Every Lithuanian earning approximately 13 euro per day or 383 euro a month can view themselves as being middle class. Minister of Finance Vilius Šapoka suggests to take up such a view, but not all agree with him.
Some time ago there was much discussion in the public sphere, what can be viewed as society’s middle class, who represents it in Lithuania, how much they have to earn or how much they can allow themselves to purchase without experiencing further difficulties.
Furthermore, with the cabinet offering proposals over future tax changes, a number of questions arise, how they will impact not only the poorest, but also those in the middle.
“In economic theory, there are efforts to define the middle class based on various criteria such as the ability to satisfy more than just basic needs or by comparing income to other groups.
If we are to take the middle class definition which employs calculations based on the median <…>, also applying the Organisation for Economic Co-operation and Development metrics <…>, holding as middle class the interval from 0.75 to 2 times the median income, also based on Sodra data about the distribution of insured individuals’ income, we can make the presumption that currently the middle class would be formed from individuals earning 450 euro to 1200 euro prior to tax per month.”
The median is the middle number in a set of numbers. If we list the official gross wages of all employees in the country, we would find 600 euro in the middle, which would be the median.
Including tax into the calculations, from the minister’s mentioned 450 euro (600 x 0.75) and 1200 euro (600 x 2), we arrive at Lithuanian middle class earners net monthly earnings being between 383 euro and 912 euro.
Based on Sodra data, there are 610 thousand individuals (56% of everyone insured), who earn between 450 and 1200 euro per month prior to tax.
Why is other income not included?
A. Maldeikienė finds the response lacking in economics knowledge and logical thinking:
“Firstly it states that the middle class is those people who can allow themselves a little more, which makes sense.
But to expect that a person who earns around 320 euro after tax can adequately live in Lithuania is naïve. To say that such a person can allow themselves anything more is cynical. Even the upper limit – around 800 euro after tax – actually speaks of life where you never get a toothache. Not to speak about serious dentistry – pulling teeth or replacing.”
According to the member of Seimas, the answers contradict themselves.
“When speaking of the middle class he says that this is based on OECD research, which supposedly states that the middle class is those whose incomes are between 0.75 and twofold the median. In the same sentence he suddenly turns incomes into wages.
In Lithuania a large portion of one’s income is received not in terms of wages, but as income for property, rent, various individual business activity, business permits, farming income and such. So you could take he is simply seeking fools,” the politician said.
According to her this is done in order to avoid establishing normal Western progressive taxation in Lithuania. Supposedly there are not many earning larger amounts, thus there is no-one to pay greater tax. However such excuses are based on data on just wages, without considering income from other sources.
“It remains a great secret who drove past me in Vilnius Street in a Porsche jut now. <…> It is shameful to read, I do not know what discussions this can be talked about. People are being fooled. This is definitely not the median income. Perhaps it is the median wage based on Sodra.
On the other hand we well understand that Sodra data does not reflect payments off the books. This means that people’s incomes are actually larger. This is the minister’s own field of work. If he could think, he could likely understand that it is not off the books payments and that minute wage that those people earn, they end up in a kingdom of twisted mirrors,” A. Maldeikienė explained.
Emigration for the intelligent
According to the member of Seimas, the cabinet’s intended tax changes promise nothing good for the middle class. Having been rapidly drowned out since 2000, it continues to be pushed towards poverty. It will continue to be particularly difficult for those employed in the public sector – doctors, teachers, scientists and others.
“All of these people are left in an impossible position. If they manage to earn 1000-1200 euro after tax (this, I believe, is the minimum limit of the middle class) and can then aim at being middle class, have some sort of income planning, they will then be taxed again.
Usually representatives of this class send their children to better schools, have more books at home, need a concert ticket and such. This means that as soon as they reach this level, they are taxed again. And they have to share that money with those below.
The very top does not share with anyone. The top 1% earners have 42 tax exemptions – it is a horrid number of tax exemptions and zero taxation.
And you see that more than half their incomes are completely tax free, with the rest – at a low tariff, they are actually living in a Porsche and Lamborghini kingdom and openly, cynically ridicule the nation,” the politician commented.
She predicts that the tragic consequences of this will arrive in 10 years. There will apparently be no more doctors or teachers, young specialists will emigrate. “This tax reform is intended to encourage emigration. And not any emigration, but that of intelligent people,” she pointed out.
According to Ingrida Šimonytė it is still early to speak of the impact these reforms may have on the middle class, stating that, “It would be best to await a clearer image, what will remain in the proposal because for now anyone can say anything. This isn’t even impact on the middle class we should talk about. Since this is not a tax reform, just placing some money into the pockets of low income earners, this will have no direct impact on the middle class, only an indirect negative.
Take the tax free income size for Sodra payments. If minimum wage earners’ payments are not reduced (and they aren’t), this means that in Sodra, compared to now, redistribution increases to the benefit of low income earners. This burden will fall on the middle class.”
It is ineffective and unobjective to specify numbers
Delfi inquired V. Šapoka, why he only made use of Sodra data on wages when defining the middle class, not calculating other sources of income.
“Let’s start with the fact there is no single definition of middle class in economic theory. Some theories link it with the ability to eat one’s fill, go on holiday once a year and such. Other also add the capacity to visit the theatre, purchase books, dedicate money to leisure and such.
I want to stress that there are still many components – family situation, profession, accumulated wealth and income, loans, purchasing power, based on all of which a person can be attributed to the middle class or some other layer of society.
It is obvious that the same amount will mean different things for someone living along, someone living with or without a loan, other responsibility, it will mean a different quality of life, while for someone else who has three children, takes care of their parents and is paying off a home loan it will be completely different.
Thus specifying a single number is neither meaningful, nor objective,” the minister explained.
According to him, commentators of this topic employ different criteria closer to them. Apparently the answer to the members of Seimas specified that there is a myriad of theories and the data from Sodra being used was as an example.
“Let me remind that the government’s priority for next year is combating poverty and social segregation. Upon resolving these issues in the future, considering the state’s financial capacities we will be able to talk of, for example, reducing employment costs for the middle class.
I would accent yet again that we do not add any further taxation on the middle class with these changes. We seek to create further opportunities to create one’s own business, we simplify individual business activity taxation, seek to attract investment to create better paid jobs,” the minister said.