Latvia’s Tax Rebellion

RIGA - There’s a tax revolt in Latvia. The protestors are threatening to challenge a new tax in court. They are threatening to call for the finance minister to resign. What got them angry? A levy on the top 0.5 per cent of Latvian earners to bring in 40.9 million euros of revenue to the government’s 2016 budget.
The tax is part of the government’s revenue raising quest as it grapples with waning inflation and slowing growth, spurred on by NATO defence spending commitments in response to Russia’s military probing of Latvia’s borders by air, land and sea.

But some argue that’s no case for gallantry among the country’s wealthy few. “There is a strong feeling in this country that high earners - they have deserved it, because they are good,” said Morten Hansen, Head of the Economics Department at Stockholm School of Economics in Riga and a member of the Fiscal Discipline Council of Latvia.
Stressing that these were personal remarks rather than any that represented the Council, Hansen questioned whether the country was ready for a Nordic style of taxation, where “the broadest shoulders have to bear the biggest burden.”
But he was surprised at the furore nonetheless, as the tax is still a long way from anything approaching the progressive tax rates seen in the Nordic countries. “It’s a small tax,” he told New Eastern Europe. “It hits about half a per cent of those who work. It’s not money people would see anyway, not right away at least, as the money would have gone into pension savings.”

The tax, which applies to those earning over 48,600 euros annually, will affect approximately 5,000 people in Latvia, providing for an equal state social insurance fee rate, currently at 34.09 per cent.
“I cannot say this tax hits these people hard,” Hansen added. “If your income here is more than 4,000 euros a month, what exactly hits you hard? It’s a very high level of earnings for this part of the world.”
During the economic crisis, the government eliminated caps on social taxes, effectively extending contributions to all salaries of high income earners. In 2014, the government again capped contributions which means now people who earn 10,000 euros per month pay the same effective tax rates as those on the minimum wage.

The Finance Ministry has pushed the tax bracket for these earners back to 2013 levels for 2016’s budget. It has released a statement arguing that its adoption of the Solidarity Tax Law on Sept. 22 is devoted to “diminishing income inequalities and regressions of the tax system.” The statement reads that correcting inequalities is “one of the government’s main tasks.”

But its critics are unconvinced. Leading the revolt is Juris Gulbis, the CEO of Latellecom, a state run company. Gulbis has broken ranks with his government employers to lambast the government’s Solidarity Tax.
Speaking on the television show Rita Panorama, Gulbis blasted the Solidarity Tax for its “obvious incompetence and inconsistency,” calling it a “harmful idea” with serious consequences for the state economy and welfare, including encouraging a shadow economy.

“Besides,” he noted, “for some reason it is referred to as a ‘Solidarity’ tax, even though the Finance Ministry’s plan is to use revenue from this tax to patch up the deficit in the general budget, neglecting the social benefit receivers once again … no matter how hard I try, I see no solidarity here.”
According to public records, Gulbis earns an annual salary of 392,000 euros per year. His earnings make him one of the 5,000 earners who would be affected by the Solidarity Tax. He has threatened to take the Finance Ministry to court.
Karlis Sadurskis, Chairman of the Saeima Budget-Finance Committee, believes these sorts of law suits Gulbis is calling for would be ill-advised.

“It would be hard to oppose it in the Constitutional Court,” he said on the same programme. “The majority of EU member states have progressive personal income tax. Latvia will soon have it as well, but it is impossible to adopt it right here and now.”
However, Sidurskis responded with timidity about the long term future of the tax itself, stating that it may only be adopted for a trial run of one year.

The lack of long term planning and last minute nature of the government’s attempts to raise revenue has exasperated foreign investors who are looking for long term certainty in the country’s tax system.
Stephen Oldfield, honorary chairman of Latvia’s Foreign Investors Council (FICIL), a research group, believes that instead of hasty, unpredictable changes in the tax system, the government should drastically improve the way it executes its insolvency laws as a far more effective way of balancing its books. While Latvia’s insolvency laws themselves, he describes, are “quite good” the present execution, he stresses, is “awful.”

“If you could stop leakage, you could start to have more money in the system,” he told New Eastern Europe. According to FICIL’s latest research, he notes, the government has lost approximately the equivalent to an entire year’s budget over the last six years.
Equally, he believes, the government should be doing far more to crack down on those who avoid the existing taxes before throwing other ones into the budget mix at the last minute.

The government’s Solidarity Tax is a strategy FICIL’s executive director ĢGirts Greiskalns describes as “rushed, short term thinking,” which he fears could deter foreign companies from basing their work force in Latvia and lead to a situation where most of the taxpayers forking out for the new tax would not be private companies, but government employees. “The state will be taking their money out of one pocket,” he warns, “and putting it into the other.”  
The government’s reluctance to go for anything other than what both describe as “a quick-fix plaster solution” is that as Oldham points out: “It’s easier to go to someone you know is paying tax already and ask them to pay more, rather than go to someone who is not paying tax and ask them to start paying tax.”

FICIL’s criticism of the last minute tabling of the Solidarity tax is shared in the Economy Ministry. Economy Minister Dana Reizniece-Ozola has turned against the Finance Ministry, voicing her displeasure with the whole process, suggesting a capital tax would have been the right way forward, and complaining that her calls fell on deaf ears.
“Already in the spring, I called for discussions with business organizations about tax policy,” she said in an interview with LETA news agency. “But this was not done.”

“New proposals were offered in a short period of time, and there was no time to discuss them,” she said. “I, too, believe that instead of a solidarity tax, capital tax would be a more efficient solution, but quality analysis would take time.”
The urgency to rummage for additional revenues has been present in the Finance Ministry ever since Latvia’s agreement at the NATO Summit in Wales last year, when the government committed to upping its defence spending to 2 per cent of GDP by 2018. The government aims to ramp up its defence spending already this year to 367.9 million euros (1.4 per cent of GDP) - in addition to other mounting budget items, including 17.9 million euros already earmarked for quickly increasing the number of military personnel.

Russia, in the meantime, has stepped up its military pressure in the region ever since its annexation of the Black Sea peninsula of Crimea in March, 2014. NATO reports suggest that in 2014, NATO aircraft conducted over 150 scrambles to intercept Russian military aircraft in the Baltic region, approximately four times as many as in 2013.