It was with interest that I read last issue’s article (June 5, TBT no. 847, ‘EC proposes tax reform for growth’) on proposals for tax reform in the EU, and more specifically in Latvia. I have lived in Latvia for the past several years, and have seen the changes sweeping the country forward.
Latvia continues to lead other EU countries when it comes to GDP growth, showing good choices made in its struggle through the crisis. But I see many left behind, young people continue to leave the country, those who have left find no reason to return, public spaces continue to deteriorate, unemployment remains unacceptably high and the homeless numbers keep rising.
Without turning Latvia into a socialist welfare state - something it couldn’t afford to do anyway - there are good reasons for taxes to go up, selectively, and for other initiatives expressed by the EC to be carried out. After the destruction left by 50 years of Soviet occupation, virtually all of the country’s infrastructure needs rebuilding, and this will take huge investment. In the 20 or so years since re-independence, work has only started. One look at most of the country’s roadways, a ride on city trams, trains shows the dilapidated state of transport. Areas such as telecoms infrastructure will of course be taken care of by the private sector: it is in the public sector where higher tax revenue will be needed to get Latvia fully back on its feet.
This will make the country a more attractive place for foreign investment, and a nicer place to live. Proper spending on defense – made all the more important as we witness Russia’s aggression in Ukraine, and much-needed spending increases for education and other areas need to find the money somewhere. To make Latvia more businessfriendly, corporate income tax should remain at its current low rate of 15 percent. Labor taxes, with excessive social security and health insurance rates, need to come down. This would also help to lessen company incentives to do everything ‘under the table.’ The current personal income tax rate at 24 percent too is excessive, and though the trend was for it to drop to 20 percent, what happened?
Areas that should see rate increases include capital gains and dividend income, to the personal rate (though capital gains from start-up investments should pay no capital gains); real estate taxes surely need to go up, from the current standard rate of 1.5 percent. Algirdas Semeta in the article recommends green and consumption taxes. Good ideas in general, though implementation needs to be thought through in a country with already low purchasing power. Higher tax revenues would help the government address currently neglected areas of the budget. Taxing authority devolved to the regions and cities would also allow for more localized spending and development initiatives. Though I’m not in favor of high taxes in general, what I see in this country is that those who can afford to pay their fair share aren’t, while those at the bottom end up carrying the burden. This can and should be addressed through better tax policy.