The government’s cunning plan to raise taxes

DELFI / Šarūnas Mažeika

The majority is planning tax changes and states that they will not impact those in employment financially. For those earning by other means such as contracting or property sales, taxes may rise.
It is currently regulated so that if an individual’s wage on paper is a thousand euro, then roughly they earn a net of 760 euro. This is because the employer pays the government 150 euro (15%) income tax and 90 euro (9%) social insurance for the employee.

Furthermore the employers also need to pay their part of social insurance, a total of 310 euro (or 31%) from the one thousand euro wage. As such the total price of the individual’s employment is 1310 euro.


As it was previously announced, the government is planning to merge the taxation of employees and their employers and hold the entire cost of employment as gross pay. At the same time the aim is to ensure that the employee’s actual wage would not be reduced.

The Ministry of Finance does not hide that in merging the taxes, their tariffs will change. For example the income tax tariff would rise from the current 15% to 21%.


The ministry calls this “recalculation” consistent because base pensions are to be financed not by Sodra in the future, but by the state budget. Furthermore the ministry stresses that the overall tax burden will not rise and net wages will not decrease.

The most important detail here is wages. Income tax is paid not just based on wages, but also many other types of income such as contract work, rent or sales of property. In a response to Delfi the ministry indirectly admitted that the taxation for these will be reviewed.


Expecting transparency without raising payments

Lithuanian Farmer and Greens Union representative, Chairman of the Seimas Committee of Budget and Finance Stasys Jakeliūnas views the tax merger and equalisation of tariffs positively.
He explains that such proposals date back to 2013 during his term in the Butkevičius cabinet where he worked as a finance and tax advisor. While the proposal was formulated back then, it was not widely discussed. It would later become a part of the Farmer Greens’ electoral programme, entering the government programme and action plan.

The planned changes are expected to clarify how much employment costs and how much taxation there is on jobs. Jakeliūnas explains that it should also aid in the struggle against off the books wages because there would be less incentive to hide incomes. The politician also expressed support for an equalisation of income tax tariffs for all income types, including dividends, rent or sales of property. The head International Monetary Fund has apparently not objected to such a move either.


Jakeliūnas notes that while wages will rise on paper with such changes, actual incomes will change little due to the changes to social insurance payments.

Income redistribution or insurance?

Former Minister of Finance, member of the Homeland Union – Lithuanian Christian Democrats Seimas group Ingrida Šimonytė is wary of the planned changes to the tax system.


“The devil is in the details – what would be the payment ceilings for the other insurances, what insurances would be moved into the income tax. If a 21% tariff is proposed, it is clear that it is only part of them, but it is unclear what part.

There are also questions on what the healthcare financing model would be, what would have the untaxed income size applied (total income or just wages) and such. Thus I will not hazard any evaluations until I specifically see it, I cannot be certain about reforms no-one has revealed so far,” she commented.


According to I. Šimonytė the foundation of the reform should be a simple segregation of income redistribution from that which is alike insurance. She explains that horizontal and vertical tax equity demand that everyone would contribute according to their capacity to do so and those in equal conditions would be treated equally.

She points out that a base pension is purely redistribution and is something where everyone receiving similar incomes should contribute, but there are nuances where we have to keep in mind the need for long term investment and untaxed income sizes.


What to do with contract wages

Chief Economist for Swedbank Nerijus Mačiulis spoke on the LRT TV news show Panorama last week and stated that if all the taxation is shifted onto the employee, then it would require rewriting of all work contracts. Lawyer Vida Petrylaitė does not agree however.

She explains that at most it would be one point in the contract that would require changing, namely the one on wage payment. IF this is done, she stresses, it is important for employers to remain responsible and it would be necessary to review changes to contracts to make certain there has been no decrease in wages.


According to the lawyer, for large companies it could even be enough to announce wage changes in relation to the change in taxation to their staff, explaining that there is no change in net wages.

About Martynas Zilionis 22 Articles
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