The most important reform should take place in people’s heads

Peteris Strautins, Luminor economist

From all psychological wisdom taught at the business school I best remember the idea of an internal/ external locus of control. There are people who believe that they define their destiny themselves and there are people who think that their destiny is defined by external power. I have huge suspicions that people in Latvia explain their success and failures with external circumstances more than in Switzerland or any other country that has been free for a longer period of time.

If not better, at least different

The biggest advantage of the tax reform is that it will no longer (hopefully) be on the political agenda. The previous system was not bad at all, the new one could be a bit better, but anyway it will not influence our lives and the development of economy radically. Something might be changed if more attention is drawn to really important issues.

In our country we somehow under-appreciate the society attention “zone” as a resource. The huge political-economic disaster with the electricity production subsidies might have happened only because the attention was distracted by something else. People did not have time to clarify, consider, understand, what was going on, as the only thing that was all around was the major crisis. The most harming decisions were taken in the beginning of 2009, afterwards we fought the consequences more or less successfully.

I am not sure that due to the tax reform things would become better, but for sure they will be different. The life will become more interesting, especially for accountants, without any doubts. Speaking of private individuals, everybody can verify the impact on their lives on the calculator which is available on Internet. I did it for myself as well - the result showed microscopic decrease of net salary, which does not bother me in any way. There are people whose net salary will become bigger, however depending on their lifestyle and habits, it might be eaten up by the excise duty, where driving a vehicle also might be considered as a bad habit.

There will be more changes in the life of companies. One good system promoting investments in production, which was formed of, for example, enlarged ratios for the amortization of machinery, now has been replaced with another good system - exempt of taxes for reinvested profit. Just like in Estonia, yes!!!

The most important tax reform should take place in people’s heads. We have to stop using taxes as an explanation of events, which they do not explain, at least not the essence of the processes. For instance, if a company is not sustainable - very often this is declared by two “evil-doers” - a tax inspector or a bank. Even if the involved persons have already understood or suspected the reality, the delivery of this clear message may cause strong emotions. If we do not blame abstract market powers, but somebody specific, it does not solve the problem, but makes us feel better. Discussions about tax reforms that have low influence shall be replaced by processes creating added value. In other words, the future of the Latvian economy depends on two processes - export of services in Riga and development of manufacturing in the rest of Latvia. To promote this development we need measures the influence of which is more precise, specific than any practically possible changes in taxes.

Should we and how will we build capitalism?

The feeling that there is something wrong with the taxes, that they hinder our lives, that the system should be properly reformed, was very explicit in one part of society and especially in particular business media and organizations of entrepreneurs, so the political will for the conduction of reform was rather strong. I still hardly understand what they wanted to achieve, but I at least hope that a part of our residents now feel better.

Definitely I am not saying that the system was or now is perfect. Some changes in taxes will still be needed. However the goals should be rather related to ensuring solidarity of the society, not just pure economic. Latvian legislation too much allows for legal decrease of taxes in economically illogical and unfair way.

The system is slightly "feudalized” with privileges in some particular industries or business spheres. It allows for the situations when people may cheat themselves, convincing that social insurance payments are taxes, which should be avoided, however it should rather be considered as a frozen part of one’s salary. I perceive these peculiarities as a duty to the feeling deep inside one’s sub-consciousness that a state is evil, everything local is good, but global is bad, that the world is hopelessly unfair and the main goal is to grab something for yourself.

In this way we will not be able to build capitalism.

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