VILNIUS (Reuters) - Lithuania’s government proposed slashing income tax in a bid to boost growth, saying on Tuesday it wanted the lowest rates in Baltics and among the lowest in the European Union by 2021.
The economy has expanded by an average rate of more than 3 percent a year since 2010. However, growing wages and worsening demographics, togwether with an exodus of workers to the West, have hurt Lithuania’s competitiveness.
The government expects economic growth to slow to 2.5-2.8 percent per year during 2019-2021.
“At the moment, we tax mid-income earners at a European Union average. After the changes, we will have a distinct advantage,” Lithuania’s finance minister, Vilius Sapoka, told reporters. “We will be in a better position to compete.”
The government called for a tax cut of 4 to 6 percentage points, taking the rate down to 24 percent for people on the minimum wage and about 38.4 percent for those earning twice the average wage. Social security tax would be cut for high-earners, it added.
“Investors coming into the Baltic States are deciding on a location for the head office, for the factory and a service centre. Tax is one of the factors on which they base the decision,” said Sapoka.
The government estimates the tax cut would cost about 1 billion euros of lost income over the next three years, not an insignificant sum for the small country where total tax revenue this year are forecasted at 16.1 billion euros.
The loss would be cushioned by a windfall from the growing economy, the government said.
Lithuania’s parliament, in which the government holds a majority, is expected to vote on the proposals by late June.
Reporting By Andrius Sytas; Editing by Johan Ahlander and Andrew Heavens