derived from certain business activities. Sadly, the government-approved list of these activities as well as the tax rates and payment procedures have failed to meet taxpayers’ expectations. In an attempt to improve the rules, the Ministry of Finance drafted a resolution on lump-sum income tax. The Interdepartmental Council on Small and Medium-Sized Enterprises reviewed the draft, concluding that the proposed regulations would mitigate rather than solve the existing problems. A joint task force was formed by the Council and the Ministry of Finance to develop a new concept of lump-sum income tax. LFMI’s policy analysts participated in this work and submitted their own proposals.
Anyone wishing to engage in entrepreneurial activity faces a range of inexplicable problems. In addition to having appropriate abilities and deciding on what business to run, an entrepreneur-to-be has to answer two vital questions: First, does he have the nerve and patience to go through the bureaucratic process? Second, is he clever and patient enough to calculate and pay taxes? Adopted in 1994, lump-sum income tax was to simplify the payment of income tax. It was supposed to provide an opportunity to run a business without establishing a firm and thus avoid much of related red tape. Lump-sum income tax is the simplest form of paying income tax. It does not exempt taxpayers from any other taxes, such as VAT, social security contributions, customs duties, etc. The size of lump-sum income tax should not depend on the level of income received. It should allow taxpayers to carry out business activity and pay income tax without registering a firm and without keeping accounts that are mandatory for firms.
Sadly, the regulatory basis for lump-sum income tax has provided minor improvements to the payment procedure and business conditions. The reasons are manifold. For one thing, the list of business activities for which lump-sum income tax may be paid is incomplete. Second, different business activities are subject to specific tax rates depending on speculative profitability figures. Third, lump-sum income tax is not a one-off payment, for additional taxes must be paid if incomes exceed an established ceiling. Finally, the taxpayer is still required to keep accounts.
Lump-sum income tax should help business people to pay income tax at the right time, correctly and cheaply. It should help avoid regulations and bureaucracy related to enterprise registration. It should discourage tax evasion and encourage legal business undertakings. To that end, lump-sum income tax should meet five requirements: It should be a single, one-off payment applicable at a uniform rate to all business activities and payable by one individual.
At present, lump-sum income tax is differentiated depending on types of business activity and their speculative profitability. For example, a higher tax is imposed on machine knitting than on hand knitting. It is true that machine knitters are able to knit and sell more, but they also need to invest in knitting machines! Auto-repair services, it appears, are the most profitable, as one of the highest tax rates is charged for them. But car repair requires appropriate equipment, tools and skills-things that cost time and money, too. The levels of lump-sum income tax are unjustified insofar as one cannot judge about the profitability of individual businesses. Moreover, attempts to level profits are inherently fallacious. If no barriers are imposed on market entry nor restrictions on business activity, potential profitability tends to even out. In each individual case real income and profits will differ due to many other reasons, such as professional skills, organisation, and even sheer luck.
Lump-sum income tax should be the same for all activities. Also, one person should pay a single tax. It is inappropriate that a person pays several taxes if he carries out several business activities. Equally unacceptable is the requirement to pay additional tax for incomes exceeding 50,000 litas. Anyone has his time and capacity limits. One who knits cannot sew at the same time. One who builds houses cannot repair cars. A single income tax should relieve one from a tax on incomes from any activities. Lump-sum income tax should be a single uniform tax. It can be reduced proportionally only if paid for a shorter than the tax period.
According to the existing rules, lump-sum income tax may be paid only for business undertakings approved by the government. This discriminates against those areas of activity which are not included in the government-adopted list. Proposals have been voiced to expand and supplement the list. There is a danger, however, that some areas will be overlooked anyway. The list in question should be abandoned altogether. Any person should have a right to engage, without incorporating a firm, in any business activities that are not banned by Lithuanian laws. Licensed activities, e.g. dentist’s services, are no exception. Those who want to have a licensed business without registering a firm should receive a licence under general conditions. Lump-sum income tax is a form of paying income tax and not a permission to carry out a business.
Many oppose this idea, arguing that everybody would then start paying lump-sum income tax, and all enterprises would eventually dissolve. In fact, there is nothing wrong with such a state of affairs. If lump-sum income tax were paid by all working individuals, it would become a sort of capitation tax, a convenient form of taxation for both taxpayers and tax inspectors. But if capitation tax is unacceptable, it could easily be discarded. The popularity of lump-sum income tax applicable to all businesses would depend on the size of the tax. It is obvious that an excessively high tax would preclude a boom. In fact, it may be so high as to scare away anyone originally attracted to it. On the other hand, one should remember that companies are established for many other reasons, such as to limit liabilities or to be a co-owner. Therefore the argument that all enterprises would dissolve in the case of a universal lump-sum income tax is largely unfounded.
These considerations should not be viewed as a proposal to regulate the number of payers of lump-sum income tax. Introducing a single uniform, universal but excessively high lump-sum income tax would be tantamount to not having the tax at all. Low-income earners, e.g. hired housekeepers, would not be able to pay the tax and would preserve informal labour relations. Taxation ideologists would argue that low lump-sum income tax would be abused, and companies’ incomes would be withdrawn tax-free. First of all, such a possibility exists today as well. Second, a compromise could be reached, and two kinds of lump-sum income tax could be adopted: one for listed activities, the other-a higher one-for the remaining businesses. Although this compromise would violate the principle of uniformity, it would help achieve universality and equal treatment of all activities.
The requirement to keep accounts is another concern. A person who pays lump-sum income tax should be relieved from book-keeping necessary to pay income taxes. Of course, everybody is free to keep books and to calculate income, costs or assets in order to assess their financial state or to inform their lenders. But this should not be a must. People have a propensity to know the contents of their purse without the help of the government. If they have paid lump-sum income tax, they don’t need to calculate income tax nor to keep accounts for that matter.
The logic and advantages of lump-sum income tax are evident when the tax is applied to individuals, not companies. Individuals may discard book-keeping and pay a single tax and only once. A person who wishes to start a business and not bother about income taxes may pay lump-sum income tax instead of establishing a firm. Applied in this way, lump-sum income tax does not only relieve people of calculating income tax. The adoption of a single, one-off payment applicable at a uniform rate to all business activities and payable by one individual would be a giant step in furthering business deregulation.