Economists have evaluated the proposed tax rework – those earning the least will benefit, while there will be no impact on everyone else. The commenters were unwilling to describe the changes as reform.
The majority has presented its tax reform and revealed what changes await for the VAT tariffs, how much the tax free income size will be raised, what disbursements will be provided for children and other changes.
While the country’s economists received the proposals rather positively, they were nonetheless uninclined to describe them as tax reform.
“This is not the first and not even the third tax system rework and despite all the reworks differing, they all have one thing in common – none are actual tax reform.
This rework can be compared to a park with benches, trees and a children’s playground. The benches are painted a new colour, look better, but they haven’t been moved, they remain in the same places. You cannot call this a fundamental change of the park, same as this tax rework.
It would be a reform only when the tax burden would be significantly reduced, compensating it, for example, via indirect taxation such as VAT or excises,” the advisor to the SEB bank president, economist Gitanas Nausėda commented.
The economists have unanimously supported raising the tax free income size to 380 euro, albeit noting that it has been raised almost every year anyway, were also fairly positive regarding the monthly disbursements for children in all families.
They were most positive of the reduced income tariff for commercialising inventions and removing taxation on funding companies use on innovation and technological renewal.
The greatest amount of criticism was levied at the 15% exemption rate for central heating, where it was proposed to completely abolish the current exemption rate of 9%.
Most benefit to the lowest earners, but little impact on others
Chief economist for the Nordea bank Žygimantas Mauricas stated that raising the tax free income size to 380 euro is laudable because it raises tax progressivity and reduces tax burdens on the lowest earners.
“This is the correct way if we are to speak of progressivity. It is certainly a better idea than was before when there were discussions of raising tax burdens for supposedly wealthy people who earn barely more than 1000 euro when in countries such as Germany that is borderline poverty,” Ž. Mauricas said.
He also found other positives, noting that “This way municipalities themselves are interested in creating not only jobs, but also create ones where people would earn far more than the minimum monthly wage (MMW). This is because if people earn just the MMW, the municipalities will not receive any income from their portion of the income tax. Thus they will have to strive to combat low wages and off the books wages.
G. Nausėda concurs that raising the tax free income size to 380 euro and abolishing the 3% Sodra pension insurance contribution will certainly improve the net incomes of those earning minimum wage, but others will not experience any changes.
“It isn’t worth to expect any particularly good news for those who earn more, especially those earning more than 1000 euro, from these tax changes. Due to this we are left with the question whether social segregation exists as a problem only for the category of those earning minimum wage or if it is a broader phenomenon in Lithuania.
Emigration exists with more than just those earning the minimum. Well, this is not a complaint, but more of a doubt,” he mused.
Swedbank chief economist Nerijus Mačiulis views the increase to the tax free income size fairly positively, however he also stresses that this is raised almost every year, stating that, “It could be increased practically without any political decision, the process should be completely automated. For example setting that the tax free income size always equals the MMW.”
He supports the idea to include the 3% pension social insurance fee within the 380 euro untaxed income, but this still leaves the economist with questions.
“This is a positive change, but questions arise, what those employed may lose due to it because there seemingly were hints that the variable portion of the retirement pension may changes. In such a case of course it would be a mistaken decision, no tax exemption should reduce future social guarantees,” the economist stressed.
Children’s disbursements for all families – a chance to raise birth rates
Ž. Mauricas views plans to establish a 30 euro grant per child for all families positively, recalling his own bitter experience. This proposal is mostly criticised because the grant would be for all families that raise children, even wealthy ones.
“Grants for children are a sort of form of the idea of base income (income guaranteed and granted to every citizen without exception), which is becoming popular around the world, being considered in Switzerland and Finland. I believe that in several centuries, with technologies developing, it will be inevitable because it is far simpler to pay a fixed amount for everyone, rather than try to establish who needs it and who does not.
My parents’ situation was difficult after Lithuania established independence, same as for many people. They worked in the public sector, my father was a scientist, my mother worked in a kindergarten. Life was difficult, sometimes we lacked money for food at the end of the month, lacking money.
But my family did not consider appealing to anyone, even while my friend’s parents were well off, worked in Gariūnai, had a fairly new car, much furniture and utilities I had never seen before in my life, but they would also be visited by social workers and would also be brought toys I had never seen before and such.
This is a significant social inequality because in reality, people who have more audacity, more fierceness to ask for something, beg for something – win. In such a case it is better to pay everyone rather than establish who is rich and who is not,” he stated.
Due to this he is in support of base income for not only children, but also adults, stating that, “This is far better than having an army of bureaucrats who evaluate who should receive certain income or not. Currently a great deal of administrative resources is spent on this.”
Regarding criticisms that even wealthy families will receive the grant, Ž. Mauricas pointed out that this could be an excellent opportunity to nurture civic mindedness. “It would be very civic to allow such families to dedicate the sum to a different family,” he said.
Nevertheless he also believes that 30 euro is a very small amount and the children’s grant should reach 100 euro.
“You can’t even buy diapers with this much, it should be larger, I believe reaching even 100 euro. Overall if the idea of base income would be discussed, an adult person’s base income would be around 200-300 euro, thus children should receive 40-50% of the amount, which is 100 euro,” he explained.
N. Mačiulis does not agree that the grant should be increased, no matter how much one may wish for it.
“There will always be a desire to see larger grants, but understand that this is already a compromise and economic resources will always be limited.
I believe that children’s grants are the right decision, though I know that it is criticised for being handed to those who may not need it. But this could be a means to raise birth rates and not just among socially supported families.
We definitely do not want a situation like that in Russia in the past where families were planning to purchase a car by making use of large social grants for their second, third and so on child. And usually it was impoverished families that would plan children like this,” he cautioned.
Heating exemption – compromise that satisfies no-one
The economists were most critical of the proposed 15% exemption rate on centralised heating when the planned exemption was to be removed overall.
“No-one talks about it in Lithuania when natural gas prices shift by 6-8%, no-one cares about it at that time, but when we talk about heating tariffs, it sounds like it is a matter that will decide the fate of Lithuania.
In this case we can admit that establishing these 5, 15 and 21% exemption tariffs, if we are to get side-tracked toward conspiracy theories is there to justify a higher heating VAT tariff. I do not know if there is a basis for it, but such a conspiracy theory could exist.
The question is the same, why the exemption tariff would be only for centralised heating, why an analogous tariff isn’t applied to gas or firewood based heating. It is not easy to answer that question. When politicians are oriented toward the voters’ moods, it would be odd if they did otherwise,” G. Nausėda stated.
Ž. Mauricas quipped that it is a decent compromise. “Perhaps it is good because it would appear that it is those that are dissatisfied who wanted to keep the exemption rate, not those who wanted to abolish it. As such it is a good decision. Good negotiations happen when both sides are left dissatisfied,” he laughed.
According to the expert this exemption is pointless because it is relevant for city residents and not, for example, countryside residents who heat their homes with firewood or other solid fuels and definitely live in far more poverty typically.
N. Mačiulis says that it would be more correct to compensate citizens directly for hot water and heating, which was the original plan, rather than a tax exemption.
“There was already a mechanism for it. Perhaps it was only an intermediary stage, but I would call this a political decision for now, not one based on economic arguments. This decision, by the way, is discussed every year and always scrapped. It is very difficult to pass it politically, often the party which proposed it, when it enters the opposition, opposes the new majority’s intents to pass the same decision and scrap the exemption,” he ironized.
Certain proposals particularly praised
N. Mačiulis was glad that the government is seeking to resolve another problem, that of Lithuania’s competitiveness.
“For a few years now wage growth has exceeded productivity growth and this was observed by the European Central Bank. But since there is neither necessity, nor ability to obstruct wage growth, the only way is to encourage productivity.
The 5% income tax rate proposed by the cabinet and Ministry of Finance for scientific research and commercialisation is what could encourage investment and the growth of productivity in the long run. This is a positive change, though it will not impact all companies,” he said.
These proposals received praise from G. Nausėda as well, who stated that, “All these measures are good, it is particularly important that decisions are made without teaspoon size changes, raising the tax exemption on companies engaged in technological and scientific renovation from 50% to 100%, which in essence allows them to not pay income tax.
The 5% exemption rate for commercialising inventions is also good, just that it is unclear what the scale of this is. But looking to the future it acts as encouragement,” he said.
The cabinet’s main proposals
Based on the cabinet’s proposal, starting next year the tax free income size should rise to 380 euro. Furthermore there would be a 380 euro wage size which is not taxed by the 3% retirement social insurance fee.
This would allow those earning the minimum monthly wage which currently is 380 euro in Lithuania to not need to pay income tax and Sodra fees, though employees would need to continue paying the 6% mandatory health insurance.
The VAT exemption for heating is a compromise variant – applying a 15% exemption rate for centralised heating and hot water. This exemption would also be applied to residential services.
A 5% VAT rate is proposed for non-compensated prescription drugs, passenger transport services, books and periodicals.
From next year a 30 euro monthly grant for children is to be paid to everyone, regardless of the family’s income and wealth. It is promised that there will be further grants for those raising three children, irrelevant of income, while for one or two – if the income per person is less than 153 euro.
Also, in order to raise productivity, it is proposed to establish that income from commercialising inventions would be taxed at a highly competitive 5% income tax tariff, whereas currently such income is taxed at a standard 15% rate.
For companies performing investment projects and investing into technological renewal it is proposed to reduce taxed income for the expenses faced up to 100%. Currently such companies expenses on renewal investment are taxed from 50%.