Tax policy a barrier to investment

  • 2013-06-26
  • From wire reports

VILNIUS - Economist and Adviser to the President of SEB Gitanas Nauseda believes that the parties of Lithuania’s ruling coalition have not paid enough attention to tax reform in their programs leading up to the recent national election and, therefore, now have difficulties in formulating a consistent tax policy, reports ELTA. According to Nauseda, only the Labor Party is consistent in expressing its position on the increase of the minimum monthly salary (MMA).

“The Labor Party says that there are too few VAT exemptions and that instead of increasing non-taxable income (NPD), MMA should be increased. The dramatic MMA increase and a large list of VAT exemptions were included in their election program,” said Nauseda after the presentation of the latest edition of Lithuanian Macroeconomics Review.
He added that it is possible that the findings on tax reform of the working group were criticized by some politicians since the findings did not comply with the election programs of those parties.

Nauseda also stated that if the election programs would have included clear guidelines for tax reform, there would have been no need for the working group and these costs would have been saved.
According to the economist, the uncertainty of tax policy direction slows down not only investment by companies, but also the spending decisions in households. After successful tax reform it would be possible not only to more effectively allocate public funds, but also boost the development of the domestic market.

Nauseda supports an increase in non-taxable income level, though says that it will not significantly supplement the income of low-earners. Currently, it is planned to increase the NPD for low-earners, from 470 litas (136 euros) per month to 570 litas. In this case, their income will be supplemented by 21 litas. Yet, Nauseda noted that even such a slight increase in income would allow boosting the overall consumption in the country.
“Yes, we might ask, what does this 21 litas mean in terms of consumption? Yet bearing in mind that there are many low-earners, thousands of them, the impact on consumption would be positive,” said Nauseda.

The economist also said that raising NPD is a better way to increase purchasing power compared to raising the minimum monthly salary since NPD would be executed at the expense of the state, and not economic entities.
“The increase in MMA is an order from the state for a private employer to raise the minimum salary paid to an employee. It goes without saying that every employer seeking to maximize profit, seeing no way to raise the salary and not willing to fire the employee, would begin looking for legal and illegal ways to circumvent this requirement,” said Nauseda.
In another discussion on taxes, Prime Minister Algirdas Butkevicius till now does not see any possibilities for the introduction of progressive tax rates. The PM says that this question is premature since people receive small salaries and if such a tax system was introduced, a large part of budget income would be lost.

“It is a bit strange to talk about a progressive tax system today when 95 percent of working people’s salary does not exceed 3,500 litas a month. Thus, we have decided to help those people in need through non-taxable income,” said the PM on June 20 in an interview on radio Ziniu Radijas. He was discussing the amendment to the tax law submitted by the ruling coalition partners, the Party of Order and Justice. They propose to introduce a progressive tax system, depending on received income.

The PM does not support a general real estate tax, either.
Chief Economist at Swedbank Lithuania Nerijus Maciulis, referring to the possibility of a progressive tax introduction, says that the discussion should not focus on the introduction of a progressive tax but instead consider whether the progressiveness should be higher.

According to Maciulis, the progressiveness of the income tax in Lithuania has already been created by differentiated tax-exempt income (the NPD), and additional NPD depending on the number of children in the family and the non-existent SoDra contribution cap, although the cap for the allowance is fixed.
“The debate should not be about the introduction of a progressive tax but about whether the progressiveness should be higher. A majority of economists and politicians agree that a certain progressiveness must exist - residents who receive a lower-income should be less burdened with tax. However, it is necessary to understand that very large jumps in the income tax rate, from 5 percent to 20 percent or to 40 percent, may have negative side effects,” says the economist.

Firstly, Maciulis notes that high income tax progressiveness may hamper the ambition to study and improve one’s skills, therefore earnings. Also, when income gets close to the income tax barrier, a wish to hide income may occur, or convert it into a form that is not taxable.