Progressive Taxation: Are Taxes in Lithuania Too Low?

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With several policy proposals on introducing a progressive taxation model put on the table, the upcoming parliamentary session in Lithuania is sure to become a heavily debated one. In fact, every tenth taxpayer is threatened with higher tax burden as personal income tax might increase from a flat 15%up to 20%.

According to the new model proposed by social democrats, a progressive 16% rate would apply to monthly income exceeding EUR 1,267 after tax, 17% would be levied on income over EUR 1,892, and 20% on monthly earnings over EUR 2,508. What does it mean to a taxpayer? Nothing else, but a heavier tax burden. Loudly speaking of their commitment not to increase taxes or introduce new ones, politicians seem to be going in the exact opposite direction.

If implemented, the progressive model will affect every tenth taxpayer, but aren’t they taxed enough already? Today tax burden on average income earners in Lithuania equals EU average and is higher than in some of the most developed countries, including members of the Organisations for Economic Co-operation and Development (OECD). According to OECD, in 2016, the actual tax burden in its member states amounted to 36% as compared to 41% in Lithuania. And though the proposed increase might not look like a significant one, we should make no mistake about its future implications.

A progressive tax model will certainly result in ever-growing taxation. As income gets higher, less and less people will pay 15%. Proponents of the proposal claim that the well-being of the Nordics is built on progressive taxation, but they seem willingly to avoid mentioning the income thresholds that apply there. The proposed annual income threshold in Lithuania is merely EUR 20,000 as compared to EUR 63,000 in Sweden and EUR 67,000 in Denmark, not to mention the fact that those countries allow deductions from taxable amount, e.g. interests paid or transportation costs incurred while travelling to work may be deducted from taxable income.

Moreover, proponents of the proposal fail to realise the current progressiveness of the Lithuanian tax system. First, the tax-exempt amount of income is higher for lower-income earners and those earning more already pay more in terms of both absolute amount and percentage. Second, those paying four times as much social security contributions may only expect up to two times higher pensions.

Finally, drafters of the proposal claim that progressive income taxation would bring additional EUR 105 mln in tax revenue; however, the numbers are overly optimistic. First, the implementation of a new income tax model will certainly require more resources, resulting in additional administrative costs. Second, higher taxation will incentivise tax evasion and undeclared labour as well as encourage high-income earners to change their tax residence. All in all, the new model might bring significantly less, if anything.

To sum up, the overall tax burden in Lithuania is already high and with elements of progressivity. Therefore, instead of braking their promises politicians should be looking into the ways of stimulating growth and increasing the competitiveness of the economy. Sadly, unconstructive debates only create the image of an unstable and unpredictable policy environment.

Ieva Valeskaite
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