Tax reform could up budget deficit to 1.5-2%, says Bank of Latvia president

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The proposed tax shake-up by the Finance Ministry will put weight on Latvia's budget in the short term, increasing the budget deficit by 1.5-2%, said Bank of Latvia president Ilmārs Rimšēvičs in an interview to Latvian Television on Thursday.

According to Rimšēvičs, the Bank of Latvia would be "ready to put up with a larger fiscal deficit [..] and it will be one of the matters to be coordinated with the European Commission." 

Due to tax reform, budget deficit is expected to grow in 2018 but decrease in the following years, he said.

As concerning the two separate tax proposals by the Finance Ministry and the Bank of Latvia, they mostly differ in scope, with the ministry's proposal being the more encompassing of the two, Rimšēvics explained.

He said that the tax reform would be beneficial to both residents and businesses, while the state and municipal budgets will suffer as a result.

The Finance Ministry proposes to reform labor taxes, introducing a personal income tax at 20% for income of up to €45,000 a year, and a tax rate of 23% on income above €45,000 a year.

The minimum wage should be raised to €430 a month, and the solidarity tax on high earners should be abolished.

The ministry proposes to apply 20% corporate tax on distributed profit.

The ministry explains that if at the moment a person receives €910.50 a month as a gross wage, it ends up as €641.30 as a net wage, while after the proposed labor tax reform, the net wage would amount to €680.90.

The Finance Ministry has proposed changes in capital tax, setting a 20% income tax on distributed profit, and 0% tax on reinvested profit.

The value added tax (VAT) should be retained at 21%. The ministry wants to start discussions on gradual increases of excise tax.

The ministry has also prepared proposals in relation to microenterprise tax. The ministry proposes to retain the microenterprise tax system, reducing the maximum turnover from the current €100,000 to €40,000 a year.

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