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Latvia: Tax Policy and Equity Study
Context and Study Plan
Riga
March 14, 2016
What is the World Bank? (1)
2

International financial institution based in Washington D.C. with
offices in Brussels and Warsaw for the EU (including Baltics)

Provides advisory services on a non-commercial basis with global
perspective

Country collaboration on structural reforms(covering multiple sectors from
health to infrastructure)/macro/fiscal/trade/equity issues worldwide

Global products focusing on competiveness and growth (e.g.
http://www.worldbank.org/en/publication/global-economic-prospects)

Provides loans for projects and budget support

Latvia is a shareholder (Nordic-Baltic representative on the Board
of Executive Directors)
What is the World Bank? (2)
3

Global portfolio of public finance/tax reform projects


Community of international experts on taxation covering:

Tax policy and revenue administration reforms (including tax compliance)

Competitiveness and trade

Tax system and inequality

Information and compliance systems

Global agenda, including transfer pricing, improving frameworks for
exchange of information; tax transparency; climate change, knowledge
products (e.g. Doing Business
http://www.doingbusiness.org/data/exploreeconomies/latvia/)
Wide range of advisory projects related to public finance (e.g. Brazil,
Cyprus, Chile, China, Poland, Russia, Thailand)
Role of the World Bank and government in
collaboration (1)
4

Provide rigorous analytical assessments

Array of tools and framework to deploy, e.g.:

Domestic revenue mobilization assessment framework

Integrated assessment model for tax administration

Tax reform simulation models (impact on income distribution, economic
implications)

Draw from diverse range of global experience

Collaboration with Latvia

Public expenditure review and support on design and implementation of
safety net during stabilization period

Social protection review (with Ministry of Welfare), Health review (with
Ministry of Health)
Role of the World Bank and government in
collaboration (2)
5


World Bank provides

Team of World Bank international and local (policy and academic) experts

Analysis, relevant international experience and policy options

Support the government in dissemination of findings and results

Consult widely in collaboration with the government during report
preparation and presentation stages
Government’s prerogative

Decide on policy

Implement (or not!) policy changes based on World Bank advice
Objective of study
6


Review tax system—focusing on efficiency, competitiveness, revenue
mobilization, and equity—with the aim of:

Maintain competitiveness of the tax system

Reduce high labor tax wedge faced by low-income workers

Analyze options to improve equity

Reduce evasion and the grey economy

Identify options to increase government revenues to finance increased
spending needs (particularly national defense, education and health)
Inform medium-term tax strategy of Government of Latvia, including
2017 budget proposals
Tax revenue as a share of output in Latvia is relatively
low compared to peer countries
7
Level of taxation vs. GDP per capita (PPP), 2014
Source: World Bank staff calculations based on OECD data.
Lower tax-to-GDP ratio explained by lower revenues
from PIT and social security contributions
8
Difference between the level of tax-to-GDP in selected countries and Latvia, percentage
points
OECD - Average
Germany
United Kingdom
New Zealand
Finland
Ireland
Austria
Czech Republic
Poland
Slovak Republic
Estonia
-10
PIT
CIT
SSC
Source: OECD, SRS.
-5
Payroll and workforce
0
Property
5
VAT
10
Excise duty
15
Other
Total
Effective tax rates for capital are relatively low in
Latvia
9
Implicit tax rates on capital, labor, consumption in Latvia and benchmark countries, 2012
45
40
35
30
25
20
15
10
5
0
Consumption
Source: Eurostat.
Labour
Capital
Inequality high compared to EU countries after taxes and
transfers, but not as high as selected non-EU countries
10
Gini coefficient before and after taxes and transfers, selected countries
0.7
post-fiscal Gini
pre-fiscal Gini
0.6
0.5
0.4
0.3
0.2
0.1
Slovak Republic
Norway
Slovenia
Iceland
Czech Republic
Denmark
Finland
Belgium
Sweden
Austria
Netherlands
Switzerland
Germany
Luxembourg
Poland
Ireland
Korea
France
New Zealand
Australia
Estonia
Italy
Spain
Japan
Greece
United Kingdom
Portugal
Latvia
Israel
Russia
United States
Indonesia
Turkey
Chile
Brazil
Colombia
0
Sources: Gini before and after taxes and transfers is from OECD for all OECD countries, and from the Commitment to Equity country
papers for the remaining countries .
Tax wedge is high for low-income workers in Latvia
11
Tax wedge, minimum wage, single person without children, in percent of total labor
compensation, 2013
50
40
30
20
10
0
Source: OECD Tax-Benefit Models (2013 provisional).
Spending is lower in Latvia than OECD and EU average
though efficiency not just level of spending is critical
12
Difference in spending with the OECD and the EU28 average, in percent of GDP, 2014
Social protection
Education
Recreation, culture and religion
Health
Housing and community amenities
Environment protection
Economic affairs
Public order and safety
Defence
General public services
Total
-15
-10
-5
Distance
0
5
OECD
EU28
Note: A negative value means that government expenditure as a share of GDP is lower in Latvia compared to the comparison group
of countries.
Source: World Bank staff calculations OECD Stat database.
Evidence that social protection/tax policy is important
for demographic developments
13
Social protection and tax policy is to demographic developments:
• Macro and micro econometric evidence suggests families don’t have the critical second
child due partly to not having adequate incomes
• Supporting families can also play a role in stemming out-migration
Changing Profile of European Employment Services Clients in Latvia, 2004-2010
2004-2007
Planning to move alone
Looking for temporary, lowskilled jobknowledge of foreign
Minimal
languages
Planning to return
2008-2010
Planning to move with family
Looking for permanent, skilled job
Better knowledge of foreign languages, higher
qualifications
Interested in legal employment and social security
Note: Based on the daily records of European Employment Services (EURES) consultants in Latvia.
Source: Hazans (2013: Table 4.6).
m.
Latvia: Tax study components
14
Rapid assessment
Stage 1(Report: June 2016)
Revenue
adequacy,
options for
increasing
tax collection
How to
balance
PIT on
wages and
capital?
Corporate
tax review,
including
microenterprise
tax
Equity
analysis, taxbenefit model,
simulations of
reform options
Stage 2 Report:
December 2016)
Who is not
paying
income
taxes
(admin
data)?
Equity
analysis
of taxes
(admin
data)
Social
security
contribs:
balance
between
employers
and
employees
Timetable and Outputs
15
Final terms of reference
 Rapid assessment of tax system
 Technical Mission (full team)
 Consultations with Social partners
 Draft report Stage 1
 Conference on Stage 1
 Final report Stage 1
 Final report (Stage 1 plus 2)

January 2016
March 2016
March-May 2016
end-April 2016
June 2016
June 2016
July 2016
December 2016
Presentation of results
16

Public discussion (June 2016)
 Presentation
of results of tax study by World Bank
 Reaction of government
 Discussion and feedback from Social Partners, and local
experts
 Sharing of relevant international experience from
relevant country cases, top international experts, and
international institutions
 Consultation on policy options
Thank you