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Reform of labour taxes in Latvia 2011-2013

Author

Listed:
  • IlmÄ rs Sņucins

    (Deputy State Secretary, Ministry of Finance of Latvia, Riga, Latvia)

  • Ieva Kodoliņa-MiglÄ ne

    (Head of Tax Policy Strategy Division, Ministry of Finance of Latvia, Riga, Latvia)

Abstract

The paper analyses the motives for and results of the labour tax reforms undertaken by the Latvian government in 2011-2013 with a special focus on the lowwage sector. The reforms were developed with the goal of overcoming negative effects on the labour market caused by the deep economic crisis in 2008-2010 as well as of coping with an increase in labour tax burdens during consolidation. In 2008-2010, Latvia was seriously affected by the global economic crisis and during these years real gross domestic product (GDP) declined by 21 percent. Labour market conditions became worse rapidly and at the beginning of 2010, the unemployment rate reached 21.5 per cent of the economically active population. For the period of 2011-2016, the reforms provide for a reduction in the rates of personal income tax (PIT) and social security contributions (SSC) as well as for an increase in PIT allowances. Taking into account the changes made in labour tax laws, we employed forecasts of average wages and applied the Eurostat methodology to calculate the tax wedge for different groups of employees depending on income level and on the number of their dependants. The results show that the impact of the reform varies greatly and it is more beneficial for employees with dependants and for low-wage earners. The findings of the paper contribute to policy discussions and decisions on the tax wedge, especially in the Euro area. In the period covered by the paper, about half of the Euro area member states (including Latvia) received a country-specific recommendation to address this issue in the context of the European Semester.

Suggested Citation

  • IlmÄ rs Sņucins & Ieva Kodoliņa-MiglÄ ne, 2015. "Reform of labour taxes in Latvia 2011-2013," Financial Theory and Practice, Institute of Public Finance, vol. 39(4), pages 371-391.
    • Handle: RePEc:ipf:finteo:v:39:y:2015:i:4:p:371-391
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    References listed on IDEAS

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    1. Igors Kasjanovs & Anna Kasjanova, 2011. "The Crisis in Latvia," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 12(3), pages 105-122, July.
    2. Anna Zasova, 2011. "Labour market institutions: an obstacle or support to Latvian labour market recovery?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(1), pages 5-24, July.
    3. Anders Aslund & Valdis Dombrovskis, 2011. "How Latvia Came through the Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6024, April.
    4. Primož Dolenc & Suzana Laporšek, 2010. "Tax Wedge on Labour and its Effect on Employment Growth in the European Union," Prague Economic Papers, Prague University of Economics and Business, vol. 2010(4), pages 344-358.
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    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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