The tax policy reform will make Latvia more competitive in comparison with other Baltic States. In addition, reforms in the country will introduce the largest PIT benefits for dependents among other Baltic States, Finance Ministry promises.
“Tax burden decline for labor taxes and increased benefits will be felt by all residents,” the ministry states.
PIT rate’s decline from 23% to 20% on income that does not exceed EUR 45,000 will apply to all working people, increasing the money on their hands. People whose income is above EUR 45,000 will also benefit from reduced PIT rate, because 23% rate will only be applied to income that exceeds this amount.
In addition, positive effect on residents’ income is expected from increased non-taxable minimum, which will have the biggest effect on income of small wage recipients.
Based on FM’s tax reform assessment, average wage increase will exceed 5%. Reduced tax burden will have a positive impact on private consumption and corporate costs, increasing their competitiveness and labor attraction opportunities. Reduction of labor costs can also help stimulate company investments, freeing up additional finances in the process, the ministry reports.
It is also noted that the expected minimal monthly wage rise from EUR 380 to EUR 430 will increase residents’ income and reduce income inequality. At the same time, minimum wage increase, if realized in conjunction with major labor tax decline, will not reduce companies’ overall external competitiveness or their financial situation, which is especially topical for Latvian regions, where labor pay levels remain low.
Also the tax reform will make labor costs similar to other Baltic States.
In the context of Baltic States, Finance Ministry notes that minimal monthly wage in Estonia is currently much higher than it is in Latvia and Lithuania (EUR 470 in Estonia and EUR 380 in Latvia and Lithuania). After the reform, it will be EUR 430 in Latvia. Latvia’s current PIT of 23% will be made 20% – close to Estonia’s level.
According to Finance Ministry’s estimates, by introducing planned labor tax changes, the labor tax gap index for employed people without dependents that receive 67% of the average labor pay, will increase in Latvia from 41.9% in 2015 (Eurostat data) to 38.1% (Eurostat data suggest it was 39.2% in Lithuania and 38.0% in Estonia in 2015).
After the tax reform, employees will receive larger income, which will improve Latvia’s overall competitiveness with other Baltic States. While in 2015 an employed person in Latvia without dependents received EUR 641 a month (at gross wage of EUR 910.1 a month), after the reform the amount paid will be EUR 666 a month.
Finance Ministry’s goals realizing this tax policy include the following: improving regional competitiveness, motivating residents to start a business, pay taxes and invest in business development. This will help improve residents’ overall economic activity and make sure tax payment procedure is simple and convenient.
The reform is also meant to make sure the country’s tax reform is transparent and predictable all the way until 2021. (BNN/Business World Magazine)