RIGA - Against the background of Latvia's diminishing international competitiveness amidst an inflationary morass, an ideological war on how to fix the problems is breaking out between the finance ministry and FICIL, a group representing foreign businesses making large investments in the country. The outcome is set to impact economic performance far into the future.
Latvian Finance Minister Oskars Spurdzins says he does not support the proposal for reducing taxes on personal income while simultaneously increasing taxes on consumption, as this would make it difficult for the state to ensure social guarantees at the same levels as before.
"If the state leaves more revenues with the people, it cannot then be asked to provide the same level of social insurance guarantees. The residents then have to be active enough and assume more responsibilities for their own social insurance. Then the participation from the state in the present amount cannot be expected to continue," the minister said, adding that he prefers the Danish model, which leaves a greater share of revenues with the employees.
The minister said that the Latvian people are not ready to take responsibility for themselves. "It can be seen that understanding is sometimes lacking," said Spurdzins and pointed to the discussions on the salaries of public sector workers, which are paid from the state budget.
"I think that at the moment destroying or changing something in the existing taxation policy would not be advisable," he said. Spurdzins claims that during the current period of high inflation in Latvia the existing taxation system should be maintained or, at the minimum, should undergo very careful consideration before any changes are made.
"The promise by the government to reduce the personal income tax remains effective, but we cannot afford it in the present economic situation. It is not to be forgotten forever, but we cannot afford it in the nearest future. This has been the assessment of experts and social partners," announced the minister.
The Foreign Investor's Council in Latvia (FICIL), in a differing opinion, said that the reasons for the unbalances in Latvia's economy and in some long-term processes are a set of deformed economic stimuli created by an unbalanced taxation system. The organization believes that the taxation system has fallen behind the country's general economic development, and is now even slowing it down, and does not provide the environment appropriate for balanced long-term growth.
FICIL underscored the requirement that the taxation system should be fundamentally changed, by introducing several concerted proposals that would have to be introduced simultaneously. The main direction of taxation reform must be to combine a reduction in labor taxes with an increase in consumption taxes, which would also affect the real estate tax. As the total tax burden currently is low in Latvia, it is not necessary to reduce it further, but a restructuring is urgently needed.
A restructuring of the taxation system would redirect Latvia away from a consumption economy to a creative economy with greater long-term development potential, placing the individual in the center, a goal which the National Development Plan already provides for, say the investors.
Foreign investors point out that the state taxes labor, the most mobile of resources, while it taxes to a minimal degree the least mobile of state resources, real estate. Thus, not only is the opportunity to supplement the state budget with an easily administrable tax lost, but the net result is an encouragement for ineffective use of land.
The real estate tax for land is often only symbolic in Latvia, as cadastral values have fallen behind market values. Additionally, individuals are exempt from paying real estate tax on residential space thus, an entire class of valuable property is not being taxed at all. On the other hand, companies have to pay real estate tax on their premises effectively reducing their competitiveness, says FICIL.
The investors recommend that the personal income tax in Latvia should be reduced from 25 to 15 percent, and that the level for the tax-exempt minimum salary should be raised. A reduction in the level of social taxes could also be considered.
A further recommendation by the council is that the value-added tax should be increased to 20 - 22 percent, from its current 18 percent level. They say that it is possible to differentiate VAT for different goods, for example, essential goods, to tailor the tax rates for desired effect. Excise taxes for fuel, alcohol and tobacco should be raised, suggests FICIL, even beyond the levels provided for by EU guidelines.
Concerning real estate cadastral values, FICIL says these should be adjusted to market levels as soon as possible to assess the tax base, while the real estate tax should also be levied on residential spaces belonging to individuals.