The Lithuanian Free Market Institute has examined draft amendments to the Law on Personal Income Tax aimed at introducing a progressive income tax model, and submitted its comments and proposals to relevant authorities. According to the proposal, a progressive 16 per cent rate would apply to monthly income exceeding €1,267 after tax (€20,000 before tax per year), 17 per cent would be levied on income over €1,892 (€30,000 before tax per year), and 20 per cent on monthly earnings over €2,508 (€40,000 before tax per year). In its position paper, LFMI called for the rejection of the draft due to the following:
- today tax burden on average income earners in Lithuania equals EU average and is higher than in some of the most developed countries, including members of the Organisations for Economic Co-operation and Development (OECD);
- a progressive tax model will result in ever-growing overall tax burden. As income gets higher, less and less people will pay 15 per cent;
- the proposed income threshold subject to progressive taxation is extremely low as compared to other countries (the lowest proposed annual income threshold is merely 20 thousand euro as compared to 63 thousand euro in Sweden and 67 thousand euro in Denmark);
- the Lithuanian tax system is already progressive as the tax-exempt amount of income is higher for lower-income earners and those earning more already pay more in terms of both absolute amount and percentage. Moreover, those paying four times as much social security contributions may only expect up to two times higher pensions;
- the estimated budgetary revenue of €105 million is overly optimistic. The implementation of a new income tax model will require more resources, resulting in additional administrative costs;
- higher taxation will incentivise tax evasion and undeclared labour as well as encourage high-income earners to change their tax residence;
- rather than addressing poverty and social exclusion, the proposed changed will only result in higher redistribution;
- frequent policy changes will create the image of an unstable and unpredictable policy environment, sending a bad signal to potential investors; and
- high labor taxation already undermines business environment and hinders job creation.
The full position paper (in Lithuanian) is available here.
