It’s Time to Break up the European Tax Cartel, says LFMI

On September 13, 2004 the Lithuanian Free Market Institute (LFMI) issued a press release saying that harmonization of direct taxes in the European Union (EU) would prompt increased spending by governments of member states, while competitiveness of the EU economy and efforts to conduct immediate social and economic reforms would falter. LFMI urged EU authorities to abandon attempts at harmonising taxes whatsoever and breaking up the European tax cartel.

The press release stated the following: “Initiatives to harmonize corporate taxes, recently stepped up by some old member states, are adequate to calls for creating a cartel among EU governments, which would make life easer for national governments at the expense of European people. Undermined tax competition would markedly reduce incentives of EU governments to enhance performance of the public sector and to collect and allocate EU budget more effectively. For this reason, LFMI encourages governments of the EU member states to discard plans to harmonize direct taxes. Instead, governments should take measures to carry out social and economic reforms, which would lead to more favourable conditions to boosting people’s initiatives and economic growth.

The ongoing debates over the need to harmonize direct taxes across the EU indicate politicians’ stereotyped belief that tax competition is harmful. They maintain that - seeking to create a more favourable investment climate – national governments are forced to cut taxes below the optimal level which is indispensable to finance the public needs. Tax harmonization is also seen as a proper means to halt capital movement inside the EU.

LFMI says that the arguments for tax harmonisation are not farsighted. Harmonisation of direct taxes would certainly raise the tax level in the EU, and indeed would benefit the neighbouring non-member states with lower tax rates. This would surge the investment climate in the EU’ neighbours and, potentially, cause reallocation of capital from the EU to non-member states.

Proposals of the old member states somewhat run counter to the principle of solidarity, although it is one of the declared virtues of the EU. Even the displayed diplomacy does not hide the old Europe’s itch for shaking the competitiveness of the new member states. But, most regrettably, such proposals reveal a surprising poverty of virtues of these European democracies: instead of alleviating the tax burden for its citizens, some old EU member states attempt at forcing the remaining ones to increase the tax burden.

However, such attitude and decisions may turn around against the old European countries themselves. Taxes are not the only factor that might determine the investment climate. LFMI believes that currently the old EU countries should be more concerned about a faster wage growth in the new member states. This can be ensured only by a rapid economic development, however, tax harmonization would clearly choke it off.

It is also noticeable that some of the old EU member states that use the “card” of tax competition are simply trying to throw off the responsibility for the rampant public sector, a drastic increase in taxes, and a groundless surge of social benefits which undercut people’s incentives and retard structural reforms and changes in the public sector. These factors are the primary reasons why the EU economy is at a standstill and doesn’t grow at the same pace as it has been before.

LFMI thinks that hints about possible cutting of EU funds for the new member states that have low corporate taxes are not intimidating. Long-term benefits of the common market are more important than short term benefits gained from EU funds, which, inter alia, will also bring negative results for economies of the new member states.”

LFMI draws up a health care reform proposal

In October 2003 through May 2004, LFMI implemented a project on a viable health care system in Lithuania. The primary aim of the project was to promote an effective healthcare system in Lithuania by formulating a conceptual framework and by preparing specific policy proposals for health care system reform. The project explored how costs are distributed within the health care system with a view to identifying ways of providing the most cost-effective and high-quality medical treatment. In the course of the project, LFMI cooperated with state institutions, the media, and other organizations. The project was supported by the U.S. Department of State.

To present the reform model developed during the project, LFMI launched a wide dissemination campaign. In February 2004, LFMI staged a seminar “The Prospects of Private Medical Practice in Lithuania’s Health Care System.” The seminar gathered around 80 participants - representatives from private and public health care institutions, the Ministry of Health, municipalities, and insurance companies. The event was also attended by health care analysts and journalists. Heated, but constructive, discussions at the seminar testified that the issue of health care reform is of great relevance to Lithuanian society. In addition to that, LFMI’s policy analysts also gave a number of interviews in the specialised media and commented widely on the proposed health care reform in national mass media.

The study on health care system reform is posted online: http://www.freema.org/Projects/Health.phtml.

LFMI analysed electoral programmes for parliamentary elections

In autumn 2004 the Lithuanian Free Market Institute (LFMI), the Institute of International Relations and Political Sciences, and the Institute of Civic Society implemented a joint project which is aimed at analysing electoral programmes submitted to the parliamentary elections of the year 2004. This project was designed to offer a structured approach to creating electoral platforms and stimulating informed public debates and prudent involvement in the election process, thus promoting sustainable, consistent and predictable policy reforms for the benefit of people’s welfare. The project was financed by the Open Society Fund Lithuania and the Konrad Adenauer Foundation.

The specific objectives were to make analysis of electoral programmes of Lithuanian parties and to disseminate a questionnaire to parties and formulate conclusions based on their answers. The project findings were presented at a press conference and a conference held on October 4, 2004. The analysis was posted on Lithuania’s leading web portal Delfi, and the questionnaire – on a special webpage of the news agency ELTA. Special material was prepared according to the analysis of electoral programmes and printed in Lithuania’s leading business daily Verslo Zinios.

The analysis made by LFMI showed that the majority of programmes submitted for the 2004 parliamentary elections in Lithuania virtually do not differ from those of the previous elections. Again, short-term slogans/emphases prevail in the programmes, and social support in the first place (promises to raise wages and pensions). The absolute majority of the parties do not debate issues of long-term reforms and do not submit proposals on how to cure the health care and education system. Instead, parties focus on short-term measures that would, at best, improve the situation of certain groups of society, and, at worst, would pose serious problems to the country’s fiscal system.

LFMI’s study on the development of information society in Lithuania

In 2003-2004 the Lithuanian Free Market Institute participated in an international research project “Factors and Impacts in the Information Society: a Prospective Analysis in the Acceding and Candidate Countries.” The project was contracted by the Institute of Prospective Technological Studies, Seville, one of seven institutes of the Joint Research Centre of the European Commission providing prospective analyses in support of the EU’s policy making-process.

The goal of the project was to make an in-depth analysis of challenges and potentialities related with EU enlargement by identifying technological, economic, political and social drivers and their impact on science and technology policy, competitiveness and employment in the wider Union over a ten-year horizon.

Twelve new EU member states and candidate countries took part in this project. The Lithuanian Free Market Institute carried out and presents hereby a study on factors of information society development in Lithuania. According to an uniform methodology, the study analyses a set of factors of information society development, including macroeconomics, information society policy, industrial development, the presence of economic activities most relevant to information society (such as investments to innovations, innovation policy, R&D), information society penetration rates, education, demography, cultural and sociological factors; provides a multifactorial contextual evaluation and delineates likely future scenarios for its development.

More about the projects and the study can be accessed at: http://www.freema.org/Projects/Seville.phtml.

The EC unveiled a study on undeclared labour in the EU, containing a country-report conducted by LFMI

In the autumn of 2003 the Lithuanian Free Market Institute, among institutions from other European countries, participated in a project “An Analysis of Undeclared Work: An In-Depth Study of Specific Items,” financed by Inregia AB, Sweden, and in co-operation with Regioplan, the Netherlands.

The goal of the project was to write framework country-studies into the informal economy. LFMI conducted a study on Lithuania by analysing specific items such as the description, characteristics, factors, etc. of the informal economy in Lithuania.

Country-studies have been presented in a report “Undeclared work in an enlarged Union” by Inregia AB and Regioplan BV which was commissioned by the European Commission. The report contains a description and analysis of undeclared work in the EU15 Member States, the new Member States and the candidate countries (Bulgaria and Romania). The principle objective of the research was to clarify definitions, measurement methods, estimated sizes, good practices and the gender dimension of undeclared work. The European Commission presented the study “Undeclared work in an enlarged Union” at a press briefing on July 2, 2004 in Brussels.

More about the project: http://www.freema.org/Projects/Informal.phtml.

Associate policy analysts join the team of LFMI

Seeking to utilise the potential of experienced policy analysts to full extent and searching for flexible forms of employment, the Lithuanian Free Market Institute has established a new position of an associate policy analyst. Starting from the autumn of 2004, LFMI’s former Vice-president Ruta Vainiene, Senior Policy Analyst dr. Ramunas Vilpisauskas and lawyer Sigitas Groblys will take up this position.

Ms. Ruta Vainiene will co-operate with LFMI on the issues of economic, monetary and tax policies, focusing on the advocacy of LFMI’s ideas in the international community. Ms. Vainiene has been with LFMI for almost 14 years since its inception in 1990. In May 2004 she decided to change her activities and moved into private business. Thanks to her expertise and efforts, LFMI has achieved significant achievements in the field of economic and monetary policy, the tax and the public finance systems in Lithuania. Ms. Vainiene holds a diploma in economics from Vilnius University.

LFMI‘s Senior Policy Analyst Ramunas Vilpisauskas, who accepted the proposal from the President of Lithuania back in summer, will start working as economic adviser to the President from November 1, 2004. Concurrently, he will continue co-operation with LFMI by preparing studies and generating ideas in economic issues related to the European Union and other aspects of economic policy. Working at the institute since 1997, Mr. Vilpisauskas has given a strong impetus to research on the conditions and implications of European integration and has formed LFMI’s position on issues of integration into the European Union. He holds Ph.D. in social sciences, a M.A. in international relations and M.Sc. in international trade from Vilnius University as well as a M.A. in international relations and strategic studies from Lancaster University.

The ranks of LFMI’s associated policy analysts have also been joined by lawyer Sigitas Groblys. He will contribute to LFMI’s work mostly in the area of company law and civil law. Mr. Groblys holds a diploma in law from Vilnius University and currently is employed at the law firm Foresta in Vilnius.