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Economist: the most important reform has to happen in people’s heads

Pēteris Strautiņš.
«Of all the clever things taught to us in school about psychology, one thing that has stuck with me over the years is the idea of internal/external control point. There are people who believe they make their own fate. There are also people who believe our fate depends on external powers. I suspect people in Latvia explain successes and failures with external factors much more than people in Switzerland or any other country that has enjoyed its freedom longer than Latvia,» comments Luminor Bank’s economist Pēteris Strautiņš.

According to the economist, the disappearance of this matter from the political agenda is considered the largest success of the tax reform. «The previous system was not bad, but the new one may be slightly better. Still, it will not introduce any radical changes to our lives and the country’s economy. Focus on actually important matters could bring about larger changes, however.»

Strautiņš adds: «Society’s attention is an under-appreciated resource in Latvia. There could have been a catastrophe with the mandatory procurement component had there been some other topic to catch people’s eyes. The biggest damages were caused by decisions made at the beginning of 2009. After that, there was more or less successful fight with consequences.»

He notes that he is not confident about the tax reform, that it will bring tangible changes. «Life will become more interesting, especially for accountants. As for private persons, everyone can calculate the effect of the reform on them, using tax calculator available on the internet. It did this for myself – the result was a microscopic net wage decline. I am not worried about it. There are people who earn more. Whether or not the increase for them will be eaten away by excise tax will depend on their spending habits and driving habits.»

The economist predicts businesses will experience the largest changes. «One good system to improve production investments and increase amortization coefficient for equipment was replaced with a different good system – non application of taxes on reinvested profits. It will be like Estonia – yes!»

Strautiņš emphasizes that the most important tax reform should take place in people’s heads. «We have to stop using taxes as an excuse for developments taxes cannot possible explain. For example, if a business is no longer sustainable, this fact is often brought about by two ‘evil figures’ – the tax inspector or bank. Even if blaming something specific instead of abstract market forces does not resolve a problem, but rather lets the ‘victim’ feel better.»

The economist says discussions about less effective tax reforms in public space should be replaced with processes that help create added value. «Simply put – the future of Latvia’s economy depends on two processes: exports of services in Riga and industrial development in Latvia’s regions. Development relies on measures with a much more accurate effect.»

How are we supposed to build capitalism?

The general feeling in society, especially in certain business media and business organizations is that something is not entirely right with taxes, that they make it harder to live, that the system needs serious changes was so great, political will to perform reforms turned out strong enough. I still don’t fully understand what it was intended to accomplish, but at least I hope that some of our residents will feel better, says Strautiņš.

«I’m not saying that the system was perfect before and that it has become perfect. More changes to taxes will definitely be needed in the future. But their goals should focus on consolidating society, not purely economic development. Latvian laws provide too large opportunities for ways to legally reduce taxes in an economically illogical and unjust way,» the economist continues.


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