An in-depth analysis of the impact of reforms on inequality – Latvia

Latvia faces significant challenges in terms of both income inequality and inequality of opportunity. This paper examines to what extent these inequalities can be reduced by recent reforms, both those addressing the country-specific recommendations (CSR) by the EC and others, as well as those yet to be implemented. According to microsimulation results, differentiation of the non-taxable minimum is not well-targeted on low-income earners, while raising the size of the family state benefit paid for the second child and third child, although not directly related to CSR, appears better targeted. The solidarity tax on top earners, also not directly related to CSR and criticized for competitiveness concerns, clearly reduces inequality. Recent increases in minimum wage are also likely to reduce income inequality, but earned income tax credit would be a more targeted policy. The paper concludes that the inequality-reducing effect of recent reforms implemented in according with CSR has been small; some other reforms, however, did have a more substantial effect, and some recently launched reforms, as well as reforms yet to be implemented (such as improving accessibility, quality and cost-effectiveness of the healthcare system and increasing opportunities for work-based learning) have a much larger potential.