How clever

22. septembris, 2009


Vjačeslavs Dombrovskis

A somewhat original solution to fight tax evasion was just proposed by Ingrida Circene (Jaunais Laiks). What she offers is to tie provision of healthcare benefits to whether a person paid his or her personal income tax (PIT). An exception would be made for (registered) unemployed and certain other groups, however. According to Mrs. Circene, "this would be as a carrot, to encourage people to pay taxes". She refers to statistics that only 43% of working age population pay PIT. According to Diena, this proposal already received "conceptual support of the ruling coalition".

At a fist glance it may all sound very nice and plausible – but only at a first glance. A bit more thinking about this proposal reveals that (i) it would little, if any, effect on tax evasion; and (ii) it would have some very awkward side-effects.

First, tax evasion (I mean PIT and social tax here) in this country largely works through paying “envelope” wages on top of an “official wage” (usually close to the minimum wage). Unregistered employment is actually not that widespread. Circene’s proposal CANNOT address tax evasion through envelope wages because the government CANNOT know what the ‘true’, but unobserved, wage for a given worker is. Trying to link healthcare benefits to PIT paid is equivalent to legislating that the rich get more healthcare benefits than the poor – and that would be a political disaster. If one wants to address tax evasion, one needs to think about the factors that explain it. That’s largely the burden of personal taxation, which aligns incentives of employers and employees. The largest component of this burden is the social tax. Addressing the issue of excessive social tax requires much more creativity, hard work, and also guts.

Second, lets start with this shocking finding that “only 43% of working age population” pays PIT. Roughly speaking, working age population = employed + unemployed + economically inactive. According to CSB 2009 Q2 data (15-64 age group), 61.4% were employed, 12.8% were unemployed but looking for a job, and 25.9% were economically inactive, i.e. not looking for a job. Now, lets think what would happen if Circene’s proposal was to be implemented. The ones who wouldn’t qualify for subsidized healthcare benefits (largely economically inactive) would say a few nice words about Jaunais Laiks, and declare themselves job-seekers. Those who were not registered unemployed would register. As a result, the officially measured number of unemployed would increase three times! Does this ruling coalition want to ‘rule’ over a period in which official unemployment tripled?

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