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Progressive taxes - not today

Once again, Social Democratic party has displayed an intention to implement progressive taxes in Lithuania. In the beginning of April they have registered an amendment to the Resident Income Tax law, which has burst out a wide discussion not only about the possibility to implement the tax, but also about the whole fairness and equality of the Lithuania’s economic system and between its subjects. As a leftwing author, I consider progressive taxes to be a positive phenomenon, however, not possible in Lithuania at this time.

The origins of the progressive tax idea can be traced back even as far as the pioneer of political economy Adam Smith, who wrote in his famous book “The Wealth of Nations” that: “The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion”.

Time and time again various researches have proven that the best way improve overall nation’s happiness is to decrease the social disjuncture. Countries like Luxembourg, Sweden, Denmark and Netherlands have the lowest social disjuncture in the world, while at the same time they share the highest places in the happiness index. Of course, many other factors play in this situation and the moral side of the progressive taxes is still quite ambiguous, but there is no definite answer to this problem. Progressive taxes are a matter of choice and political views, not a solution to a problem; however, in Lithuania the case is quite different.

Even the project of the new amendment is, to say the least, quite odd. It is proposed to implement the tax only to two sorts of income - work and dividends. All other income would be left the same 15% tax rate. Thus, there is loophole in the law for those, who would like to avoid the progression.

Another reason, as Social Democrats say, to implement the new tax is to increase the middle class of Lithuania. The chairman of the Social Democratic party Algirdas Butkevičius commented: “I think that the salary of a middle class representative should be about 3000-4000Lt. I don’t say that that is a line from which the progressive taxes would be applied, they would be applied to a sum which is greater than that”. However, the percentage of Lithuanians, who earn such a salary is considerably low - only 7-8%. The best examples of where the progressive tax was successful are countries, which had a strong middle class at the time of introduction. Today a half of all Resident Income Tax is paid by top 15% earners of the whole population. Do we want to burden them even more? Maybe yes, but it could have negative effects on the state’s business climate.

Progressive taxes in Lithuania would increase the shadow market, have a negative effect on the qualified labor force and deter potential foreign investors. Maybe other kinds of taxes, like estate or vehicle, would be a more suitable choice to improve Lithuania’s economy in 2011 and later years. Whereas, the progression could be implemented when Lithuania will be a stable country with a strong economy and other politicians in the parliament.

Edgaras Savickas - EBN Reporter