Algirdas Sysas
© DELFI / Kiril Čachovskij

Recently tax reform proposals, which would help raise tax income, of those preparing the new social model were dismissed by the coalition government leaders, the Social Democrats. Now the LSDP has made a U-turn in considering new taxes or tax increases BNS reported.

The state budget will gradually have to support base pensions and increasing tax-free income sizes, thus the LSDP has concluded that just economic growth and diminishing black market will not be sufficient to keep up. Thus the party now alludes to increased property and income taxes, potential implementation of automobile and environmental conservation taxes.~

Economists Jekaterina Rojaka and Romas Lazutka are critical of such proposals to raise taxes or introduce new ones. Instead the experts recommend ensuring more efficient tax collection for the taxes already present.

See no other way than to raise or implement taxes

The Deputy Chairman of the Social Democrat party, Seimas Vice-Chairman Algirdas Sysas echoes the observed LSDP approach, noting that the changes to the Labour Code and increases in base pension sizes will not be possible to cover just with economic growth and new sources will need to be found.

“Base pensions being transferred to the state budget will gradually increase by 12%, thus for this there is a need for [funding] sources that would allow this process to proceed stably. If we want to make the pension system more robust, it matters not if you are in the right or the left, we have to find sources and I have listed what sources those could be.

What source is selected is a matter of political agreement. It will depend on who wins the elections, maybe they will work some sort of magic and will find other sources. Though no-one in the world has figured out anything else than property, automobile, dividend taxation. Well we can also talk about ecological taxes, something else, but I believe that we should use what other countries have implemented and recommend,” spoke A. Sysas.

When asked why these taxes weren’t implemented by the current coalition government, the politician answered that there was a lack of resolve to do so due to disagreements among coalition members.

Refuting recommendations from scientists and going their own way

One of the authors of the new social model, Vilnius University Economics Faculty Theoretical Economics Cathedral head Romas Lazutka notes that one of the tasks the scientists working on the model faced was to propose reforms to the tax system in a way that would provide extra finances for the state budget to cover the base pensions. Politicians shot down the proposed ideas, deciding that economic growth will suffice; something they have changed their minds on lately.

“One of our tasks was to propose how to reform taxation, but when we provided the proposals and they were publicised, the PM distanced himself, stating that nothing like this will be done, it is just a proposal by scientists. Later the Minister of Finance chimed in as well, stating that the tax reform is not related to the Social Security and Labour Ministry which ordered the social model project.
We then stopped and the final variant no longer contained the part which compensates for increased state expenditure,” recalls R. Lazutka.

According to the economist scientists offered a proposal to reform the tax system and to move the base pension to the state budget over 3-4 years. It was, however, decided to do this at a slower pace, thinking that the fruits of economic growth would suffice, which proved to be incorrect. In fact the expert points out that there is no legislative assurance for the gradual transition of Sodra payments into the budget, thus it is unclear if the pension migration plan will even be completed. Indeed the reform has become very undefined, with it being necessary to negotiate regarding each percentage of migration every autumn.

Problems could be resolved without increased or new taxes

The DNB bank Chief Economist for the Baltic States Jekaterina Rojaka agrees with the idea of paying the base pension directly from the budget since it does not correlate with payments to Sodra. With that said the lack of funds in the budget does not have to be compensated through increased or new taxes.

While she notes that the current proposals are difficult to evaluate due to the lack of information on implementation strategies, Rojaka stresses that first it would be better to look into the effectiveness of fund collection, rather than increasing taxes. The expert notes that while taxing old automobiles could help move toward more efficient and environmentally friendly solutions and vehicles, such an option would be particularly tough on low income earners. This is particularly so given the high fuel prices in Lithuania; the expert highlights that with those high prices are mostly comprised of taxes, thus already making citizens pay for their usage of cars.

Similarly taxing dividends would likely not bring in much extra income, rather acting as a cosmetic change, one which would irritate investors, manufacturers and other businessmen. Rojaka concludes that considering individual taxes will not help the situation, particularly with how infamous Lithuania is among investors for the frequent tax system changes it has gone through.

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