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Excise Tax Policy and State Revenues in Latvia: Impact and Laffer Curve

This study analyzes the impact of excise tax policy on state revenues in Latvia, focusing on alcohol and cigarette taxation. The Laffer curve is used to examine the relationship between tax rates and revenue generation. The findings suggest the need for optimal tax rates and measures to combat the illicit market.

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Excise Tax Policy and State Revenues in Latvia: Impact and Laffer Curve

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  1. EXCISE TAX POLICY FOR ALCOHOL AND CIGARETTES IN LATVIA,ITS IMPACT ON STATE REVENUESAND THE LAFFER CURVE Andrejs Strateičuks Diāna Fadejeva Valters Kaže 11.11.2011

  2. The Laffer curve (3; 4) does the after-tax revenue justify job efforts? • entrepreneurial activity and motivation to work reduces • pre-tax income declines • tax evasion boosts shadow economy • decline of State revenue

  3. Excise tax policy for strong alcohol in Latvia, 2000-2011(6; 7) Aim: • Increase state revenues • Reduce harmful effect

  4. Sales volumes by alcohol groups, 2007-2010(12)

  5. Share of alcohol groups in total sales volumesin Latvia, 2007-2010

  6. Changes in State revenues from excise tax (excluding beer) in thousands LVL, 2004-2010 (12)

  7. Excise tax revenues from alcoholic drinksin Latvia, 2007-2010 • Total decrease – 13.7 mln. LVL In the 1st HY of 2011 – revenue stabilization BUT new excise tax increase for strong alcohol followed on June 1st

  8. Changes in alcohol turnover in Latvia,2008-2010 • Total decrease in state revenues from VAT ~22 mln LVL

  9. Number of deaths from consumption of alcohol,2004-2010(22)

  10. Changes in Excise tax rate for strong alcohol per 100l a/a, retail turnover and state revenues from excise tax, 2006-2010 (6; 12; 13)

  11. Latvia's State Tobacco Monitoring Programme for 2006-2010 Core aims: • excise tax harmonisation - Latvian tax rates’ increase till minimum required EU level • increase public awareness of tobacco’s negative impact on health • reduce overall tobacco consumption and smoking rates • reduce tobacco availability, etc

  12. Changes in excise tax rates for cigarettesin Latvia, 2004-2010 (20) *MRP – maximal retail price ** but not less than LVL 48 per 1000 sticks

  13. The average price of the most demanded pack of cigarettes LVL, 2004-2009(7) + 411%

  14. Cigarette sales in Latvia,2005-2010, thousand units (21)

  15. Cigarette consumption in Latvia,2005-2010, thousand units (21)

  16. Share of smokers in Latvia, Eurobarometer data: 2006 36% 2010 36%

  17. Excise tax rates for cigarettes and State budget revenues, 2005-2010 (20) *average annualized rate (till July 1, specific tax rate was 8.4%, ad valorem - 19.2%, after July 1, specific rate - 10%, ad valorem - 25%) ** but not less than LVL 48 per 1000 sticks *** but not less than LVL 52 per 1000 sticks *** *Maximal Retail Price State revenues from cigarettes grew by 7% during 1st HY of 2011 BUT new tax increases followed in July 2011

  18. Changes in specific excise tax rate for cigarettes and respective changes in State income, 2005-2010, million LVL (20)

  19. Changes in ad valorem excise tax rate for cigarettes and respective changes in State income, 2005-2010, million LVL (20)

  20. The impact of various factors on illicit cigarette market share in European countries

  21. Conclusions and suggestions (1) • The increase of tax rates does not necessary lead to growing state revenue • Latvian alcoholic beverages’ and tobacco markets - typical examples of the Laffer concept • 41% excise tax rate increase for strong alcohol (2008-2010) caused Latvian state budget revenues in 2010 to decreasby 15%, comparing to 2008, which was the result of increasing illegal market

  22. Conclusions and suggestions (2) • Specific excise tax rate for cigarettes tripled since 2006 while ad valorem rate more than doubled. Respective state revenues, on the contrary, in 2010 were 37% below 2008, when tax rates reached their optimal value • Tax increases have to be supported by stricter legislation and more effective complex of border monitoring, controlling and other activities aimed at preventing the thrive of illicit market,but in Latvian case, these were reduced • Illicit market should be reduced in order to raise the competitiveness of legal producers

  23. Conclusions and suggestions (3) • For alcoholic drinks, an optimal excise tax rate for strong alcoholic drinks would be approximately 650-850 LVL per 100l a/a, that’s at least 10% below the current rate (940 LVL). • For cigarettes, tax increases, were implemented at much quicker pace than Directives actually required. In future rapid excise tax increases should be avoided, gradually reaching the EU target by 2018. • Set of activities in order to combat illicit sales is required. • Until situation in tobacco stabilizes, an increase of excise tax rates for cigarettes definitely cannot be considered as a source for boosting state revenues.

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