RIGA - A reduction in Latvia's personal income tax rate would likely boost economic activity, but it may also have a detrimental effect on inflationary growth, analysts said this week.
The Finance Ministry, together with the State Revenue Service, is working on proposals to lower the personal income tax from the current 25 percent.
SEB Latvijas Unibanka market and industries analysis department head Andris Vilks said that, from an economic standpoint, a cut in income tax should be saluted.
"We are the poorest of EU member states, with the lowest personal income. Extra money would lead to greater spending and increased economic activity. Of course, consumption will grow, but this is not something one should worry too much about if we look at how low we stand in all categories of consumption," he said.
He agreed that a lower personal income tax would bring down tax revenues but the reduction won't be substantial. In addition, part of those currently avoiding taxes would go legal then.
"Loans will grow, and inflation may rise a little more steeply because of that, but it won't really have that big an effect on price growth. We still have insufficient competition, and monopolies and semi-monopolies quote their prices as they please, seeing that people are bent on consumption," said Vilks.
Zigurds Vaikulis, market analysis department head at Parex Asset Management, said that lowering the tax burden was one of the methods for improving economic activity. "Reducing the personal income tax will lay the foundation for increased economic activityâ€¦ There's no doubt about it," he said.