Lithuania is discussing further changes to tackle income inequality ESPN Flash Report 2019/51

R OMAS LAZUTKA, JEKATERINA NAVICKE, ARUNAS POVILIŪNAS AND LAIMA ZALIMIENE – EUROPEAN SOCIAL POLICY NETWORK JULY 2019

A new proposal aimed Description at increasing the marginal personal income and The members of the ruling coalition of million more in 2021 (see Savickas lowering the pace of the Lithuanian Parliament put forward a 2019). increase of tax proposal for amending personal income allowances was put tax (PIT) legislation in late June this The new proposal, according to its forward by the members year. The proposal aims to adjust the authors, would improve social justice by of the ruling coalition in recent by lowering the pace distributing tax liabilities more late June 2019. The of increase of tax allowances and proportionally among average and high proposal is an important increasing the second marginal tax rate earners. Moreover, it would enhance step towards preventing of PIT. funding opportunities for the basic part potential adverse effects of and child allowances. of the recent tax reform The proposal would amend the PIT on income inequality legislation implemented at the beginning Outlook and and social protection of 2019. This PIT legislation foresaw a financing. gradual increase in the amount and commentary scope of the general tax allowance. The latter was to increase by €100 each year The proposal for further amending the from 2019 to 2021. Moreover, the PIT PIT legislation revived a discussion on legislation of early 2019 replaced the very important topics for : single marginal PIT rate of 15% by two income inequality, redistribution and rates, of 20% and 27%. It should be public sector financing. For a long time, mentioned though, that, in parallel to the country has been facing three these changes, social insurance interrelated challenges: high income contribution (SIC) rates were lowered inequality, a high income poverty rate, and capped for those liable for the higher and a poorly funded public sector, marginal PIT rate. especially in the sphere of social protection. The new proposal for further amendments to the tax legislation The level of income inequality in

proposes to limit the growth in tax Lithuania is one of the highest in the EU. allowances to €50 each year instead of The Gini coefficient (which varies from €100. According to the authors of the 0%, perfect equality, to 100%, proposal, the amendment would result maximum inequality) increased from LEGAL NOTICE in €70 million additional in 37% in 2016 to 37.6% in 2017 (EU-28 This document has been 2020 and €100 million in 2021. average: 30.8% and 30.7% prepared for the European Commission. However, it Moreover, under the new proposal, the respectively). Despite the economic reflects the views only of the second marginal PIT rate would be upturn, the at-risk-of-poverty rate (EU authors, and the Commission increased from 27% to 32%. As a result definition) increased from 21.9% in cannot be held responsible for of this change, according to preliminary 2016 to 22.9% in 2017 (the EU-28 any use which may be made of the information contained estimates by the authors of the average remained broadly unchanged - therein. proposal, state and municipal budgets 17.3% in 2016 and 16.9% in 2017). would receive around €8 million more in Among those at an above-average risk tax revenue in 2020 and around €15

the Lithuanian tax/benefit system of poverty are groups targeted by IMF (2019). Republic of different social protection schemes: to strengthen the public sector, Lithuania: Staff Concluding children (25.3% versus 19.9% at and to reduce poverty and income Statement of the 2019 Article IV EU-28 level), people with disabilities inequality. They are proposing to Mission. 25 June 2019. (35.1%; EU-28: 20.5%), retired raise more resources for social elderly people (36.7%; EU-28: protection and strengthen the Lazutka, R., Navicke, J., 14.4%) and unemployed people redistributive function of the tax Poviliūnas, A. and Zalimiene, L. (2019). ESPN Thematic Report (61.5%; EU-28: 47.8%). The share system by taxing income more on Financing social protection – of gross expenditure on social progressively. Lithuania, European Social Policy protection out of total GDP is much Network (ESPN), Brussels: lower in Lithuania (11.2% in 2017) The new proposal for revising and improving the recent tax reform is European Commission. than at EU-28 level (18.8%). The share of total receipts from a step forward towards discussing Navicke, J. and Lazutka, R. and social contributions in GDP is measures which would contribute (2018). ”Distributional also much lower: 29.8% versus to reducing inequality, and Implications of the Economic 40.2% at EU-28 level in 2017. strengthening social protection and Development in the Baltics: public sector financing. Still, a Reconciling Micro and Macro Under-financed social protection is revision of marginal PIT rates and Perspectives”, Social Indicators acknowledged as a problem at the allowances will not suffice. There Research, 138(1): 187-206. highest governance level in are important gaps and potential OECD (2018). Economic survey Lithuania. Nevertheless, the latest for tackling inequalities and raising Lithuania. Overview. tax reform implemented at the additional revenue through capital beginning of 2019 is a move in the and property taxation in Lithuania, Savickas, E. (2019). ”Valstiečiai” opposite direction. It is following a emphasised by both international siūlo stabdyti mokesčių long-standing “small government” and local experts and institutions. mažinimą ir nori naujo progresinio tarifo [“The Farmers” approach, i.e. reducing effective propose to stop tax reduction taxation and tax revenue. It is and want a new progressive estimated that if the recent reform is rate], Delfi.lt 27 June 2019: rolled out in full, the average tax Further reading https://bit.ly/2G2Zm0t wedge would decrease in Lithuania Alfa.lt (2018). R. Lazutka: reikia by 6.26% between 2019 and 2021, Author didinti biudžeto pajamas, o ne benefiting most those previously not mažinti mokesčius. [R. Lazutka: Romas Lazutka, Jekaterina entitled to tax allowances and those budget revenue needs to be Navicke, Arunas Poviliūnas and with the highest earnings. According increased, not tax cuts]: Laima Zalimiene ( to the most conservative estimates https://bit.ly/2XA6qwh University) published on the website of the Ministry of Finance, the effective E-.lrs.lt (2019). Gyventojų pajamų mokesčio reduction of PIT and SIC would lower tax revenue by €250 million if įstatymo Nr. IX-1007 2, 6, 16, 20, 21 ir 27 straipsnių pakeitimo implemented in full. įstatymo Nr. XIII-1335 2 ir 4 Hence, the reform does not straipsnių pakeitimo įstatymo strengthen, but instead weakens the projektas. XIIIP-3613, 2019-06- Government’s ability to adequately 27. [Proposed amendment to finance social protection, public- the personal income ]: https://bit.ly/2XD4ZIB sector wages and other public goods. It also benefits those with the European Commission (2019). highest earnings, which could Recommendation for a Council further boost income inequality. Recommendation on the 2019 That is a huge problem for National Reform Programme of Lithuania’s future social Lithuania and delivering a development. Local experts and Council opinion on the 2019 international organisations Stability Programme of (European Commission, IMF and Lithuania. COM(2019) 515 final. OECD) highlight the weak ability of Brussels, 5.6.2019.

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Quoting this report: Romas Lazutka, Jekaterina Navicke, Arunas Poviliūnas, Laima Zalimiene (2019). Lithuania is discussing further tax changes to tackle income inequality, ESPN Flash Report 2019/49, European Social Policy Network (ESPN), Brussels: European Commission.