Feb. 1 (Bloomberg) -- European countries should consider lowering taxes on the poorest citizens to bolster participation in the labor market, Swedish Finance Minister Anders Borg said.
“We need income-tax cuts for low-income groups in the long term,” he said in a speech today at the Stockholm School of Economics in the Latvian capital, Riga. “It’s a huge difference when you raise taxes on low-income earners or on income taxes where you see a direct impact on labor-force participation, or whether you increase taxes on consumption or property.”
Latvia’s gross domestic product shrank about 25 percent during its 2008-2010 crisis and the government passed spending cuts and tax increases equal to approximately 18 percent of economic output. The country needed a 7.5 billion-euro ($9.9 billion) bailout from a group of international lenders.
The government of Prime Minister Valdis Dombrovskis, which completed its loan program in December, raised taxes on the country’s poorest people. The government choose those measures over higher real-estate taxes or a progressive income tax.
In 2009, the non-taxable minimum income was cut to about 35 lati ($65.88) from 70 lati per month, which was the equivalent to increasing the effective tax rate for the bottom third by 7 percentage points, according to the International Monetary Fund. The non-taxable minimum later rose to 45 lati.
“Not only for economic, but also for social reasons, it’s very, very important that the threshold ceiling, the reward for entering the labor market, is quite high,” Borg said.
The Baltic country sold international bonds last year and plans to narrow its budget deficit to about 2.5 percent of GDP in 2013 to qualify for euro adoption two years later.
Latvia’s gini coefficient, which measures inequality, was the second-highest level in the European Union in 2010, behind neighboring Lithuania, according to most recent data available from Eurostat. About 21.3 percent of Latvians were at risk of poverty in 2010, the EU’s highest level, according to Eurostat.
“The Latvian government has overpreformed when it comes to building credibility,” Borg said said.
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