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Lithuanian c. bank proposes reviewing taxes, reducing VAT gap as population ages

As the population ages, the Bank of Lithuania proposes reviewing existing tax exemptions and privileges, and income and wealth taxation, and reducing the VAT gap to increase budget revenue collection.

Vaidotas Tuzikas, principal economist at the central bank’s Macroeconomics and Forecasting Division, says that the ratio of tax collection to GDP in Lithuania averages 4.5 percent, lower than it should be given the country’s level of development, and could potentially double in 10-30 years.

“This could be achieved in several ways. First of all, in our view, we need a thorough review of the current tax exemptions and privileged regimes. We should also pay attention to areas where we collect relatively less tax than similar countries,” Tuzikas told the parliamentary Committee on Budget and Finance on Monday.

“In particular, income and wealth taxes stand out here: on the one hand, we apply a non-taxable income threshold. Clearly, this is a very socially sensitive exemption,” he added.

There are other areas where more revenue could be raised, he said, such as property tax or the VAT gap.

“(The VAT gap) has been narrowing quite significantly in our country recently, but still, if we compare ourselves with Scandinavian countries or even our closest neighbors, Latvia or Poland, it is higher here,” the economist said.

“If we managed to reduce it further, we would generate more revenue, which would help prepare for the aging population situation,” he added.

As the Bank of Lithuania unveiled in March its proposals for additional defense funding, Gediminas Simkus, the central bank’s governor, said that the state could raise around 300 million euros, or 0.4 percent of GDP, in extra budget revenue by borrowing, increasing some taxes, and either eliminating or reducing certain tax exemptions and privileges.

Borja Gracia, head of the International Monetary Fund’s recent mission to Lithuania, told BNS in an interview in early June that due to the aging population, financing pensions in the next decade will require increased state spending, which is why the IMF recommends, among other measures, to tax pensions.

Source: BNS

(Reproduction of BNS information in mass media and other websites without written consent of BNS is prohibited.)


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