On 28th of May, 2010 the Foundation for European Progressive Studies (FEPS) with the support of Freedom and Solidarity Foundation (FSF) held the discussion forum “Progressive tax system: a modern income distribution system in the mixed market economy or the ghost of communist past?” in Riga. Among participants and speakers of the forum there were about 100 economists, politicians, students, professors, representatives of various organizations and other persons interested in the subject.

The event was opened by the chairman of the Freedom and Solidarity Foundation Mr. Atis Lejiņš. In his speech he gave a short retrospective of the previous forums organized by the Foundation and outlined the issues discussed further even in the highest State institutions. He also expressed his hope for the establishment of the progressive tax system in Latvia as soon as possible.

The first speaker of the forum was the energetic new school economist Mr. Jānis Ošlejs who noted the importance of the tax system as an economy regulator. He stated that after having introduced the fixed currency, the tax system is the only way to regulate the economics;therefore the State needs a tax reform. Moreover, in a time when high inequality creates many social issues, the real estate tax is the most favorable for the economic development as it diminishes the possibilities to speculate and raises the consumption and the income rate, while the income tax is said to be the least favorable due to the fact that it diminishes both the consumption and the investment rate.

Mr. Aigars Štokenbergs, MP of 9th Saeima and former Minister of Economic Affairs, spoke about the same issue emphasizing the impact of progressive tax system on employees. He highlighted the issue of the current inequality and its impact on the society: the decreasing health and education level and therefore also a decreasing working performance quality. To his mind, the progressive tax system would be one of solutions how to eradicate the inequality as the flat-rate tax system is an obstacle for economic development

It certainly is necessary to take into consideration various points of view concerning such an important aspect of economics;hence the forum was continued by the Latvian Chamber of Commerce and Industry board member, Mr. Daniels Pavļuts, who expressed his opinion on the progressive tax system. He opened his speech by reminding that these often are entrepreneurs who are blamed by society for not paying taxes. So, maybe we should look to this issue from a different angle to understand better why the taxes are not paid. Mr. Pavļuts recognized that the progressive tax system is not either good or bad. It will just simply bring no benefits if there will be no specified, socially transparent goal and administrative reforms continued to be carried out besides modifying the tax system.

The next speech, given by the professor of the University of Paris and the present MEP, Mr. Liem HOANG NGOC, dedicated his presentation to the main trends and the global context of the progressive tax system. Already in the beginning of the speech he stated that inequality was the source of the crisis, but the consequences of the inequality are the income stagnation. He also emphasized that the progressive tax is a part of the fiscal model were the flat-rate tax system is not appropriate, the flat tax boosting the highest social class and the “economic bubbles”. He mentioned France and other countries as examples and emphasized that the inequality has to be eradicated, as well as the households have to be supported by introducing a good tax policy.

Riga Stradins Univerity political science department lecturer, Mr. Jānis Bērziņš, gave some other interesting examples. He agreed with some of the previous statements by saying that the Latvian politics can make an impact on economics only by the tax system. He gave the example of Brazil, proving that arranging the income tax rates as well as the short term and long term deposit rates can raise the general State income level.

Mr. Juris Stinka, Head of the Finance Ministry Tax and Customs Administration Policy Department, contested the idea about the impact of the tax policy, stating that it is incorrect to take into account only this aspect as the economics are influenced by many other factors. In his presentation he described the present Latvian tax system and offered two progressive tax system models, however, both of them were further contested by the audience.

Mr. Rein Järvelill, the adviser of the Estonian Finance Minister from 2007 to 2009, started by cheering up the tired participants of the forum by exercising a game. In his presentation he admitted that the tax system in Latvia as well as in Estonia is too regressive;therefore the main issues are eradicating the poverty and stabilizing the national economics.

The bank sector was represented by Mr. Dainis Gašpuitis, SEB bank Macroeconomics Analyst, who admitted that the present tax system is regressive but it should be sustainable, fair and effective. The progressiveness is a good way to reach these goals, however, the speaker pointed out the counter arguments to this system, for instance, the decreasing motivation of making bigger profit and the increasing desire to avoid paying taxes.

The presentations were closed by the speech of Mr. Romans Vitkovskis, the Chairman of the E&IC board, who talked about „Various reasons for a progressive income tax and a regressive national social insurance payment.” Mr. Vitkovskis pointed out that the basic goal of the progressive income tax is not to fill in the budget but to even up the tax burden. He emphasized that it is necessary to establish at least two income “thresholds” and corresponding tax rates to avoid the income curve rising and falling sharply. As to the population caught in the “poverty trap”, the progressive tax could ease their problems, and this way the social development and equality would be favored.

In the second part of the forum there was a panel discussion, where the representatives of various political parties participated. The Civic Union (Pilsoniskā Savienība) was represented by the party chairman Mr. Ģirts Valdis Kristovskis, who admitted that in general the Latvian taxes are not fair, therefore even Civic Union (EPP-affiliated), being a right wing party, has done the research and has concluded that the progressive tax system is necessary concerning various taxes. The chairman of the Latvian Socialdemocratic Worker’s Party (Latvijas Sociāldemokrātiskā strādnieku partija (LSDSP)) Mr. Jānis Dinevičs reminded that progressive tax system has been always on party’s agenda and presented the calculations done by LSDSP and published already on February this year promoting the introduction of the progressive tax system. As regards the representative of the Concord Center (Saskaņas centrs), Mr. Igors Pimenovs, MP, he generally consented to the previous speakers but avoided mentioning particular numbers and figures, explaining that it would have been discussed inside the party and prepared for the upcoming parliament elections program.

The discussion was chaired by Mr. Ervins Labanovskis, Freedom and Solidarity Foundation board member. During the discussion, the party representatives shared their opinions and plans concerning the necessity of the progressive tax system, as well as answered to various questions from the audience.

Conclusions after the forum:

One of the most efficient tools to modify the Latvian economic and social area when having a fixed currency is to build an appropriate and progressive tax policy, therefore well considered tax reforms on large scale are necessary.
Today in the society of Latvia there is an inequality that has to be eradicated. In the flat-rate tax system the rich are paying proportionally less while the poor are paying more, hence, it does not guarantee an economic development. One of the possibilities to guarantee it is to introduce the progressive tax system. The progressive tax can be used as a tool to decrease the negative effects of social stratification, to boost the business activities and to raise the national income.
Currently the capital tax burden has considerably risen, but the disbalance (an excessive workload and regressivity) has not decreased. Besides introducing the progressive tax system, it is necessary to continue the administrative reforms.
The progressive tax system has to be introduced accordingly – in a progressive way;it has to be clear, fair and effective. In order to ensure the system work and to motivate the population in general and the entrepreneurs in particular to pay taxes, it is necessary to establish State money spending transparency.
The progressive tax system elements have been supported publicly by several political parties: the Society for Different Politics (Sabiedrība citai politikai), the Civic Union (Pilsoniskā Savienība), the Latvian Socialdemocratic Worker’s Party (Latvijas Sociāldemokrātiskā strādnieku partija), the Concord Center (Saskaņas centrs) and the Greens and Farmers Union (Zaļo un zemnieku savienība) which, according to recent opinion polls, could get the majority in the next Saeima (National Parliament).

The forum was held by the Foundation of European Progressive Studies with the support of the Freedom and Solidarity Foundation.