What would seem like a new benefit for employers: it would force employees to increase wages

Ferry wages – reduced income tax

Some time ago, President Gitanas Nausėda discussed with politicians, economists and other representatives of companies and unions the direction in which the country’s tax system should move.

The meeting also discussed income tax relief for employers, which could apply to businesses that significantly increase employee wages.

Tax expert and representative of the association “Investor Forum” Kęstutis Lisauskas, who also participated in the meeting of the presidency, explained that Lithuania has already reached 80 percent. The OECD average GDP per capita, but the average salary is only 60%, so the proposed new corporate tax credit aims to accelerate salary growth.

When asked for further clarification on how such an incentive could be applied, it argued that its operating principle could be similar to existing incentives for investment and research and experimental development (R&D).

“A company that meets the criteria established for the growth of the salary fund could reduce its taxable income for that year by a certain amount.

So far this is just an idea, no specific parameters have been proposed yet, only the direction of future discussions has been presented, ”he said.

According to Lisauskas, three main aspects are important when modeling the new corporate tax credit: it must be attractive to companies, it must have safeguards to avoid abuses and the state must “amortize” so that the state budget recovers more, at least long-term. than he himself invested in such an advantage.

The expert also considered that the increase in the wage bill could be linked to last year’s size and / or the national average.

“The national average indicator would provide better comparability, but on the other hand, it takes time to compile the country’s statistics, the question is whether Statistics Lithuania could publish the indicator before the deadline for filing the income tax return of the companies.

Another important point is how to treat those companies where salaries are already significantly above the national average. For one thing, they can’t grow wages as fast as they lag behind average companies. On the other hand, if they are already paying a high salary, don’t they deserve the benefit if they increase it by 5 percent instead of 20 percent?

Apparently, a sliding scale is needed, which would evaluate both the existing salary level and the percentage growth ”, he considered.

K. Lisauskas also stated that he believes that not only should the absolute growth of the salary fund be evaluated, but also the average salary of the company or its median should be taken into account. It is said that this would be necessary for companies that have simply employed many people for the minimum wage to qualify for the benefit.

“And finally, the ‘recovery’ of profits.” Intuitively, the relief could pay off. If the corporate tax base is reduced by the same amount as the wage bill, the state will lose 15 percent. income tax, but you will receive 19.5 percent. social security contributions and 20%. GPM, that is, two and a half times more. The question is, how many companies would have already increased their wages even if there were no benefits?

Another question is whether a corporate tax cut will be a sufficient incentive to specifically raise wages, and not just respond to labor market pressures. The answers to these questions could be provided by the econometric model, that is, cost-benefit calculations based on the projections of taxpayers’ behavior ”, commented the expert.

Industrial: difficult to assess, too many unknowns

Representatives from the Lithuanian Confederation of Industrialists (LPK) asked Delfi how the company itself evaluates a possible benefit from corporate income tax. LPK economist and analyst Titas Budreika said that in order to unequivocally support or reject the idea of ​​corporate tax relief, further details of it must be evaluated, which are not yet known.

“When evaluating the purpose of the idea, it should be noted that employers are interested in a balanced wage increase (UD), because the competition for labor occurs at the international level, especially in the production segment with the highest added value. .

From 2015 to 2019 At the end of the year, the average gross DU in the industrial sector grew by around 9%. per year, as much as in the public sector. Due to the impact of the COVID-19 pandemic on the economy, depleted uranium in the industrial sector did not grow during the first half of the year, but this is a temporary effect and by the end of the year the growth is expected to reach about half of the growth of the previous year, that is, 4-5%, “said Budreika.

Referring to the benefit advantage itself, he argued that the application of benefits typically creates additional administrative costs and that a detailed cost benefit analysis must first be carried out.

“It is necessary to evaluate if the implementation of the benefit will not be more expensive than the expected benefits. The impact of the income tax relief on wage growth would depend on specifics, but if the relief were significant enough, it is probably worth it for companies to raise wages faster, ”the analyst explained.

According to him, the US Brookings Institution came up with a similar idea regarding the application of the benefit advantage. The analysis conducted there showed that, if properly implemented, such an initiative would create incentives for wage growth.

“A similar initiative, but only temporary, has also been implemented in Japan. There, the corporate tax rate was reduced by 5% for large companies that collect more than 3% of the DU and by 1.5% for micro, small and medium-sized enterprises (SMEs).

In Japan, this initiative has only partially paid off. One of the main criticisms of this benefit was its “temporary nature”. Companies have been slow to take advantage of the temporary corporate tax credit, as the DU increase has reduced corporate income tax in the short term and companies will have to pay higher wages in the long term, when the benefit expires, “he said. T. Budreika.

However, according to him, there are assumptions that such a benefit would have a positive effect on the growth of wages in Lithuania, but, as he added, the devil is in the details.

“It is precisely these details that are not yet available to properly evaluate this initiative,” said the analyst.

Navick: It can turn into a bureaucratic nightmare

Economist Vaidas Navickas agreed that low wages, compared to the level of development of our economy, are indeed a sensitive problem in Lithuania today and one of the main drivers of emigration, but, as has been said, Such a solution would ignore the main characteristics of our labor market. problems and solve the problem in an uncomfortable and doubtful way.

“It may be possible to drive from Vilnius to Kaunas via Paris, but why not go straight?”

“Unlike tax breaks, they would not reduce our budget revenues, which are already meager,” he said.

This income tax credit should theoretically incentivize wage growth faster than wages are rising now, in addition to this benefit, so the profit calculation should be compared to the growth rate of wages for each company in the sector in which it operates: during the last 12 months. Wages in agriculture grew by only 3%, but in health care by 21%.

The administration of this benefit can become a bureaucratic nightmare, ”he said.