World Bank, OECD: Latvia needs tax reform

Some of the world's top tax experts put their minds to the problem of improving Latvia's tax system December 14 at a special conference called by the Finance Ministry.

The World Bank and Organization for Economic Cooperation and Development both presented fairly long to-do lists to policymakers, centering on the need to reform micro-enterprise tax and broaden the tax base so that low earners carry less of a tax burden. 

The OECD's Bert Brys gave a straight-talking presentation saying:

"Latvia needs a fundamental tax reform... Your tax system is not very coherent and that's where the challenges lie."

"You have very high taxes on labor income, very low taxes on capital income," Brys said, before suggesting reforms to the so-called flat-tax system.

"A flat tax doesn't work if social security contributions are very high, which is the case in your country... In fact you do not even have a pure flat tax system. Reform of the personal income tax is necessary," Brys said.

"It's very important to address the very high social security burden on low incomes... the amount of taxes you levy on low income labor is too high."

A similar tone was set by World Bank expert Emily Sinnot who said: "The flat tax option could be reconsidered... one thing you could do is strengthen tax progression."

Tax credits like those used in the US or UK could be used "to provide support for low-income families, to target in-work poverty."

A big concern is that the underlying distribution of wages is very skewed with a lot of people working around a very low wage level, when the economy needs to move towards better-skilled and better-paid jobs, the World Bank added.

There was also a reminder that so-called "envelope payments" - cash-in-hand wages that avoid tax, are not just a phenomenon among low earners and that potentially much more tax revenue is being lost as a result of envelope payments aming high earners rather than low earners.

The many migrants who have left Latvia frequently say one of the reasons is that they want more of a sense of social security

In contrast the Latvian Central Bank's Uldis Rutkaste said that the introduction of 'solidarity tax' on high earners had already introduced an element of progressivity into the system that was not particularly welcome.

He also pointed out that for average wage earners Latvia ranked fairly well in comparison with most other countries, and emphasised that with open borders within the European Union, Latvia's tax system needed to be competitive to attract businesses and investment.

"This competitiveness is a very important consideration," Rutkaste said, suggesting that higher tax rates would likely drive companies back into the shadow economy.

"We need to balance all the various aspects," he said.

Economics Minister Arvils Aseradens summed up the discussion saying: "We don't have agreement among ourselves on what we need to do."

Latvia's productivity is abnormally low, its current capacity for innovation is nothing special and the tax burden is currently spread unevenly he told delegates.

The summary tallied quite well with a wish-list of items put on social media by the Foreign Investors Council in Latvia.

 

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