High labor taxes encourage cheating

RIGA - Unfair competition remains a key problem in the construction industry in Latvia, CEO of the construction company Latvijas Energoceltnieks (LEC), Peteris Dzirkals, said in an interview with the daily Latvijas Avize, reports Nozare.lv. Approximately two-thirds of all companies pay workers under the table to avoid taxes, claims Dzirkals.

“Everyone can see this looking into the information on the average remuneration in the industry, provided by the Central Statistical Bureau (CSB). It is impossible to find an employee for such [low] wages. If one company is paying twice as much in taxes as another, it is completely clear how the companies are paying taxes,” Dzirkals said.
Currently, only employers are responsible for paying personal income tax and social insurance payments; however, employees should also take some responsibility for these payments, stresses Dzirkals.

“They often ask themselves for the salaries to be paid ‘in envelopes.’ The reasons are different. Some have unpaid bank credits, some have to pay child support maintenance. In my opinion, it still has not happened [employees do not yet have to pay part of personal income tax and social insurance payments] just because the State Revenue Service does not want to busy itself with the problem - it will be much harder to administer such a taxation system,” says Dzirkals.
According to CSB, the informal economy in the construction sector exceeds 40 percent of the industry, mainly due to wages paid under the table. Dzirkals claims that the main reason for that is the large number of employees and the so-called labor taxes.

Labor taxes are currently the most serious burden for businesses. For an employee to receive 100 lats (142 euros), an employer must pay 80 lats in taxes alone, not to mention other social guarantees provided by a given company.
“If we want our economy to grow more rapidly, tax rates should, of course, be lower than they are now. But the problem will not be solved only by reducing tax rates. First, taxes should be paid by those who are legally obliged to pay taxes. If we manage to achieve this, the state revenue will increase significantly. Unfortunately, we have chosen the easiest way in the taxation policy. It is easier to collect the tax from a company rather than its employees. It is easier to raise the tax on real estate, as the owner cannot take the estate with him or her anywhere,” says Dzirkals.