The future Coalition‘s anti-recessionary plan puts forward not only an expected cut in public spending, but also an increase in most tax rates. Such a move would only exacerbate the current recession and its effect on people, businesses and the state. The three main taxes – VAT, personal income tax and corporate tax shall all be increased and set at the level of 20 percent. The equalization of tax rates may sound politically attractive, yet it is worthless in the economic sense and will increase the tax burden. The increase in VAT will lead to higher prices of most products and services, decrease consumer purchasing power and consumption. Moreover, budget revenue will increase by less than the Coalition expects, because higher taxes imply less economic activity.
Currently, 130 thousand people possess business patents (a single annual tax which allows simple economic activity without registering a company and avoiding bureaucratic routine), and the Coalition has proposed to abolish them. Coercing these individuals to register individual businesses, pay a 20 percent income tax and do bookkeeping will be an incentive for these individuals to move into the shadow economy. Even if business licences are in some cases too cheap and they may serve as a cover up for an actual employment (thus avoiding to pay an income tax), it is this simplest form of business with an easy market entry and little administrative burden which may serve as a buffer to unemployed people during the recession.
The proposal to bring in more people into the state social security system is hasty and shortsighted. Increasing the number of people covered by social security implies more revenue yet more spending, thus this proposal as a solution to the social security fund‘s problems is inappropriate. Another proposal is to „temporarily“ decrease the transfers from the social security fund to private pension funds. Currently, 900 thousand employees participate in the private pension scheme that has allowed participants to transfer up to 5,5 percent of their social security payments to private pension funds, yet the Coalition has proposed to halve the amount transferred and invested. This is a blow to everyone who has made a conscious choice in favor of private pension savings, to 8 private pension fund management companies, and to Lithuania‘s image as a reliable investment partner.
LFMI proposes not to increase tax rates and instead focus on abolishing tax privileges (primarily reduced VAT) and cutting state expenditure. A number of positive changes has been outlined in the anti-recessionary plan, including proposals to liberalize employment rules, reduce corporate tax rate on reinvested profits (50 percent of reinvested profits would be tax-free), simplify procedures of opening and closing a business, decrease the number of state institutions that control businesses and simplify territory planning procedures. LFMI analysts suggest the Coalition to act vigorously in those areas, because the most important thing the new Government can do to alleviate the recession is to streamline bureaucracy and business regulation, to make business flexibility possible.
