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November 2, 2005 | russianeconomy.org

A Competitive Flat Tax Spreads to Lithuania

On June 7, 2005, Lithuania's Parliament approved a major reduction in the country's personal income tax law, cutting the 33% flat rate on wages and salaries to 27% from July 1, 2006, and to 24% from January 1, 2008. This puts the country's flat-tax rate in line with Estonia, currently 24%, which is scheduled to fall by one percent over each of the next four years to 20% by 2009, and Latvia, which has a flat rate of 25%. A 15% flat rate on royalties, interest, and other sources of income remains unchanged.

Earlier, on March 24, 2005, Prime Minister Algirdas Brazaukas stated that his country planned to make this move "to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them." The stated reasons for the approved reduction in the flat rate from 33% to 24% over the next three years are (1) to increase the competitive ability of Lithuania in the region and the country's attractiveness to foreign investors, (2) reduce tax evasion and avoidance, and (3) lower the tax burden on individuals.

With a flat rate of 24%, Lithuania becomes the ninth country in Central and Eastern Europe to adopt a low flat tax. The others are Estonia and Latvia, mentioned above, Russia and Ukraine at 13%, Slovakia at 19%, Serbia at 14%, Romania at 16%, and Georgia at 12%.

Movements for a flat tax are currently on hold in Poland and Germany, but remain active for a 15% flat tax in the Czech Republic and Croatia, and a 20% flat tax in Slovenia. There is strong support for a 20% flat tax among the younger members of the Flemish Liberal Democrats, the largest party in a coalition of seven political parties that governs Belgium under Prime Minister Guy Verhofstadt.