Friday, June 19, 2009

Economist: raise of VAT rate, excise duties will deepen recession

The upcoming increase of VAT rate and raise of excise duties on motor fuel will deepen economic recession, not ease it, says economist Viktor Trasberg.

Trasberg who teaches economics in Tartu University says that Estonian government is doing the same what IMF did in Latvia. “In Latvia, the extremely incompetent recommendations of IMF to increase consumption taxation and decrease income tax put Latvian economy into a state of coma. It seems that we will do the same in Estonia, but without help from IMF,” he writes in Eesti Päevaleht.

According to him, increasing consumption taxes will push up prices and fuel grey economy. Another downside is that tax burden will be even faster shifting from the affluent middle classes to the poorer population and that the state will be depending only on one type of tax revenues. “Richer people can buy goods from abroad, poorer people are stuck with what they have got. This is likely to increase the wealth gap further.”

“While in the EU, direct and indirect taxes are about fifty-fifty, in Estonia consumption taxes make up 64 percent of the total. At the same time Estonian tax burden including social insurance payments was 34.2 percent of GDP last year, while EU average wage over 40 percent.”

Trasberg says that VAT raise and higher excise duties will force people to consume even less. This will mean lower demand for goods, tourism and hotel services.

“Instead of increasing indirect taxes, Estonia should increase direct taxation such as corporate income tax,” he says, adding that zero-income tax on reinvested profits has taken Estonia to the bring of bankruptcy and allowed foreign companies to expatriate billions in profits earned in Estonia.”

“We must admit to ourselves that our current tax system is bankrupt, does not ensure sufficient tax revenues, is not able to influence the economy nor increase social integration,” ends Trasberg.

Source: BBN

2 comments - React:

Martin-Éric said...

Funny, because the old adage goes that the only way to tax crime, is to tax every Mercedes that the Mafia buys.

In other words, people can always find ways to evade income tax, but it's pretty hard to evade VAT when it's included in the price tag.

Funnily enough, if Latvia had done this, they would have managed to make money out of their Mafia, whereas instead they could never find a way to impose income tax on what's obviously a mostly black economy.

Maybe Estonia ought to go one step further: completely eliminate income tax and collect everything they need via VAT.

Guillaume said...

I would say it is not so hard to avoid paying VAT, alternative ways of "consuming" are several..

The results of this disastrous economic policy are already there in Latvia, revenues fell: