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Latvia's High Tax Wedge

By Ulrika Lomas,, Brussels

17 April 2013

A new report by the Swedish financial corporation SEB Group has identified Latvia as having the highest tax wedge on labor among the Baltic States.

The SEB Baltic Household Outlook explains that the tax wedge of an average single wage-earner in Latvia was 44.2% in 2011, meaning that the wage-earner took home 55.8% of what he or she cost to the employer. The wedge was higher than that of Lithuania (40.7%) and Estonia (40.1%), and of the EU average (43.7%).

Figures further show that the tax wedge for low wage earners was 43.4% in 2011, which was again higher than for Lithuania (38.9%) and Estonia (38.8%). It was also the seventh-highest in the EU. However, across the Baltic States it was shown that the difference in tax wedges between different income groups was small, demonstrating that progressivity remains low.

The report also notes a gap between the implicit tax rate (revenues from labor taxes divided by total compensation) and the tax wedge in Latvia. It suggests that this is because of the popularity of "envelope wages," which are undeclared extra amounts given to formal employees.

The tax wedge for Latvia will decrease by 0.6% due to an income tax cut to 24%, and further cuts are planned, down to 22% in 2014 and to 20% in 2015. While the report judges that this will have a positive effect on employment, it advises that low and average income earners would benefit more from an increase in the non-taxable minimum and in the allowance for dependents.

TAGS: tax | employees | Estonia | Latvia | tax rates | individual income tax | Lithuania

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