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BOO! Real estate tax! 14

Here we go again. News were leaked that the IMF recommended raising real estate taxes to 1.5% (and bringing cadastral prices more in line with market prices) and all hell broke loose. The newspapers are full of indignant reactions, and even the Prime Minister Dombrovskis was forced into guilty excuses that "these are only recommendations", and "taking into account [low] purchasing power, 1.5% is too high". Well, as we all know, the budget deficit needs to be reduced by some 800 million LVL over the next two years, whatever the "purchasing power". It can only be done by increasing taxes, reducing expenditures, or (most likely) both. And yet, the real estate tax seems to have become some sort of a 'third rail' of Latvian politics. Touch it - and you're dead.

Iesaki citiem:

Is real estate tax really such a monstrous tax, compared to other methods of taxation? What does the economic theory say? Roughly speaking, there are three criteria with which economists analyze taxes: (i) distortions to incentives; (ii) tax collections costs; (iii) distributional fairness. Distortions arise whenever individuals (or firms) modify their behavior to avoid taxes. Usually these result in efficiency costs. For example, high levels of (combined) personal and social taxes produce huge distortions for the economy through encouraging envelope wages. Tax collection costs (ease of administration) depend on how easy it is to evade taxes. Personal and social taxes are pretty easy to evade, especially in small firms, not least because both employers and employees benefit from envelope wages. Evading VAT is more complicated because it leaves substantial paper trail that enables detection via cross-referencing, and especially in retail trade where detecting evasion via 'control purchases' is relatively easy. Distributional fairness is whether individuals pay the same share of their total income in taxes. One may argue that personal income taxes largely fall on the poor and the middle class. The rich (business owners) can avoid personal taxes with relative ease.

So what about the real estate tax? On all counts, it's a pretty good tax. The distortions it introduces are pretty small. It's very easy to collect (although there is an issue with determining the value of real estate) since tax evasion is near impossible. It's fair because someone who has a villa in Jurmala will, in all likelihood, pay much more, than someone with a 'serial apartment' in Purvciems. Even more so, why is there such a determined opposition to a tax that seems so optimal relative to other taxes?

We're talking about political economy of taxation now. It doesn't matter whether some tax is good or bad for a 'representative' tax payer. What matters is the distribution of gains and losses from such a tax, as compared to other taxes. Small but politically powerful groups of population would prefer the tax burden to fall disproportionately on those who are large in numbers, ignorant, and politically disorganized. In other words, a somewhat cynical explanation for such a great opposition to the real estate tax lies precisely in the fact that it's such a fair tax. Someone with a villa in Jurmala WILL pay quite a lot with a higher real estate tax and little, if anything, with a higher personal income tax. Naturally, those someones would favor higher personal income taxes rather than higher real estate taxes. And this is precisely what happened during the last round of fiscal consolidation.

Ok, there is nothing surprising about the parties of the rich protectingthe interests of the rich. That's called delivering good value for their patrons' money. What IS surprising, however, is the silence of all those parties that classify themselves as "social democrats". In other words, where is the LEFT, and where has it been?! Where are the guardians of the poor and deprived? Why aren't all the parties like the Saskanas Centrs, Sabiedriba Citai Politikai, PCTVL, social-democrats (who else is out there?) galvanized when some parties offer to raise personal income taxes instead of real estate taxes?!

Paraphrazing Eminem, would real social democrats please stand up?

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Komentāri (14) secība: augoša / dilstoša

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Rainers 10.06.2010 23:22
My full support for this blog and an increased real estate tax in Latvia.

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G.D. 15.03.2010 22:28
BTW. For the Riksbank Prize lareate's fans.
http://www.nytimes.com/2010/03/15/opinion/15krugman.html?par...

Yep. You have heard ir right 25 percent... It is also refreshing to know that after all the "stimulus" and funny monetary policy "Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates...". So... all this stimulus & money printing worked.., or not?

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G.D. 10.03.2010 00:20
Kas tas par klaunu? Kaadi tik friiki uz zem shis saules nestaigaa. :)

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gundars d. 09.03.2010 23:54
G.D. once again you write one of the dumbest posts here on politika.lv. if you dont tax real estate then you are basically making it the most favorable investment in the country because its untaxed, is that correct? what about the actual trade deficit, or do you think you can build a whole economy on just trading real estate from one person to another?

gundars. d.

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G.D. 09.03.2010 17:39
Good point, especially about VAT. Though, I must admit I cannot quite remember the arguments from school behind the brainwashing story about how exactly a real estate tax can be less damaging than any other tax in terms of "tax distortions". As far as I see, it sure distorts our choice of owning as much real estate as we want. Of course, if we start to think that there is 'good' or 'bad' investments, - then it is a different story. But economists are usually reluctant to admit that, as then it should be substantiated somehow...

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meinhardt 09.03.2010 14:47
No problems.
First and foremost - Latvia can issue eurobonds. Examples from Lithuania and Hungary show that they are reasonable priced and are in great demand in current period of low interest rates (for souvereign debt). The interest rate of LVL bonds includes devaluation risk premium as well and tax payers should pay for it. It is small now, but it was enormous a year ago. Quick calculations could show that latvians paid at least some additional tens of millions of LVL because of political decision (by treasury or someone else) to issue LVL and not EUR denominated bonds in the last year.

The honest tax regime can be additional source of government income as well.

I don't believe the argument that there are other (and more effective) ways how to spend the stimulus money. These are well known facts that there are big amounts of idle money in bank coffers (European banks have money from extra long-term open market operations and Latvian banks have made important reserves over the time and there are ever decreasing reserve requirements, etc.) but some of them don't want to lend and from the other hand - companies don't want to get new loans (they already have idle capacities, no need for capital spending now). I don't see any event in the past quarters where stimulus money had prohibited private investments. All the big banks have succesfully raised additional capital, the bond issues by companies (at least - by Scandinavian) are routinely oversubscribed - so - there is no proof.

I agree that the situation can be a little bit different in Latvia, because Latvia had underinvested in non-real estate industries and these industries can be interested in some help now. But one can see that government is not aware of this either. JL is spending money to put people on disastrous 100LVL jobs and there is no comprehensive vision that Latvia need decent companies and decent jobs. And government should attract them.

Right wing parties usually talk that Latvia is in need of investments. Well but they don't say that there are different types of investments and investors and that the government should work hard to attract only the benvolent of them. This requires additional work and additional money and that is why we can expect that only social democrats can implement such policies.

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Kaspars Gasūns > bika 09.03.2010 14:20
Jūs jaucat sociālo taisnīgumu ar iedomāto ienākumu un komforta līmeni; nekur nav teikts, ka dzīvoklis sērijveida mājā ir nabadzības slieksnis - paskatieties uz ķīniešiem un indiešiem. Kā arī iepinat pa vidu plaisu starp bagātajiem un nabagajiem.

Lielāks NĪ nodoklis jau būs liels solis taisnīgākas nodokļu sistēmas virzienā, pat ja tam nebūs nekādu progresivitātes mehānismu. Jau pie vienādas likmes bagātie maksā proporcionāli vairāk, un tas būs ieguvums arī nabadzīgākajiem.
Savukārt tiem, kas dzīvo saviem ienākumiem neadekvāti "šikā" mājoklī, nāksies to pārdot - par esošajām tirgus cenām. Tāda ir dzīve un tāda ir ekonomika.

Savukārt, ja šāda nodokļa nav, tad jāceļ citi nodokļi, no kuriem savukārt var (un to arī aktivi dara) izvairīties liela iedzīvotāju daļa, tostarp bagātie. Tas palielina slogu tiem, kas šos nodokļus maksā. Savukārt no NĪ ir grūti izvairīties (ja likums ir korekti nodefinēts).

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Kaspars Gasūns > meinhardt 09.03.2010 14:07
Your real estate proposals need "free" money for investment. Any ideas, where to get it? It is also important, if there are other ways with more potential, where to spend money. Perhaps export guarantees etc.Some of the IMF ideas are just too chaste and idealistic to be realized in real an messy life, Latvia being an excellent example of such. (I am not against just taxation, but let preserve a dose of healthy cynicism.) IMF's "homeground" US would never accept all IMF suggestions as well, if it ever was to receive them.

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bika 09.03.2010 14:01
Likums nav sociaali taisniigs, lai kaa uz to skataas. Sakotneeji gaaja rune ne tikai par nodoklja nepiemerosanu vienigajam iipasumam, bet arii par tadu variantu, kaa neaplikt ar nodokli konkretu m2 skaitu (t.i., pec deklareto personu skaita dzivoklii). Tieshi shis guva vislielako atsaucibu no cilvekiem, bet ne no valdiibas, laikam jau VID, kas sudzejaas, ka shadus nodokljus ir sarezgjiiti administriteet. Labi, ka nepateica, ka neiespejami, jo tad shiem cilvekiem vienkarsi butu jaatkapjas no amata. Tas ir iespejams, es pat to varu izstukot (matematika un logiskaa domasana vienmer man ir padevusies, un uzcept programmu, kas to dariis, arii iespejams, saku kaa programmetajs).
Likums, kaa tas ir sobriid, piespiez gjimeni ar 3 berniem dzivot mazaa 2istabu dzivoklitii, kur virtuvee vairak par vienu cilveku uztureties nevar (nav mans gadijums), jo, plasaks dzivoklis nozimee lielakus nodokljus.

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meinhardt 08.03.2010 19:21
to ?
The original idea, proposed by IMF and clearly stated in some diena.lv articles was that there will be no tax on the property that is the owners first choice of residence, so - this automatically eliminates the need to address arguments by ? I guess - that right wing policians will be eager to present the tax proposal as it should be applied to any property and in such way degrade this idea. This is usual tactics, when parties lack arguments and it has been used by 'honest' JL party as well.

Housing in Latvia is overcrowded and unaffordable indeed and the crisis was the excellent opportunity for governmet to invest in new housing - this could have provided decent workplaces, less severe labour market deterioration. After crisis the government would have been the owner or property and it could save it for a bit higher prices and pay off any debt, coming from this program and also from many others.

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? 08.03.2010 18:18
Perhaps in the case of LV housing is mostly privately owned, overcrowded, low quality and at the same time rather unaffordable(SILC)? to add more burdens on average inhabitant struggling with heating and similar costs and even unable to sell the said property is more than theory only?:)

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Ieva 08.03.2010 14:31
I have 50 square meters appartment in Bolderaja and no idea where I could get anything smaller, since because my debilitating and rare disease flat must be in Riga (to access doctors easier) and near public transport routes, preferably sevaral routes, it is also important to live near shops, since Riga city council is likely to withdraw rights for for persons with II group disability to use public transport free of charge....Of course it may seem I am whining, but taking into account for example, that it is extremely difficult to find a state- paid doctor (and I need several different) and so I have to pay full proce for medicines and examinations....

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meinhardt 08.03.2010 14:16
The negative reaction from the 'ordinary people' to proposals was a small suprise, because there always was mentioned that tax would not be applied to the first residence of the owner, that is in line with social justice. But one should introduce some cap on the worth of this first residence as well, because - without that one wealthy villa owners will pay no cents in this tax.

About SC - my understanding is that they are for this tax but they lack the capacity both to udnerstand the full consequences of every new idea in the political life and also - the capacity to react. It is sad but it is quite understandable as well. Right wing parties (or some "left" wing puppet-parties - owned by the same wealthy people that owns he right wing ones) have attracted every person with determination to make political career and so - little manpower is left for other political forces.

There are some issues:
One should encourage to support social democracy (or any of its outsprings - like 'Third Way' movement) in Latvia. At least for one reason - that existence of the strong left wing party gives the electorate chances to shift policy without violent actions. Such actions do and can arise when there is no legal alternative to this. But this encouragment requires some solutions for the practical problems as well. E.g. personaly - I would like to make donation to SC but I don't want that information about my donation is publicly available in KNAB webpage. I am sure - that can lead to discrimination against me and I am sure that any legal proceedings about discrimination in small-donation cases are more costly that the decision not to publish information about them. Protections of small donations can be revolution in Latvia – it can lead to totally different ways how parties are financed and greatly increase the reponsiveness of political parties – e.g. - they could introduce primaries of candidate selection etc.

Other issue is - how far SC is willing and how much technical capabilities they have for engagement of people. There is no even such thing as forums in their webpage saskanascentrs.lv. It is sad. It would be nice if they would move to more open-source like processes for development of policy documents and gathering skills to implement them.

Well – as a conclusion. Big guys have big opportunites to increase the capabilities of social democracy in Latvia – they can particiapte in parties and so on. But small guys – like me – who is prohibited to make donations for my party of who lack little time or maybe – something else for supporting party – small guys is left with the only duty – to cast vote for social democrats notwithstading how bad they are. We should call loudly at least in such way, that we like idea about Scandinavian welfare state in Latvia. And then – maybe after severeal elections and some not so few lost years – maybe there will be politician who will be ready to listen to voters.

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ScapeLand 08.03.2010 13:45
A well-organized post and excellent concluding questions, thank you. For Saskanas Centrs two reasons pop into mind – cooperation with Lpp/Lc & the relatedness to "investors" who will benefit from the recently passed changes in immigration law. In my view it greatly undermines the credibility of SCP that they do not heavily support such tax changes and do continue seriously considering devaluation which, although debatable in principle, is clearly anti-social at least in the short-term; + all the populism. Dunno about PCTVL and social-democrats. Also, an unpleasant surprise was the aggressive and one-sided "Db viedoklis: Gaidāms turpinājums lāstam pār Latvijā esošajiem mājokļiem" on March 4. Keeps one sad about the independence of the press here.

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