Why do we Need Lower and Simpler Taxes?

As Lithuania is integrating into the European Union, it is important to find a sound scheme of a tax system which would ensure fair conditions for competition among the EU member states. Are we on the right track in this respect?
While integrating into the EU, Lithuania has to adopt a certain portion of legal regulations, including tax rules, according to EU requirements. Nevertheless, we have a lot of leeway in making our own decisions regarding both individual taxes and their administration, and the overall tax system. For instance, the EU regulates in detail the application of indirect taxes but leaves direct taxes solely within the competence of the member states. Drawing on the analysis of Lithuania’s integration practice, it is evident that state institutions have set up the only goal for themselves – to take over and implement immediately those EU requirements which secure bigger budget revenues. Regrettably, all tax officials ignore the issues of the Lithuanian companies’ competitiveness in the single EU market. It is particularly sad that the “European” card is often used for bluffing in order to increase taxes. Playing on the situation that negligibly few Lithuanians know what the EU requires exactly, officials have repeatedly put forward such arguments as ‘Brussels and other international organisations require to impose this and that’ in order to justify the expansion of the corporate income tax base or to levy the real estate tax for individuals. Moreover, questions about our country’s capacities to compete in the EU are often answered by saying a half-truth: politicians keep claiming that the rate of the corporate income tax has been slashed markedly and that the tax burden in Lithuania is lighter as compared with the majority of the EU member states. However, today we do not have a targeted policy which would be designed to turn Lithuania into the most attractive EU member state in terms of the tax policy.
What do you think should be done to maintain Lithuania’s sovereignty in setting taxes as we join international organisations?
Sovereignty in the international organisations does not guaranty per se that the Lithuanian tax system will become a lighter burden to people and businesses in the country. For example, shortly after joining the World Trade Organisation and manifesting publicly a desire to join the union that professes the free trade and sees its benefits, Lithuania started clinging to the countries who called for maintaining higher import duties on agricultural production and searched for ways to continue subsidising this ineffective and over-regulated area of the economy at the expense of consumers. There is no doubt that if we knew that the Lithuanian politicians and administrators would ensure an easy tax burden and other conditions for people’s welfare without any pressure from international organisations, we would have no arguments then supporting the idea that in joining international organisations we must sacrifice certain freedoms in order to obtain other ones. In such a situation, even Switzerland’s position could be a model for Lithuania.
Is the country’s tax system being sufficiently harmonised with the EU directives? What should be highlighted before implementing the EU tax rules?
When taking over EU requirements, it was necessary to negotiate with the EU for as many transitional periods as possible, needed for the adoption of those regulations that reduce or constrain more rigidly the existing freedoms of people in Lithuania. For example, raising the excise duties could have been moved later in the calendar because consumers in Lithuania had already experienced the negative effects of integration and will witness them even more conspicuously in the future. The cases of Sweden, Estonia and even Latvia show that these countries are more concerned about a lighter burden of excise duties for their citizens than Lithuania is. But this had to be done as far back as the negotiations over the terms of accession were taking place. Today, the most crucial task is the implementation of the EU-based, i.e. harmonised, laws. Future prospects of the bulk of enterprises will depend on the procedures and details of their implementation. Currently, there is a lack of information announced publicly about many of the changes which are to take place in May next year. For this reason, there is a natural concern about whether our state institutions are ready to live in the European way.
What is your opinion about the current tax policy pursued in Lithuania?
The current tax policy has some very serious maladies. The first one is a result of the feeble budget policy and populist political goals. Having promised various goodies to their voters and seeking to deliver on these promises, politicians tend to boost the state budget and demand for increasingly more money from tax planners and tax administrators. It’s not much of a problem, if the economy is growing very rapidly. However, politicians’ wishes usually grow faster than the economy does, and then they are forced to alter tax rates or the tax base and ‘enhance tax administration’ or resort to declared or undeclared rigid measures. There is only one remedy to eliminate this malady – a politically-set goal to decrease people’s dependency upon the budget. This would provide a solid base for trimming the budget and taxes. Simultaneously, the tax burden placed on people would be lifted, and tax collectors would no longer have the sword of Damocles – a threat of being removed for poor tax collection – hanged above them by politicians.
The second malady is all-out stubbornness and refusal to believe that lower and simpler taxes ensure a better tax collection, as they encourage more and more people to leave the informal sector and get used to paying taxes. Although this theoretical assumption has lately been confirmed by practical solutions in Russia, Estonia and other countries that are lowering taxes, the Lithuanian politicians and tax administrators rush at estimating potential losses of the budget at a mere hint at tax reduction.
One more malady of the tax system is its complexity. An impressive array of taxes, tax breaks and tax relieves, coupled with a desire to define things minutely and to copy the ’global practice,’ turns the tax rules into a delusive jungle where both taxpayers and tax administrators have serious difficulties to put two and two together. Among particularly harmful defects of tax administration can be listed the abundance of criteria for valuation in making decisions and the so-called ‘supremacy of the content over the form.’ These criteria turn tax inspectors into evaluators of property, transactions and prices who know the one and only truth on the market.
Businesspeople complain that they are confronted with a number of difficulties because the new tax laws go into effect too promptly, the new concepts are vague and tax administration procedures are too complicated. Do you uphold this opinion?
I completely agree with this opinion and I would even expand on it. Amending and drafting laws has been a closed domain for the society so far. As a result, the dates when laws are to take effect have not been discussed to match the financial year of the companies, and, even worse, their enforcement is often backdated. Undoubtedly, this prompts confusion and discontent. However, this mess is related not to the drafting and implementation of the tax laws alone. The same is true of the vast majority of legal acts. So long as legislation will not be strictly planned and state institutions will continue drafting laws and decrees in tune with their interests and hiding from the society, the laws will keep triggering off complaints of both people who execute them and those who supervise their execution.
Officials keep on declaring that they support small and medium size business and call for its development. But is this priority sector given enough attention? What measures should be carried through to improve the business environment in Lithuania?
Officials and politicians’ focus on small and medium size business usually has a somewhat political shade. As a rule, it is increased before elections and usually falls down when specific issues have to be resolved. If minimal and uniform business rules were created, companies of any size would have least objections and problems, and there would be no need to distinguish companies by size or type of activity. The complaints of small businesses should be taken very seriously as their opinion is like litmus paper, clearly showing where the core of the problem leis, which is usually borne more easily or is experienced not so evidently by larger enterprises.
Experts underline that the tax burden in the country does not weigh evenly for labour and capital. What should be done to level off this disproportion?
Dissatisfaction with different taxation of labour and capital is provoked by a crushing tax burden that falls on the end-users. They have to pay not just labour-related taxes (the personal income tax, the social security contribution) but also the value added tax and other taxes that are shifted onto the final price of a product or service by participants of an entire economic cycle. The Lithuanian tax system which is loaded with a plethora of various taxes and different tariffs, coupled with the high personal income tax and the social security contribution, only intensifies social discontent as people start peeking around to find out who pays how much; they begin poking hands into the pockets of those who earn more and demanding that higher-income people pay more in taxes. If all taxes were levied on capital, either of two scenarios are likely to unfold: if taxes can still be borne, they will be transferred to the end-user, and if the tax bill becomes too massive, the capital will flee the country elsewhere where economic activities can be performed for the time being, and Lithuania’s economic development will come to a standstill. Therefore, seeking to avoid social tension and maintain economic growth, it is necessary to cut taxes (tax collection is always more of a technical issue) and reduce people’s dependency on the budget. A similar course was taken in Ireland where these measures became the key factors of economic growth.
The country’s economy is recovering but tax collection is still faced with problems. Why is it so?
The poor tax collection is determined by defects of the system. A share of the economy is in the shadow because of the high taxes and the unwieldy procedures of tax accounting and tax administration. The informal economy has a direct impact on improving the official economic figures; yet, it is out of the horizon of officials who administrate and account taxes. We can make a presumption that if one day, under the current tax system, everybody paid all the taxes they are required, our politicians would not be able to boast about business performance in Lithuania. Much the same is reported about the Italian economy which, according to famous Italian economic experts, is rising entirely thanks to the informal sector.
What do you think should be done to alleviate the tension between taxpayers and tax administrators?
The roots of the current tension lie in the tax system. If taxes were lower and tax rules more transparent, it is likely that tax administration could be automated and depersonalised most significantly. In that case, there would be actually no room for objections regarding administration procedures and disputes about interpretation of regulations or application of rules. It is also necessary to eliminate a disproportion between rights and duties of tax administrators and taxpayers established by law, because presently tax administrators enjoy nearly only their rights, and the taxpayers have nearly only their duties. This is likely to satisfy both sides, and the lingering tension would subside.
Some experts believe that the eminence and status of legal tax relations in the state require that financial disputes were solved particularly professionally. Wouldn’t it be sensible to establish tax courts in Lithuania?
It would be undoubtedly sensible. The Tax Dispute Commission, set up independently from the Government, should have been fulfilling similar functions of a tax court, but it has been turned recently into the Finance Ministry’s tool and, naturally, has missed its rights and the mission.
Conducted in spring, the LFMI survey revealed that twice as many entrepreneurs blame ill-written laws for violations of their property rights rather than the officials who control how laws are executed. What conclusions should be drawn from this data?
The survey showed that businesspeople are well aware of where the problems related to any control and administration lie. Businesspeople do not fault the officials because they understand and, perhaps, even pity them for the laws and regulations they are forced to follow. Today top officials in Lithuania focus largely on the issues of officials’ preparation, qualification and delegation of power as regards the EU. But it is important to realise that under the existing mess in the laws, neither education nor qualification can be sufficient solutions if the system is not changed timely.