Ieva Valeškaitė. Progressive Taxation. Are Taxes in Lithuania Too Low?

With several policy proposals on introducing a progressive taxation model put on the table, the upcoming parliamentary session in Lithuania is sure to become a heavily debated one. In fact, every tenth taxpayer is threatened with higher tax burden as personal income tax might increase from a flat 15 per cent up to 20 per cent.

According to the new model proposed by social democrats, a progressive 16 per cent rate would apply to monthly income exceeding €1,267 after tax, 17 per cent would be levied on income over €1,892, and 20 per cent on monthly earnings over €2,508. What does it mean to a taxpayer? Nothing else, but a heavier tax burden. Loudly speaking of their commitment not to increase taxes or introduce new ones, politicians seem to be going in the exact opposite direction.

If implemented, the progressive model will affect every tenth taxpayer, but aren’t they taxed enough already? 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). According to OECD, in 2016 the actual tax burden in its member states amounted to 36 per cent as compared to 41 per cent in Lithuania. And though the proposed increase might not look like a significant one, we should make no mistake about its future implications.

A progressive tax model will certainly result in ever-growing taxation. As income gets higher, less and less people will pay 15 per cent. Proponents of the proposal claim that the well-being of the Nordics is built on progressive taxation, but they seem willingly to avoid mentioning the income thresholds that apply there. The proposed annual income threshold in Lithuania is merely 20 thousand euro as compared to 63 thousand euro in Sweden and 67 thousand euro in Denmark, not to mention the fact that those countries allow deductions from taxable amount, e.g. interests paid or transportation costs incurred while travelling to work may be deducted from taxable income.

Moreover, proponents of the proposal fail to realise the current progressiveness of the Lithuanian tax system. First, 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. Second, those paying four times as much social security contributions may only expect up to two times higher pensions.

Finally, drafters of the proposal claim that progressive income taxation would bring additional 105 million euro in tax revenue; however, the numbers are overly optimistic. First, the implementation of a new income tax model will certainly require more resources, resulting in additional administrative costs. Second, higher taxation will incentivise tax evasion and undeclared labour as well as encourage high-income earners to change their tax residence. All in all, the new model might bring significantly less, if anything.

To sum up, the overall tax burden in Lithuania is already high and with elements of progressivity. Therefore, instead of braking their promises politicians should be looking into the ways of stimulating growth and increasing the competitiveness of the economy. Sadly, unconstructive debates only create the image of an unstable and unpredictable policy environment.