It is mainly planned to obtain money from the reallocation of personal income tax (IIN), which would significantly reduce municipal revenues. Some taxes would increase for workers in different non-standard modes. The tax changes are scheduled to be introduced in three phases between 2021 and 2023.
In the first phase of the tax changes which would take effect from 2021, it is planned to earmark a mandatory health insurance payment of 5%, without increasing the total labor tax burden, but by redistributing the mandatory national social security contribution (social security), personal income tax (IIN) and solidarity tax rates.
For healthcare, it is planned to reallocate some of the social contributions as well as two percentage points of IIN. This would reduce revenues in municipal budgets by nearly €140 million.
The proposal published by FM is to reduce the IIN to 18%, while increasing social contributions by 2 percentage points on the worker's side.
In order to avoid an increase in labor tax burden for people with low and medium incomes as a result of these tax rates, it is also envisaged to increase the differentiated non-taxable minimum from €300 to €350 per month. It is also planned to introduce a minimum social security security facility in the general tax regime and in alternative tax regimes for employees whose monthly income does not reach the minimum wage level, as well as to reorganize the micro-enterprise tax regime.
According to the Bank of Latvia, the losers will be workers with a number of children. For example, a person with a salary of €700 and two children would have a salary of €14 less. “We believe that additional solutions should still be looked at, so that the tax burden does not increase for this group,” said the Bank of Latvia economist Kārlis Vilerts.
In the second phase of the tax changes, taking effect from 2022, changes will be made to the general scheme of economic operators, with the provision that for operating income above €20 004 per year (€1 667 per month), social security will be paid from the entire income.
In the third phase of the tax changes that will take effect from 2023, it is planned to provide that, at all levels of income from economic activity, the social security shall be paid in full from actual income, but not less than minimum social security.
This means that taxes would increase for workers in different non-standard modes, such as the self-employed. In turn, royalties would be eliminated as a tax scheme.
It is planned to provide that all self-employed workers must pay social contributions at least from the minimum wage amount, which would cost €175 or €185 per month, said the Ministry. Higher taxes are planned for the micro-enterprise regime.
Fairness and simplicity of the tax system are an essential objective of tax policy, the FM said. At the same time, the development and implementation of individual measures should take into account the uncertainties and risks posed by the COVID-19 pandemic and its impact on economic development.
The FM estimated that all tax changes after the revision would allow healthcare to add €180.8 million next year, while municipality income would reduce by nearly €140 million..
The Finance Minister's Councillor Ints Dālderis also said that a number of details have yet to be discussed. Among the parties there is no agreement. For example, the National Alliance said that the state family allowance should be raised so that the income does not decrease for working parents. The New Conservative Party also wants to raise the non-taxable minimum to €500, but the offer of the FM is only to raise it to €350.
The report is scheduled to be viewed in the Cabinet next week.