Tax reform should not grow budget defict, says Finance Minister

As the upcoming tax reform could reduce cash flow to the state coffers in the short term, it could be recouped by rising the excise tax, opting for this solution instead of increasing the country's budget deficit, said Latvia's Finance Minister Dana Reizniece-Ozola appearing on Latvian Radio on March 8.

"The main idea [of the reform] is improving competitiveness, making our residents more secure - so that they have more money in their wallets - and making our companies stronger," said Latvia's Finance Minister.

Meanwhile the expected short-term fall in tax revenues could be made up in several ways.

"We offer compensation mechanisms, measures for fighting the shadow economy - reverse VAT payments in the areas used for 'carousel schemes', - reducing the VAT registration threshold, deciphering transactions," she said.

"We'll also offer raising the excise tax, at first funneling [the proceeds] to the reform, and afterwards earmarking the excise tax as special budget for road [maintenance], healthcare and perhaps culture," said Reizniece-Ozola.

However she was skeptical over the possibility of increasing the country's budget deficit, contrary to earlier statements by Bank of Latvia president Ilmārs Rimšēvics. 

"I'm very cautious about looking in that direction, as we've already received support from the European Commission for two reforms - the pension reform and the healthcare [reform]. That's why increasing the budget deficit would be very difficult," she said.

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.

Meanwhile municipal budgets, expected to suffer from the reform, could be compensated by funneling a fixed percentage from the total tax income.

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