Vat rise – a tool for stabilization of latvia’s economy for the subsequent introduction of the euro in 2014

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1. Introduction

In January 2011 several European countries, including Latvia, increased their value added tax for products and services.

The VAT base rate rose from 21% to 22% and reduced VAT rates from 10% to 12%.

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Every time when Latvian ministers make some economical decisions, it leads to anger and disappointment of people. In the current economical times it is jet another pressure on the Latvia’s people. With high unemployment rate in the country and other bad factors such as low wages, it seems that people in the government have no compassion at all to their people.

But what really is the reason that stands behind such unpopular decisions? Latvia has a huge debt which government was hoping to decrease by getting more income from the increase of the value added tax. The reason why Latvia did it, is its plan to introduce the Euro in 2014, but in order to be able to do it it has to meet the Maastricht’s convergence criteria.

Taxes are an important part of any government income, because they form the largest revenue share of the total revenue. Although the value added tax in Latvia is only one of 11 existing taxes, it has a significant role in the government’s revenue. Value added tax is a comprehensive tax and its application affects the national economy as well as the population of any country, regardless of the social status, level of education, wealth and other similar criteria.

For Latvia becoming the member of the European Union also means that, as the rest of the EU member states, it has to have the tax laws aligned. It is called tax harmonization, particularly in terms of indirect tax system, which includes the value added tax. It is necessary for providing of goods and services as well as the free movement of capital between member states, which is an essential prerequisite for fair competition in the member states.

1.1. Problem statement

In the beginning of 2011 several European countries including Latvia have increased their value added tax for products and services. Latvia wants to introduce the Euro in 2014 and in order to do that, it has to meet the convergence criteria.

With the help of VAT increase Latvia was counting to reduce government debt which it obtained during financial crisis. Was it a strategically good decision to use value added tax as a tool for rising government income? How can this growth of VAT impact Latvian economy? Is it going to help Latvia fulfill the required convergence criteria?

1.2. Delimitation

In the beginning I thought about comparing the impact on the economies of the other countries which increased value added tax in the beginning of 2011 in order to determine was it a good idea in the first place to do it based on development of their economies,

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