RIGA — A curious debate has arisen as to the approximate size of the gray economy in Latvia — a question that has significant implications not only for measuring gross domestic product but for gauging the size of losses in unpaid taxes.
Estimates vary widely, with government experts saying the unofficial economy amounts to 16 percent of GDP, while some private sector representatives claiming that the real scope of the unreported economy reaches as much as 40 percent. For instance, the Latvian Employers Confederation said it examined two recent international studies and concluded that the gray economy amounted to 40 percent of Latvian GDP.
Considering third-quarter GDP amounted to 3.2 billion lats (€4.5 billion), then the confederation is suggesting that the informal economy could comprise a staggering €7 billion. Regardless, the confederation estimated that the state loses some 3.6 billion lats (€5 billion) as a result of unpaid taxes. Further, it said that not only will the gray economy will grow next year but that it will become a threat to many businesses and competition.
“The shadow economy seriously threatens fair competition and does not motivate people to continue to meet their commitments towards the state,” the confederation was quoted by the Baltic News Service as saying. Government officials disagree.
Speaking to the parliament’s budget and finance committee, Nellija Jezdakova, acting chief of the State Revenue Service, said it was essential to stick with official statistics, and not unverified reports, and that data from the Latvian Central Statistical Bureau showed that the unreported economy amounted to 12 percent of GDP. She told lawmakers that in the most pessimistic scenario the gray economy amounted to 16 percent, and no more, according to Dienas Bizness.
Jezdakova said that the Latvian Employers Confederation had based its conclusions on a study that had been provided by a private firm. She said that the steep fall in retail trade was due to the rising number of employed and cuts in wages and not a mass exodus of merchants from the official to the unofficial economy. According to the Central Statistical Bureau, retail trade in October plummeted 29.1 percent year-on-year.
Data from Eurostat, the EU’s official statistics agency, shows that Latvia’s retail market has undergone the most dramatic drop in the 27-member bloc. The employers’ confederation urged the government to act.
“We urge experts and the responsible authorities to analyze the situation and…to agree on further activities in order ensure fair business competition,” it said.
This is certainly not a suprise at all. People here in Latvia can´t feel they could get something against paid taxes. Paying more but getting less. It is not so supportive to anyone?
Also when cutting level of income, how can someone seriously think those people would be glad to help this country to new sunshine? Would be different if the level where to start cutting was higher. Now more cuttings and duties along with increasing costs of everyday “have-to-use” fees and services. It is so obvious that people are avoiding taxes as they can. The meaning is not to be a criminal or something generally negative but simply there is no money for paying any more extras. This is the major point our politicians or even IMF can´t understand in the middle of chaos.
If someone set up a question like this “how can Latvians behave like that…”
Answer is: Try to find out and test yourself to see, and if you still don´t understand there is right time of doubt of some kind of serious brain damage. Think, play with an imagination: You would have something like 275 euros. With that money you need to live whole month and not sure when exactly will get next salary. Rent, heating, water, food, traveling to work, childrens costs….Like a game of surviving, but this happens to be reality for many in this little country.
As one of the “small and medium” I am absolutely sure the Latvian Employers Confederation is much closer to the truth than Ms. Jezdakova. The latest tax rises have strongly contributed to the growth of the gray zone. Plus the demoralising effect that big firms are allowed and written off tax debts, while small companies face severe sanctions for even a couple of lats. It all makes small “white” business not worth the eforts it involves.
Simple solution: completely eliminate direct income taxation and instead collect revenues only via VAT. Bonus: the mafia’s new Mercedes is VAT-taxable, which solves the question of how to tax crime.
Marin-E – are you serious? Great, instead of working on strategies to bring people in the official economy, we impose and incredibly regressive tax? Think about it- if I earn (officially) 300 LVL per month, it is quite likely that I would spend all or almost all of it, thus subjecting it all to taxation. If I earn 800 or 900 LVL? Some goes into investment or savings or something, thus avoiding tax on it. We need to keep some kind of income tax (preferably a progressive tax from my perspective) and find ways to bring people into compliance.