The post-Soviet transition to a not so free market economy

5 June 2018 // Ieva Stepanaviciute

 

Lithuania has implemented a far-reaching economic reform program aimed at facilitating the shift from a centrally-planned economy to a free market one. Although substantial progress has been made, there is evidence to suggest a lack of effective policy implementation.

One key feature of economic freedom in Lithuania is considered to be the 15% flat income tax. However, the actual tax burden exceeds this figure significantly. The tax burden derived from social security and health insurance contributions paid by both employer and the employee is 41% on average income earners which is 5% higher than the OECD average. Employers are also taxed for the guarantee expenses (0.2%) and long-term benefits (0.5%). Combined with the rest of business taxes, the friendliness of the business environment is questionable. Currently, politicians are discussing the implementation of progressive taxation, which would lead to an even heavier tax burden. The Tax-Exempt Allowance (TEA) is already higher for lower-earners in terms of percentage and absolute numbers, while productive higher-earners, despite paying four times more of social security contributions, receive a pension only two times higher than lower-earners.

All this suggests that Lithuania is not a country of low taxes, but rather a country of already partially progressive and poorly administrated taxation.

When it comes to the remaining state-owned enterprises in Lithuania, one can think of an ‘unholy’ union between businesses and government, which results in government tailoring the rules to benefit its businesses, coupled with too few checks and balances to guarantee fair competition. An example illustrating this was the state-owned rail company engaging in economic sabotage against other companies to increase its revenue; it was not held responsible for its actions until the European Commission intervened. The Lithuanian government struggles to implement fair and transparent policies on state-owned enterprises and during the past decade most reforms have been triggered by parliamentary elections rather than consistent policies. If state-owned strategic companies were to be privatized, it would facilitate financing other strategic state projects and release taxpayers from maintaining those SOEs.

Implementing the transition to a free market economy implies many good economic policies. However, poor governmental practices will cause back-sliding if no measures are taken to ensure effective policy implementation.

Further reading:

Progressive Taxation. Are Taxes in Lithuania Too Low?

Government Watch. On Progressive Income Taxation

Lithuania to Commemorate Respect for Taxpayers Day

Private or public? What kind of business does Europe prefer?

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