Friday, November 28, 2008

A Competitive Flat Tax May Spread to Lithuania

March 24, 2005

By Alvin Rabushka

The flat tax revolution spreading through Central and Eastern Europe was launched in Estonia in 1994, with a rate of 26%. Estonia has since reduced the rate to 24% this year, with plans for 22% in 2006, and 20% in 2007. Since Estonia’s adoption of the flat tax, Latvia, Russia, Serbia, Ukraine, Slovakia, Romania, and Georgia have joined the movement. Details of each country’s flat tax have been chronicled in these Comments and Articles.

Thus far I have omitted Lithuania from this list. To be sure, Lithuania levies a 33% flat rate on wages and salaries. This rate is way too high to be competitive with other flat tax countries in the region. Apart from wages and salaries, Lithuania imposes a hodge-podge of rates on other sources of income: 20% on rent and self-employment income, 20% on salary from a foreign company in Lithuania, 29% on dividends, 20% on director’s fees. Corporation income is taxed at 15%, but agricultural products are exempted altogether. Companies with fewer than ten workers and turnover of less than Euro 144,810 are taxed at 13%. It is this multiplicity of rates, combined with the high 33% on wages and salaries, that has kept Lithuania off my list of flat tax countries.

All this may change in the near future. On March 24, 2005, United Press International reported that Lithuanian Prime Minister Algirdas Brazaukas stated his government’s intention to phase in a flat-rate income tax of 24% by 2008. He said “the move was being considered to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them.”

Adoption of a 24% flat tax by Lithuania would make a clean sweep of the Baltics and increase the pressure on the remaining holdouts in the region to follow suit.

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