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Dubious Tax Wars: The Election Menace Can Be The New Hope

On the brink of the New Year politicians were speaking about implementing new taxes and vouching for social justice. They were compelled to bring their attention to this subject because of worsened economic predictions and a threat of larger budget deficit. Now it seems that all the talks are settled; the coming elections might bring about new hope and not necessarily menace.

What politicians seem to have forgotten that, introducing new taxes and increasing the present ones would be unnecessary, if the effectual ones would collect the same amount as in other countries of European Union (EU).

Compared to other EU states, Lithuania distinguishes with one of the lowest tax revenue numbers paralleled to the gross domestic product (GDP).

Story so far

In the beginning of this year the value-added tax concession was once again restored to the hotels. A month earlier the ruling party was suggesting taxing almost everything, whereas the opposition used the moment to propose a deficit cutting plan with progressive taxation.

The introduced tax proposals were supposed to be discussed in spring, during the ordinary Parliament session. But in the preliminary agenda these questions are not included.

It seems that those taxes, so fiercely discussed in the end of the last year by representatives both from Parliament and Government, will remain as plans only. The luxury tax is completely out of sight, and the valued-added tax (VAT) will be increased exclusively in case of emergency – if budget income quota will drag too much.

If the optimistic economic forecast will come true, Parliament will not need to make quick decisions and there will be much more time for discussions, but only after the October elections.

Putting a price-tag on a tax-tag

The problem with the implementation of new taxes is that it costs money. The same money the tax is supposed to be collecting.

Since 2009 VAT was increased by 3 percent points – from 18% to 21%. Moreover, the income tax calculation method was changed, mandatory health insurance fee for everyone was introduced, and gas, alcohol and tobacco excise taxes were increased.

However, taxation income for the budget did not increase. Comparative amount of collected taxes decreased and the gap to EU average grew.

According to “Eurostat”, a negative tendency was observed in the whole EU, most economists say, that this is an inevitable consequence of economic crisis.

Blame the smugglers

The main reason for the taxation income decrease in Lithuania is the shadow economy. Particular economic incentives, such as higher alcohol, gas or tobacco excise taxes usually increase consumption of these products of the legal market.

Lithuanian Free Market Institute conducted a research that showed that the extent of shadow economy in Lithuania in 2011 might have been over 29 percent of GDP and from 2008 increased by 11 percent.

Charming future

During the last couple of years the most beneficial, in terms of budget finance, was the VAT tax. Thus, the emergency scenario of it being increased is not the worst thing to do. Minister of Finance Ingrida Šimonytė seems to hold a similar position.

New luxury taxes should be thought over, because their implementation and regulation could be even more expensive than their collected income.

In addition, Lithuania could consider a better approach to taxing the capital, so it could catch up to revenues from labor taxation.

The biggest potential is in the shadow economy. Current government should have learned a lesson that just declaring to withdraw a billion from it is not enough.

These actions could really benefit the Lithuanian tax payers and lower the budget deficit, but 2012 is the election year and in all likelihood these problems will be tackled only by the new Parliament. Let’s hope they will be successful.

Edgaras Savickas EBN reporter