividends, “made a killing”
in the real estate business. This was convenient as the land tax was inadequately low. The law
also allowed ways of avoiding a range of other taxes.

Aigars Stokenbergs, the People’s Party’s Economy Minister at the time, became a millionaire in
2006 in this way by selling property in Riga for 1.9 million euros.

At about the same time the daughter of Andris Skele (a prominent politician in the People’s
Party) sold an important former sports complex in Riga. The transaction sum was estimated
at about 20 million lats. Both Skele’s family, as well as Stokenbergs and his business partners
completed transactions bypassing the 15 percent income tax on businesses. Long-term People’s
Party adviser Jurgis Liepnieks also became a millionaire in the “good years.”

Suspicions about tax evasion were raised about the former Speaker of the Saeima, Janis Straume
from For Fatherland and Freedom/LNNK. In 2004, he sold his four room apartment in the old
town of the capital Riga for a very low price. After media reports led to a scandal, the transaction
amount shown in his income tax declaration, submitted a year later, was ten times bigger. At that
time, another popular scheme was not to show the full amount of the purchase sum, so that the
2 percent transaction levy wouldn’t have to be paid. Real estate experts estimated that the full
purchase amount was shown for only about 10 percent of transactions made in the nation.

Another former Prime Minister and Finance Minister, Einars Repse from the New Age Party
(later Unity) was active in speculation with real estate.

In 2005, Repse sold 11 parcels of real estate in Kaunata County, but the transaction sums
are unknown. Ilmars Rimsevics, the governor of the Bank of Latvia also purchased a total of
seven properties (at Jurmala, Garkalne, Ventspils) during the boom. The record holder among
government officials in terms of the number of properties could be Latvia’s President Andris
Berzins, who owns more than thirty. Half of these are in expensive coastal counties – at Kolka
and Nitaure.

The ruling People’s Party with Prime Minister Aigars Kalvitis, Finance Ministers Oskars
Spurdzins and Atis Slakteris pretended not to hear suggestions by international and local
economists to put a tax on real estate to cool the overheating economy. To supplement the state
treasury coffers, it was easier to take money from the social worker Apfelberga through increased
sales taxes rather than getting it from expensive real estate transactions.

Ieva Apfelberga and her family couldn’t speculate on property or investments, as they didn’t
have the money for that. Ieva and her husband couldn’t buy their apartment either as prices were
growing astronomically. “I remember one time when I went to the bank,” remembers Maris
Apfelbergs, “they looked at my income, looked at how many children we had and said: there’s no
chance.”

“If we look at the taxation policy over a longer period, then we see that in individual cases
[politicians] openly lie,” says Swedbank economist Martins Kazaks.“For example, at the end
of 2000, before the crisis hit Latvia, there were often suggestions coming from economists
for a reduction in the tax on labor and for an increase in the real estate tax, but the response
from the Finance Ministry was – no, we have an absolutely perfect taxation system. There’d
apparently been an assessment from the International Monetary Fund which had said the same.
This assessment of the system by the IMF was obviously kept hidden. A few years later when
this document became accessible, one could clearly see that the suggestion had been to reduce
workforce taxes. Why were we told fibs then?” said Kazaks.

As opposed to nimble politicians and businessmen, Ieva and Maris also didn’t have a company,
so that they could register their car under its name. This continues to be a popular way
of “optimizing taxes.” By registering a car under a company’s name, fuel, repairs and insurance
can be written off under expenses and the sales tax can be partly reclaimed.

Re:Baltica found out that of the 1,690 new BMW’s registered in Latvia in 2010, 80 percent were
registered under company names. In 2011 the law was tightened up, introducing a new tax which
has to be paid for all light vehicles owned by companies. In this case, the state has shown it has
the upper hand over private businesses, as state and local council institutions don’t pay this tax.
The State Revenue Service explains that employees of state institutions are not allowed to use
government vehicles for private use, but journalists have proven on a number of occasions that
this isn’t true.

Politicians like to find loopholes in the law today as well. The Pietiek.com portal revealed that
the Saeima’s Unity faction leader Dzintars Zakis was driving a new Volvo, which had been
purchased by his company.

Such actions by politicians in a way “legalizes” the evasion of taxes. It then leads to the dominant
view in the society that if people in power don’t pay taxes, and actually use laws to avoid them,
why should the average businessmen and workers do it? In Latvia about half of residents believe
that some taxes don’t need to be paid. Among the Baltic nations, Latvia has the largest shadow
economy – 30 percent.

How are decisions made?

It would be an exaggeration to say that Latvia’s tax system has been deliberately constructed
to favor the rich. Incompetent bureaucracy deserves some of the blame too. With some notable
exceptions, institutions of higher learning in Latvia rarely contribute research that could help
inform government policy. Instead, untested assumptions are often used to craft legislation.

“In my Economics Commission I have sometimes asked three civil servants to research
how a problem is solved in other countries. Quite often they think we shouldn’t even pay
attention to this aspect,” observes former Stockholm School of Economics economist and now
politician Vjaceslavs Dombrovskis. “Our problem is that academic capacity is close to zero.”
Consequently, the government often adopts decisions that haven’t been thought through and
which often deform the system.

For example, Latvia is the only Baltic nation where there is no ceiling on unemployment and
parental benefits. This means that people with large incomes receive huge benefits, degrading the
basic principle of the system – that benefits are meant to assist a person to make ends meet in a
specific, sometimes unplanned situation in life. But the state should not have to insure a luxurious
lifestyle for the rich.

Recently, the parental benefit of 55,700 lats received by The Bank of Latvia employee Raivo
Vanags caused outrage in Latvia, but the record benefit was almost twice as big. It was paid out
in 2011 and was 107,000 lats at an average of 11,780 lats per month. The names of the recipients
of the largest benefits are not publicly available.

Currently, there is a so-called “soft ceiling,” a kind of transition period when you can’t get the
full parental benefit equal to your salary as in the “good years,” but even so a maximum ceiling
hasn’t been determined. Raivo Vanags received his high parental benefit after the “soft ceiling”
was already in place.

In Estonia and Lithuania there was a parental benefit ceiling right from its introduction. In
Estonia the maximum parental benefit is 1,500 lats per month, in Lithuania 940 lats.

There is a similar situation with unemployment benefits. In Latvia the largest unemployment
benefit paid out per month was 25,000 lats, and the total amount paid out was 166,000 lats. This
was paid out in 2008, at the time when the state took over Parex Bank and the bank’s senior
employees left their employment.

At least nine of the Parex Bank’s former council and board members received handsome compensation, including unpaid holiday pay and wages. After the government took over Parex it paid 200,000 lats to some of these individuals, with the total amount paid out exceeding 1,2 million lats. It looks like at least some of these individuals also applied for unemployment benefits. Re:Baltica has found out that Parex vice-president Martins Jaunarajs also received
almost 200,000 lats in compensation. He didn’t wish to comment to Re:Baltica about the size of the compensation, nor on whether he applied for unemployment benefits. According to the information leaked in the “Neo” matter, Guntars Grinbergs, Vladislavs Skrebelis, Eriks Brivmanis also received large amounts of compensation.

In addition, another myth has developed in Latvia which deforms the system: I paid a lot in taxes,
and therefore I’m entitled to receive just as much back. Economists explain that this isn’t how the
system works.

“It just won’t be the case that I will get back every dollar I paid,” explains economist Martins
Kazaks, and “we have to take into account that a portion of these payments which we make to the
state will go to other people. (…) For example, to a neighbor or a relative.”

BICEPS economist Alfs Vanags compares the payment of taxes with insurance, which we pay to
insure ourselves against certain situations, but this doesn’t mean that we get all of the money
back. If the state provides a benefit after the birth of a child, then the amount should be sufficient
for that child’s care. “Are 100,000 lats required to raise a child?” – Vanags asks.

In addition, the state should provide services which can’t always be measured in terms of money –
a high quality healthcare system, education, well maintained roads and police protection. The
more citizens can enjoy such public goods, the better it is for the state. For example, educated and
innovative people mean more productive workers and new jobs.

English researchers Richard Wilkinson and Kate Pickett, who have compared large data sets
among developing countries, argue that a large income gap harms a country’s economic and
democratic health. They found that the greater the inequality within a country, the greater the
level of crime, homicides, the number of drug users and alcoholics, as well as mistrust of the
government. Plus these factors affect everyone – both the rich and the poor.

If Latvia’s goal is to achieve greater equality, as in Scandinavia and Estonia, the more affluent
citizens would have to pay more taxes. Of course, the high level of corruption in Latvia doesn’t
promote the desire to pay taxes, since there are no guarantees that the money will actually go
toward the salary of the nurses rather than into buying new cars for Parliament or the construction
of another “golden bridge.”

Often also a situation gets marginalized, taking one aspect out of context. Criticism is often
expressed in the press: why pay taxes, if they just go to subsidize the “lazy unemployed”? Such
stereotyping often emerges due to lack of in-depth reporting, which often doesn’t analyze the
tax, unemployment and social security system in a broader context. Inequality of income and low
wages haven’t been created by the unemployed, but rather by the political elite. (Read K.Rizga’s
article).

Why should we worry about growing inequality?

Because it harms the health of the state and estranges the wealthiest part of society from real
life. The wealthy become even less interested in paying for the common good, as they can buy
everything they need themselves – health insurance, heating and education for their children in
private schools. Why should they have to improve the quality of universities in Latvia, if their
children are studying in other countries? Why give more money to the hospitals, if they are not
standing in line for an operation?

Nobel Prize winner, American economist Joseph Stiglitz explains that growing inequality means
that we aren’t using our greatest resource - our people. For example, even though Latvia provides
grants for study in universities, young people from well-situated families have more opportunities
to access them. They tend to have more information about how and where to get scholarships
and also money to study for entrance examinations – to pay for a private tutor, to purchase the
required books, etc.

The most enterprising people, seeing that they won’t be able to improve their lives in Latvia,
leave. Those who leave say that they feel like losers in Latvia and yearn for a country which will
take more care of them.

“The time spent at home this time was too long. It’s getting harder and harder to pack the
suitcases,” writes Inese Liepina from Cesis in an email from Norway, whom Re:Baltica met in
Latvia this summer.

She and her husband have been working as newspaper delivery couriers in Norway for a year to
repay 10,000 lats which they borrowed from Hipoteku banka to finish building their home.
Despite the fact that Inese longs for her home and often cries when thinking about the places dear
to her, she still finds it difficult to accept the absurdities in her homeland. “However, the situation
continues to be the same – a visit to the building inspector, and to the Head of the Territory
Planning and Development Department confirmed in full the customary behavior of Latvian state
bureaucrats and the ludicrous legal system,” recalls Inese from her visit to Latvia.

As opposed to more hot-blooded Southerners, Latvians don’t express their opinions through
demonstrations. This summer, in Latvia’s Radio Labor Union Leader Peteris Krigers related that
Latvians find two forms of protest acceptable – signing a referendum to dismiss the Parliament,
or “packing their belongings in a suitcase and leaving Latvia.”

Krigers himself is also partly to blame for this situation. There aren’t powerful organizations in
Latvia to defend the sales clerks or nurses. The inability to speak strategically with politicians is
one of the reasons why the interests of businessmen once again prevailed in government this
summer.

“Have a look at how the representatives of employer and business organizations operate! They go
and meet politicians, talk with them, provide proof with statistics and achieve what they want,
while Krigers just shouts and nobody takes him seriously,” said a civil servant who is closely
connected with the development of tax policy.

At the beginning of this year the government was still promising that it would raise the level of
income not subject to income tax, which would mean that sales assistants, policemen, and nurses
would receive more after tax. Instead, after active lobbying by business, the government decided
that in the next three years they would gradually reduce the rate of individual income tax –
therefore, more money would end up in the hands of the higher income earners.

According to the calculations from BICEPS, if the non-taxable income amount were raised to 90
lats for families of the bottom 90 percent of society with a average monthly net income of 425
lats, income would grow by 2.8 percent, whereas for those who earn more than 1,000 lats – by
only 0.5 percent.

With the policies currently being implemented by the government, income would increase by 5.3
percent for families which earn over 1,000 lats per month, whereas for families like Apfelberga
from Cesvaine - by 3.3 percent.

The main priority for the Finance Ministry currently is the creation of new jobs, and that’s why
taxes are being reduced on labor. The Ministry hopes that more foreign investment will be
attracted in this way, although there isn’t any research to prove this.

“We never forget about social justice, but we must understand that the efficiency principle exists
as well,” explains the Head of the Finance Ministry’s Direct Tax Division, Astra Kalane. “To
implement the social justice principle in a developed model, one pays a heavy price.”

What’s so expensive? The government has calculated that to increase the non-taxable amount by
even 10 lats, 17.3 million lats per year in additional state revenue would be required. We don’t
have the money for that, the Ministry says. Instead, next summer the government will increase
the non-taxable amount by 10 lats for those with dependants, which will cost the budget 4.3
million lats.

At the same time the government did find 143 million lats from 2009-2011 to put towards saving
Hipoteku banka. IR magazine wrote that the government gave the last injection of funds, 25
million lats, just this summer.

The calculations by BICEPS also prove that with these sorts of policies, inequality will again
increase. The economist Kazaks’ view is that the priority in Latvia, together with the creation of
new job places, should also be a reduction in social inequality, otherwise residents with small
incomes have only one option – emigration.

What can be done?

Despite the large losses, the crisis also had its positive side. The government was finally forced to
make decisions which it had been putting off for the past 20 years. It placed a tax on dividends
and capital gains which brought 28.5 million lats into the state treasury in 2011. It got rid of
costly boards in state enterprises which had served as political feeding grounds for the ruling
parties. The most visible oligarchs have been sidelined.

“A change in regime actually took place in Latvia, without a war or revolution,” says economist
Peteris Strautins about the positive side of the crisis. His view is that during the “good years” tax
policy “was super elitist, (..) but now we are gradually moving to something more reasonable.”

Strautins is an optimist and thinks that “the real estate tax will definitely be developed so that
people who own valuable real estate will also pay more. In the same way, sooner or later the non-
taxable income amount will be raised, which will make income tax more progressive.”

Currently, however, there don’t appear to be any visible grounds for this optimism. Pressure from

international lenders has abated, and it looks like the ruling elite is slowly moving back to its
earlier path.

During the crisis politicians told us that international lenders were applying pressure for pensions
to be reduced and for taxes to be raised. This was only partly true. A World Bank study from
2010 points to something different. It recommended the redistribution, not the raising of the tax
burden. The main emphasis from the international lenders was to improve the lives of people on
low incomes, and the World Bank study also provided specific examples of how to do this.
Re:Baltica’s analysis shows that the majority of these recommendations were ignored.

The World Bank recommended the redistribution of the universal 8 lats state family benefit to
redirect it more to the needy families. For the wealthy politician Slesere, the 32 lats don’t make a
visible difference in the monthly family budget, whereas for social worker Apfelberga this sum
would cover her monthly electricity bill. The Ministry of Welfare says that it didn’t introduce this
proposal because the administrative costs would have been large. When Re:Baltica asked “how
large?” it appears that there hasn’t been any calculation of this and the question has been put off
until 2015.

The World Bank recommended that parental benefits be calculated from social contributions over
at least two years, to prevent cheating by making large tax contributions just before a child’s
birth. At the same time the World Bank also pointed out that Latvia’s budget can’t afford such
high parental benefits for the affluent in general, and that from 2005 until 2011 they were paid
out of the social budget without collecting additional revenue. The recommendation is to pay a
benefit of 100 lats (142 euros) to all families and to provide support in other ways - for example,
with lower tax rates.

The Ministry of Welfare is currently working on a model where the parental benefit will be
calculated from tax paid over three years. However, the ministry is not planning to put a ceiling
on the benefit, which our neighboring countries have.

The World Bank did not say that pensions had to be reduced, as had been presented by politicians
in Latvia. The recommendation of the World Bank was to reduce the non-taxable amount of
income for people on large pensions. Pensioners were hit the least by the crises since their
incomes did not fall. The World Bank hasn’t defined what it considers to be large pensions, but
data shows that in 2011, 11 percent (22,700 pensioners) received from 300 lats to 2,000 lats per
month. Fifty-nine people received more than 2,000 lats. Last Autumn, when discussion about the
pension reform appeared, the Minister for Welfare, Ilze Vinkele (Unity) said: “I am convinced
that all pensions should be indexed,” otherwise it will de-motivate people from making social
payments.

Indexation means that if Latvian President Andris Berzins’ pension is an average of 5,000 lats
(7122 euros) per month before tax, he will have more added to his pension than a person with a
300 lats (427) pension. The argument that Berzins paid a lot of taxes in his time doesn’t withstand
criticism. As mentioned previously the system doesn’t work according to the principle – I get
back as much as I pay in. There are private pension funds where one can build up large pensions.
The recommendation from many foreign experts to raise the real estate tax as a way to raise more
state revenue has also gone awry. Formally a maximum percentage rate of 1.5 percent for homes
has been set, but at the same time the local municipalities which collect this tax have been given a
great deal of freedom to apply discounted rates below 1.5 percent. The Ministry of Finance
believes that local municipal governments will have a better idea which families should be
granted discounted rates.

Swedbank economist Kazaks is doubtful on this. “It would be naive to hope that local councils
will be very aggressive in increasing real estate taxes. I doubt if the local city council member
will go to his neighbor with a smile on his face and tell him that we’re going to increase your real
estate tax and I hope that you’ll vote for me in the next election,” says Kazaks. He recommends
that the tax should be raised at the national level and “then the local council can look at who
should receive a reduced rate.”

Meanwhile, on a recent work day in September, the mother of four children Ieva Apfelberga,
couldn’t find her favorite local “Cesvaines piena” sour cream product at her local shop in
Cesvaine. The shop assistants told her that the product had not been made for some time.

“Products just start disappearing and people are laid off. The type of manufacturing which
employs people isn’t being encouraged,” is Apfelberga’s answer to the question whether the
economic crisis has really come to an end in Latvia. “In the countryside you can’t feel that in any
way,” she concluded.

The Apfelbergs’ family’s life hasn’t changed significantly in the past ten years, and they can’t see
any reason for any change in the future. The benefits for large families slated by the government
won’t affect them. They won’t gain from the real estate tax discount or the increase in the non-
taxable amount of income for those with dependants. These tax changes will be felt by the rich
Inese Slesere’s family. The former politician didn’t wish to share her view about social inequality
in the country, as “I feel that each word I say will be turned against me.”

Whereas Ieva Apfelberga’s view is that this problem must be discussed. She and her husband
Maris don’t know enough to comment about the tax policy and aren’t asking for more financial
benefits. The only way that the state could help the country is to encourage more jobs, they think.
The Apfelbergs don’t really believe that this will happen. They are Christians and at difficult
times rely on God and their congregation, not on the state.

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