Economists disagree on the idea of imposing a defense tax in Lithuania

"Most economists agree that there is a need to increase defense funding, but they disagree on whether a separate tax is needed for this.

 

Some experts interviewed by BNS believe that with great ambitions to strengthen security, defense and deterrence capabilities, it will not be possible to rely on borrowed funds alone. Others associate the idea of a separate tax with populism and believe that the necessary funds must be collected through a common tax system.

 

News agency BNS asked sixteen economists and experts to evaluate the defense tax idea put forward this year. Five would tend to support it, eight believe that a separate tax is not necessary.

 

Another expert believes that the fee can be debated, another emphasizes that it would make sense if the collected funds were used transparently and according to the intended purpose. According to another expert, the priority is to have not only resources, but also strong, efficient government institutions.

 

"The discussion on additional financing of the national defense still shows that the fundamental problem of the Lithuanian tax system is not being solved sufficiently. The goal is not to significantly increase the ratio of government sector income to GDP", said Darius Imbrasas, economist of the Bank of Lithuania.

 

The tax would help to better prepare in case of aggression, borrowed funds will not be enough

 

Experts in favor of the introduction of a separate defense tax say that it would help to better prepare for the defense of the state in case of aggression. In addition, others point out that as ambitions for defense financing grow, borrowing alone is not enough.

 

"In the current geopolitical situation, such a tax would help to better prepare for the likely defense of the state in the event of aggression, and collecting such a tax together with VAT would not require higher tax administration costs, VAT is a fully harmonized EU tax, the collection of which is given greater attention," commented Kaunas University of Technology researcher Vaidas Gaidelys, who believes that the tax could be introduced by increasing the VAT rate.

 

Indrė Genytė-Pikčienė, the economist of the Šiauliai bankas group, supports the idea of the tax, because, according to her, borrowed funds are not enough for bigger ambitions, they can be used to manage momentary spikes in needs.

 

"To secure sustainable sources of funding, a defense-specific surcharge is likely to be easier to negotiate in an election year than more significant systemic tax changes," she said.

 

"The areas where there is room for change, as indicated by the European Commission, the OECD and the International Monetary Fund, remain the same: taxes that are not harmful to economic growth, reducing the VAT gap, expanding the tax base," the economist added.

 

An increase in the VAT rate, expansion of the tax base should be considered

 

After deciding to introduce such a tax, some experts agree that it could be implemented by increasing the value added tax (VAT) rate, expanding the tax base. Others say it could be calculated on turnover for large companies.

 

Tadas Sharapov, a researcher at the ISM University of Management and Economics, says a temporary tax could be considered, creating a proportionate tax burden for both residents and businesses if there are no other financing alternatives.

 

"It would be important to analyze all possible financing alternatives: borrowing, redistributing the budget, introducing new or increasing existing taxes," said T. Sharapov, emphasizing that the defense tax makes sense if it is transparently used to strengthen national defense.

 

Swedbank economist Nerijus Mačiulis says that the defense tax could be introduced by increasing the VAT rate, but in order to reduce the tax burden on the poorest people, according to him, a preferential VAT rate for some food products could be considered.

 

"Lithuanian residents are not inclined to approve higher taxes unless they see a very clear, important and transparent use of the collected funds. After deciding that, for example, one-tenth of the collected VAT tax should be allocated to the financing of national defense, many would probably not be very opposed if the basic VAT rate were to increase as a result. The VAT tax affects all residents, diverting part of it to defense would be the closest to "solidarity", which is really needed in this difficult and dangerous period", said N. Mačiulis.

 

SEB bank's economist Tadas Povilauskas pointed out that increasing the VAT rate would be the fastest and simplest way, but he pointed out that in this case people with high incomes contribute relatively less to national defense.

 

At that time, Kaunas University of Technology researcher Rytis Krušinskas says that when increasing defense funding, redistribution of part of the existing collected VAT, for example half a percent, could be considered.

 

Indrė Genytė-Pikčienė, economist of the Šiaulių bankas group, believes that taxes that are not harmful to economic growth, reducing the VAT gap, and expanding the tax base could be applied.

 

At that time, the head of the Innovation Agency, Romualda Stragienė, suggests counting from turnover only to large companies: "Tax administration must be as simple as possible and not burdensome for small businesses or natural persons."

 

Nerijus Černiauskas, a researcher at Vilnius University, says that it is important to determine the necessary, stable need for resources for defense and to support it every year, and how to achieve funding is a secondary issue that depends on other aspirations.

 

"If you want to increase funding and have a tax system as simple as possible and less opportunities to abuse it, then it would be worthwhile to reduce the number of tax incentives. If we want to increase financing and stimulate economic growth, then it would be better to increase the value added tax, even better, the property tax. If we want to reduce income inequality, we should make taxes more progressive. If we want to increase funding and have a cleaner environment, then we should increase excise taxes and pollution taxes", commented N. Černiauskas.

 

Kaunas University of Technology researcher Vilmantė Kumpikaitė-Valiūnienė doubts the correctness of the tax. According to her, the consideration of increasing the VAT or corporate tax rate would impose an additional burden on businesses or residents.

 

"VAT in Lithuania is 21%, which can be said to be average when looking at EU statistics. (...) The number of people living at risk of poverty decreased in Lithuania this year, but the increase in VAT may cause them to increase. So I doubt his justice towards the people of Lithuania. And by increasing the profit tax, we will again reduce the attractiveness of foreign investors," she said.

 

Bank of Lithuania economist D. Imbrasas did not comment on whether a new tax is necessary at all, but according to him, if it were decided to introduce a tax, the most important thing is to ensure that the chosen funding source is sustainable.

 

Doubts the necessity of the tax due to the burden on residents and businesses

 

Experts who are skeptical of the idea of a new tax say that defense funding needs to grow, but question the burden of more taxation on businesses and residents. In addition, some call the tax idea populism and say that politicians must decide on priorities when adopting the state budget.

 

Jonė Kalendienė, head of the Research and Analysis Department of the Innovation Agency, says that the funds needed for defense must be collected through the common tax system.

 

"What is important is the commitment to allocate a certain amount collected for defense purposes, not in what form those funds will come to the common pot. The proposal to introduce a defense tax is the government's decision to shift the responsibility onto the shoulders of the population, taking advantage of a sensitive issue," said J. Kalendienė.

 

Živilė Simonaitytė, a lecturer at the training company "Countline", also said that the state must decide on priorities by adopting the budget, and not by introducing separate taxes.

 

Citadele Bank economist Aleksandras Izgorodinas says that it is necessary for Lithuania to continue increasing investments in the army and defense, but he does not think that the introduction of a new tax would significantly contribute to the strengthening of defense. The tax would offset only a small portion of the defense spending requirement, he said, so borrowing would inevitably be needed.

 

"I think that increasing defense spending must be a strategic goal, and this requires strategic and structural solutions: cooperation with other NATO countries, including military financing. In this case, the analogy can be the Covid pandemic and the borrowing of EU countries to fight the pandemic on behalf of the European Commission. The second is a significant increase in defense spending," believes A. Izgorodinas.

 

At the time, economist Romas Lazutka says that separate taxes are a populist game, because all taxes go into the budget and all areas are financed from it.

 

"Special taxes are just populism to overcome popular opposition - who dares to oppose defense taxes?" Although the economic essence is the same, regardless of what the tax is called, it reduces the disposable income of the population and increases the income of the state budget", said R. Lazutka.

 

"The government should not play populism, but explain to the public why each item of budget expenditure is necessary, including for defense. Regarding the latter, there must be public information and discussion about what that defense is, how it will be organized and what defense measures and what expenses are required," he added.

 

The president of the Lithuanian Free Market Institute, Elena Leontjeva, noted that in case of war, it is important to have not only resources, but also strong, efficient government institutions, therefore, according to her, the priority is to organize their operation.

 

"Ensure funding for the achievement of goals, not the execution of processes. This would allow resources to be directed to security and savings where they are scattered. The essential part is that the goals must be urgently updated, focusing on the security of the country. If, after doing this, it turns out that funds are still needed, it is appropriate to consider a war tax. A war tax would raise the funds collected, but it would not make our government strong and efficient. Therefore, it is necessary to start from the other end", she said.

 

The idea of a defense tax was put forward by the chairman of the Seimas National Security and Defense Committee, Laurynas Kasčiūnas, after the President earlier criticized the 2024 defense budget for the fact that it does not include funds for the plan approved by the State Defense Council to create a land division in the Lithuanian army.

 

The Conservatives are promising to gather cross-party support to agree on a new tax that could come into force in 2025.

 

Specific proposals have not yet been registered, but politicians are considering that, for example, VAT or corporate tax rates could be increased to increase the financing of national defense.

 

In next year's budget, it is planned to allocate 2.75% of the gross domestic product (GDP) to national defense. Of these funds, 2.52% are regular budget allocations, and the remaining amount is a solidarity contribution temporarily paid by banks, intended to finance only infrastructure for the reception of allies.

 

Some experts say that if it were not for the solidarity contribution of the banks, the army would not feel the increased funding. According to them, Lithuania should allocate at least 3% of GDP to defense."