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OECD Questions Lithuania's Flat Tax

by Ulrika Lomas, Tax-News.com, Brussels

18 March 2016


A thorough analysis of Lithuania's tax system is needed to determine the potential benefits and disadvantages of replacing the country's flat tax with a more progressive system, according to the Organization for Economic Cooperation and Development (OECD).

Since 2009, individual taxpayers in Lithuania have paid income tax at a flat rate of 15 percent. However, in its latest Economic Survey of Lithuania, the OECD concluded that the tax system's contribution to reducing inequality "remains modest."

"Going forward, an in-depth analysis of the Lithuanian tax system is needed to assess if the advantages of introducing a progressive tax system in terms of inclusiveness could offset some of its drawbacks on the labor supply of highly skilled workers," the report stated.

In one of the report's key recommendations, the OECD also said that Lithuania should alleviate the tax burden on labor by lowering social security contributions and in turn increase recurrent taxes on immovable property. According to the report, property taxation accounted for only 0.3 percent of GDP in 2012, compared with a European average of 1.5 percent.

Furthermore, the report observed that the taxation of capital gains from individual property sales is "limited" and exemptions tend to favor those on high incomes. This further reduces the progressivity of the tax system, the OECD said.

The report also noted scope for the Government to increase environmental taxation, which amounted to 1.7 percent of GDP in 2012, below the European average of 2.4 percent. The OECD suggested that Lithuania should increase tax on motor and heating fuels, and introduce a vehicle tax.

TAGS: environment | tax | property tax | vehicle tax | environmental tax | tax rates | social security | individual income tax | Lithuania | Europe

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