Debating the Future of Corporation Tax and Defence Funding in Lithuania
In a recent broadcast on Žinių Radijas, economist Mačiulis weighed in on the contentious debate surrounding corporation tax and its impact on Lithuania’s economy. Amidst political calls for an increase in corporate tax, Mačiulis highlighted the inherent volatility of corporate tax revenues, particularly during challenging business cycles. He pointed out that profits could dwindle, and companies might seek tax optimization strategies, including paying taxes outside of Lithuania.
Mačiulis advocated for the abolition of tax breaks, a move that has previously faced resistance. He suggested that linking tax reform to an increase in defence funding could garner more support. By positioning the reform as a means to bolster national security, potentially raising defence spending to 3% or 4% of GDP, the argument against maintaining tax breaks weakens.
The business community seems to align with Mačiulis’s perspective, signaling agreement that a modest rise in both VAT and corporate tax by 1% could be a straightforward solution without the need for complex negotiations over tax breaks.
When it comes to financing Lithuania’s defence, Mačiulis suggests that borrowing is a viable option. He argues that if there is consensus on specific measures to enhance Lithuania’s security, borrowing could be an effective tool. This approach would also sidestep the EU’s impending fiscal rules that limit budget deficits to 3% of GDP, provided there is clarity on the defence funding requirements.
Mačiulis also commented on international fiscal policies, criticizing Germany’s fiscal consolidation and Estonia’s new taxes. He underscored the need for a “strong counter-cyclical fiscal policy” to navigate the current economic stagnation and semi-recession in Europe, which could simultaneously enhance physical security and attract investment.
ELTA recalls discussions initiated by Prime Minister Ingrida Šimonytė on defence funding, where proposals were made to raise necessary funds through adjustments in taxation. One such proposal included a 1%-point increase in both VAT and corporate tax to generate €420 million.
The opposition has also put forth various proposals for additional defence funding, ranging from a bank wealth tax to defence bonds and an increase in corporation tax. In a show of unity, Lithuanian businesses and organizations are rallying behind the “4 Percent” initiative, urging politicians to commit 4% of GDP to national defence.
