Reducing the tax burden on the labor force should be one of the points of the government’s future declaration and action plan in order to further improve the business environment in Latvia, reduce the share of the shadow economy and improve the quality of life.
Although Latvia has reduced the tax burden on labor to 40.5% in recent years, it is still the highest among the Baltic states and the third highest in Northern Europe, behind Sweden and Finland.
The principle that it is expensive to hire an employee in Latvia needs to be changed. Among the priorities in the list of works to be carried out, the creators of the new government should propose the continuation of the reduction of the tax burden on labor, which in recent years has been reduced by 2.7 percentage points. For comparison, in Lithuania the tax burden on an employee is 37% and in Estonia it is 38%. This means that our neighboring countries are more attractive to investors and also to workers who receive higher wages for their work. Experience from neighboring countries shows that a lower tax burden is sufficient motivation for a higher average salary in the country than in Latvia. Latvia competes internationally and labor costs are one of the most important components that significantly affect the prices of products and services.
Likewise, in order to improve the quality of life of the population with lower incomes and to increase the net salary, it would be important to equate the non-taxable minimum with the minimum wage, as it is now. In the European Union, Latvia ranks in one of the last three places in relation to the currently valid minimum wage of 500 euros. In the final reading of the labor law, Saeima recently supported the increase of the minimum wage to 620 euros from next year, which will allow to slightly improve the position of Latvia compared to the other countries of the European Union. However, at the same time as this step, it is necessary to find an opportunity to equate the non-taxable minimum to the minimum wage, to increase it to 620 euros. This would not impose an additional burden on employers, however, state and local budgets should expect lower revenues and the search for compensatory mechanisms.
Labor taxes have a large fiscal impact on state and local budgets, which is probably the main reason why their significant reduction has been discussed for years, but politicians have not made bold decisions. According to CSB data, the total labor cost in the country (private and public sector) together with labor taxes for almost 850 thousand jobs in 2021 amounted to 13.6 billion euros.
Any tax changes and reductions have a tax impact on the state’s income. However, it is necessary to look in the long term and in the direction of the sustainable development of the country. Over the past decade, many Northern European countries have made political decisions to significantly reduce the tax burden on the average salary – for example Sweden, Finland, Lithuania and Denmark, while promoting the country’s economic growth. Latvia has set itself the goal of being the center of the Baltic economy, which more and more companies are choosing as their home and which allows their companies to develop successfully. Tax reform is the key to all of this. At the same time, it is an opportunity to reduce the share of the shadow economy, the emigration of the population to abroad, as well as a prerequisite for greater economic activity of the population and the creation of new businesses.
