Tax Cut Revolution

Sometimes it seems that all tax news is bad. France has raised its top income tax rate to a scandalous 75%. Eleven EU member states are set to introduce a financial transaction tax. Lithuania is debating progressive taxation and higher taxes on capital. Amidst this news, the world has actually witnessed a profit tax cut revolution.

Starting from 2006 the profit tax has been reduced in the following countries: Sweden from 28 to 22%, the United Kingdom from 30 to 23% (and down to 21% as of April 2014), Finland from 26 to 20%, Norway from 28 iki 27%, Denmark from 28 to 24.5%, Gibraltar from 35 to 10%, Canada from 36 to 26%, Japan from 41 to 38%, the Republic of South Africa from 37 to 28%, Thailand from 30 to 20%, the Czech Republic from 24 to 19%, Slovenia from 25 to 17%, Ukraine from 25 to 18%, Belarus from 24 to 18% (KPMG data). The number of countries that have raised the profit tax is three times as low.

This revolution has not been hampered by the economic crisis. It is going on. This year alone seven countries are going to reduce the profit tax. These countries are the UK, Finland, Norway, Denmark, Slovakia, Ukraine and Thailand.

To further improve the business environment, some countries are going to usher in further cuts in the profit tax rate: starting from 2015 the UK will reduce the tax rate down to 20%. From 2016 Denmark will lower it to 22%, and Ukraine, down to 16%.

This trend confirms once again that tax debates in today’s Lithuania have lost touch with the global context. Our politicians are advocating a progressive (!) profit tax rate, imposing social security taxes and mandatory health insurance fees on dividends and otherwise increasing taxation on business and capital. At the same time they naively believe that businessese and capital will not flee to more favourable settings. After all, capital is fleeing already today.

Our profit tax rate will soon deprive us of any advantage. The illusion that Lithuania is a low-tax country is being mercilessly destroyed by the reality and the ongoing tax cuts in other countries. So rather than debating how to pluck “capitalist” geese that lay the golden eggs we’d better do something to attract more capital. No one would argue, I guess, that more capital would benefit both citizens and the state budget.

It is no secret that „capitalist“ geese are particularly fond of Estonia. As the talks about tax exemption for reinvested profit in Lithuania have started, some have argued that we do not need the Estonian model; that taxable profit can be reduced in Lithuania too. However, Estonia exempts all of reinvested profit, while in Lithuania the exemption is applicable only to investments into unused assets that are no more than two years old and that are strictly classified by law. In many cases though even a 10-year old piece of equipment may secure a considerable leap in productivity. Restrictions by asset groups are just as unjustified and discriminatory.

The existing regulations do not make us much more attractive than others, so we need to look for something else. If countries seeing others’ success follow suit, why don’t we adopt the Estonian model? If we don’t, the “capitalist” geese will fly away, leaving us with communist crows.