General real estate tax

Looking forward for the projects of national budgets of 2014, there will definitely be some changes primarily in taxes. One of the main issues for debate in Lithuania is the proposed real estate tax amendments. The project to lower the limit from which the tax is charged has been already submitted to the parliament. Currently, the real estate is taxable if its market price is higher that 1 million Litas, that is around 290 thousand Euros. The offer claims that this limit should be reduced to 750 thousand Litas (217 thousand Euros), defined on the purpose to collect more money from the taxes to the national budget, decrease the budget deficit and pay back the debt, which now is worth 52 billion Litas and is 39.2 percent of the national budget. However, the main discussion point is the need of this tax, generally. It is quite common to argue that real estate tax is requisite for Lithuania just because Western European countries successfully employ it. But the question is if it is right to claim this and the following discussion is directed to this issue.

Following the topic, it is important to mention some technical details in order to fully understand the way this tax works. Currently, the real estate tax rate in Lithuania is 1 percent and tax-free limit is 1 billion Litas. So, if the real estate market value is 1,5 billion Litas, it means that the tax is counted only on 0,5 billion Litas.

According to the public opinion, the idea of taxing luxurious real estate or the second real estate is fair, however, only very few claim for general real estate tax. Probably, people do not consider the cost of living in Lithuania is high enough to employ this tax on the basis of examples in Western Europe countries. However, the fact that people primarily tend to think about their own benefit or disadvantage cannot be ignored. Therefore, if a person has rather inexpensive apartment he or she will claim for the tax perceiving that there are no personal losses but only benefits. General real estate tax would also determinate higher renting prices, so, even if a person does not own an apartment, he or she would pay the taxes indirectly. 93 percent lithuanians live in their own dwelling and, therefore, it would be naive to expect the public opinion to be in favour of the real estate tax.

In contrast to the public opinion, the economists have doubts about the benefit of taxing additional real estate because the costs of tax administration may be higher than the collected money. It is also because of the tendencies in the country – the majority of people have only one real estate and those who have more than one, likely, would find the way to registrate it as their relatives‘ property in order not to pay the tax as well. In addition to this, the primary real estate owned by inhabitants varies considerably by its value and quality. There are some highly cost houses in prestigious district and narrow flats in villages, as well. Considering these differences, it is appropriate to employ general taxation and lower the tax-free limit rather than charge the tax only on second and further dwelling. What is actually happening and trying to achieve.

What is more, the economists consider general real estate tax less harmful than labour or consumption taxes. The economist N.Maciulis highlights the following advantages of this tax: first of all, it is impossible to avoid this tax if it is charged generally; secondly, it does not reduce the incentives to work and to receive official income. The real estate purchased from illegal income is charged as well, so it is also an efficient way to struggle against the shadow economy. What is more, the budget income from this tax is stable even though the economy is declining. Unfortunately, especially because it would affect all the inhabitants, it will take time to employ the general real estate tax because of the political forces.

There is also a contradictory opinion that shows some evidence why real estate tax is not necessary at all. The opponents of this tax refer to the data showing the percentage of people who owns a real estate and what part of them has mortgage loans in comparison among European countries. For example, 93 percent of lithuanians own their own dwellings while, in contrast, in Austria, this value is 58 percent, in Belgium it is 72 percent. It is fair to claim that the real estate in Lithuania is contributed uniformly and, because of that, the taxation would affect all the people rather than the riches. What is more, people who operate lower income but own real estate may be forced to give up of their property. Another argument against this tax is that in Lithuania a lot of people owns dwellings but only a minority has mortgage loans. 86 percent of lithuanians have a real estate without any liabilities, while in contrast there are only 14 percent in Denmark, 25 percent in Germany and 41 percent in Portugal who owns a property without mortgage loans. It is important because of the fact that in Western European countries there are subsidiaries for mortgage loans and it counterbalance the real estate tax. Therefore, the adherents of laissez-faire claim that without subsidies and without real estate tax there would be a similar situation as in Western Europe yet without additional regulation.

Taking everything into consideration, there is no opinion or solution that would made everybody happy. The point of view depends on political or ideological belief. However, even though there are a lot of advantages to collect more money to the national budget and to reduce the differentiation among social classes, charging the property that does not create the income for a private person may be considered unfair.

Aurelija Gylyte

The essay is based on this article about the necessity of a real estate tax and comparison with other European countries.

http://www.llri.lt/naujienos/ekonomine-politika/mokesciai-biudzetas/z-silenas-ko-neivertino-mokescius-raginantis-didinti-tvf/zilvinas-silenas

[artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]