Pull up your bootstraps, fall on your face
Latvia’s economic recovery plan is placing the largest burden for recovery on the poor. Just pull up your bootstraps, as a Republican would put it, and work your way until it’s over guys.
This week Elizabeth Warren, appointed by President Barack Obama to be chair of the Congressional Oversight Panel, criticized the U.S. economic recovery plan as bailing out the top financiers but leaving the middle and lower class to fend for themselves.
Latvian Prime Minister Valdis Dombrovskis answers a rather redundant question on whether the Latvian government will support progressive taxation or not at a press conference in Vilnius Friday after meeting with the Lithuanian and Estonian prime ministers. Photo by Nathan Greenhalgh.
The same could certainly be said for Latvia’s anti-crisis plan. This summer the government supported progressive taxation, but the coalition has since bowed to pressure from the People’s Party (who are likely looking to break the coalition after the budget passes) and will not implement the tax.
The logic behind not doing so is that it would drive entrepreneurs to Estonia and Lithuania, which would retain the flat tax.
So instead the government is lowering the minimum tax income threshold, so the poor will have to pay more taxes while wealthier Latvians will pay the same percentage of their income.
I don’t think this will stimulate economic activity — after all, people need to buy things for capitalism to function well. But perhaps hoping for a return in internal demand to pull the country out of crisis is pointless anyway given the cutoff of credit from the Swedish banks. And then there’s the goal of reaching the euro, which seems to get farther and farther away for Latvia. And of course regardless of Maastricht, the Latvian government does not have the ability to take on huge deficits anyway like a large Western economy has — creditors don’t have enough faith in the country and devaluation is still off the table.
But as long as internal consumption remains low, the government can expect diminished returns on VAT revenue, so is it digging it’s own hole with forgoing progressive taxation?
That’s what Prime Minister Valdis Dombrovskis himself said that’s how the IMF and EU see the situation. So who’s right?
