Capital gains tax gets lukewarm reception

  • 1998-10-08
  • Paul Beckman
VILNIUS - When the Lithuanian Parliament approved a 29 percent capital gains tax July 2, stock brokers and market experts let their disagreement with the decision be known, as the National Stock Brokers Association (NSBA) halted trading for one hour to drive the point home.

When NSBA representatives and market experts met with the veto-empowered President Valdas Adamkus, a compromise was achieved, which was overwhelmingly approved by Parliament Sept. 29. A 15 percent capital gains tax was secured instead of the original 29 percent.

But despite what seemed like a significant slash to what the Parliament originally approved, the 15 percent tax has received a luke-warm reception from market experts.

Most experts argued that the 29 percent tax would hamper the development of the capital market. Many stated they were not against the tax itself, but simply the timing.

"Our first proposal was to postpone the tax for two years," said Saulius Peciulis of the NSBA. "But when we understood that this was an impossible goal, we proposed 10 percent. President Adamkus suggested a compromise and we ended up with 15 percent, which is a lot better than 29. It was a great accomplishment."

For almost three months, no concrete decision was made on the fate of the tax. When Parliament voted upon the reformatted version with Adamkus' amendments, it was passed by an overwhelming majority - 96 MPs voted in favor, one against and 12 abstained.

Tomas Andrejauskas, a stock broker from the Suprema firm, admitted that a 15 percent tax is much more acceptable than a 29 percent one. He nevertheless predicts that a "messy" future could surround the tax when it is introduced at the beginning of next year.

"Of course 15 percent is much better," said Andrejauskas. "Plus the small domestic investor will benefit because of the fact that if he gains no more than 12 minimal salaries, which is about 2,500 litas ($625), it won't be taxed.

"However, the administration of this tax will be difficult. There should be a lot of decrees concerning its collection, because there will be some mess."

Ruta Vainiene of the Lithuanian Free Market Institute (LLRI) was equally skeptical about the tax. LLRI representatives also participated in the meetings with the president.

While she, too, considered 15 percent far better than the Parliament's original proposal, she suggested that any revenue generated by the tax will be offset by the administrative costs.

"It's senseless to shoot such a little bird with such a big bomb," said Vainiene. "[The tax] will do more harm than good. The administration costs will be too high in comparison to the revenues the tax will generate.

"The only argument for this tax is that 'income is income,' but there are much higher distortions in the market which should be addressed instead of taxing this.

"What is the purpose of investing? It's not just to have fun and go through the process. People invest to earn money."

Euginija Martinaityte, director of the Lithuanian Banking, Insurance and Finance Institute, said some of the negative comments were a bit too harsh considering a much higher percentage was avoided.

"It is really positive that the percentage was reduced," said Martinaityte. "It also shows a good reaction on the part of the president. It was a hard discussion during the negotiations."