Effective taxation in the Baltic States

The objectives if this thesis is to estimate whether there is an inverse relationship between the personal income tax rates and national revenues with reference to the theories of supply-side economist Arthur B. Laffer. Measure the effectiveness of corporate income tax system by analyzing effective tax rates and their influence to local investment made in fixed capital formation. In addition, as the economic recession is present, these objectives mentioned are assed with respect to the high level inflation, decreased economic activity, and increased unemployment. The results of the analysis reveal that there actually is an inverse relationship between decreasing tax rates of personal and corporate income and increasing revenues of the national budget from the said taxes. Both Lithuania and Estonia are currently located in the prohibitive range of the Laffer curve, meaning that decreases in the tax rates shall eventually result in increased government revenues and vice versa. The case of Latvia is found to be effective in terms of flat taxation of personal income. Similarly the corporate income taxation systems in the Baltic States are found to be relatively efficient, due to simplicity and fairness. They are considered attractive for investments from abroad.