The Warsaw Network
The change in the tax climate in Lithuania
21.07.2014

By committing itself to not change the tax levels, the Mexican government created an environment favorable to growing prosperity of the citizens. The agreement sent a strong and serious message to the existing and the potential creators of prosperity that they will not be subject to a sudden tsunami of taxes.

In Lithuania, we have a great demand for a stable tax system. During the last decade, the laws on the five main taxes (income tax, value-added tax, corporate tax, excise, and “Sodra” payments) were changed, astonishingly, 193 times. Of these, “Sodra” payment rules were changed 52 times, the income tax laws – 51 times.

To understand that instability of the tax system is considered a problem, one does not need to look further than to the party programs during the 2012 parliamentary elections. The Lithuanian Social Democratic Party, when campaigning, promised to “ensure the stability of the business-related tax environment – new taxes would only be implemented with a forewarning issued six months before.” The Labour party promised that, if elected, it would “make sure that tax laws could not be changed more often than twice in four years and that the tax laws could not be changed together with a proposed budget project.” The Order and Justice party claimed that it would “shift to a three-year budget planning and thus guarantee that taxes could not be changed for at least three years since the last change”.

So, the three main parties of the ruling coalition promised to ensure the stability of the tax system, eradicate the Lithuanian custom of arbitrarily changing the tax code by covering it up as ‘budget planning’. These promises are written agreements with the voters – which the voters confirmed as desired by casting their ballots for these parties.

More than a year and a half later we can state that the agreement with the voters was broken. From 2013 up to this day, the five main taxes had their laws changed twenty times already – and it is nearly impossible to count how many times during this period we heard the ideas of new taxes and tax changes proposed by our politicians. It is also hard to explain why the most passionate discussions about the new taxes (the car tax, the potato chips tax) and about increasing the excise taxes took place after the state’s budget had already been confirmed (February-March) – and even harder to explain how politicians planned to implement these taxes the next month already.
Even though according to the law, a six-month period of adaption is required for any change in the tax system, the ruling coalition left the loophole to change the taxes together with the budget, which, in practice, happens in December. The adaption period is necessary for the taxpayers to have enough time to get accustomed to the changes and for the tax officials to prepare the required executive acts and renew the law. They do not care whether the tax is changed concurrently with the approval of the new budget. Having promised to close the loophole that allows changing the taxes together with the new budget and accusing the former government of abusing this gap in law, the ruling parties now themselves gladly use it.

The Prime Minister has stated, that the taxes will be reviewed in order to broaden the tax base – but this has not happened yet. Does this mean that in the second half of the year we will see another change in taxation?
It is doubtful that anyone would complain about the instability in the tax system and that no one cares about the six-month adaption period were the taxes lowered and their payment procedures made easier. This, however, remains but a dream. The reality is such that the constantly changing tax system only brings heavier tariffs and a wider tax base. Even the ruling coalition, fond of pointing fingers at the tax increases of the former cabinet, managed to implement interest and long-term capital gains taxes. Our future may see general real estate tax, car tax, and even progressive income tax being adopted.

Is there a cure to an unstable tax system? Maybe it is worth to build on the experience of the fight against climate change. This issue has long been on the agendas of the world’s politicians and one way to tackle it is to tax the polluters. Analogically, we could consider specifically taxing those constantly asking for increasing taxes and causing the unfortunate ‘tax tsunamis’. If we really want to eradicate what is wrong with the world through taxation, we might as well start with those constantly destroying the prospects of our growing prosperity.

//
K. Leontjeva.
The article was published in the „IQ“ magazine.
http://en.llri.lt/news/economic-policy/tax-and-budget/k-leontjeva-the-change-in-the-tax-climate-in-lithuania/kaetana-leontjeva

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