The Impact of the Tax System on Business Environment

Abstract

The possibilities for business development depend in many cases on larger financial resources, which may be problematic to form from own sources, especially in developing countries. Therefore both economically developed countries and developing countries struggle actively for investment flows. As a rule, the most effective methods are employed in order to create an environment which is attractive for investments and for business development. One of the most important factors determining the attractiveness of business environment, is the level of tax burden or, more generally, tax policy. The opinions of politicians and researchers differ quite often: while the one part pays most attention to the income taxes of enterprises, the other part attach more importance to the level of capital or work taxes. Many people will, however, agree that any taxes at all contradict to the economic principles of business, and that they deform the economic relationships in the market. Therefore it is highly important to ensure that the boundary, where no stimuli are left to develop honest business and to increase the effectiveness of the activities, is not crossed while one determines the tax basis, tariffs and other conditions for assessment of income, work and capital. Many countries in the world have achieved better results with respect to the growth of economics by means of lowering the tax rates. Lithuanian experience with respect to the economic development after the restitution of Independence, has also confirmed the main regularities, related to tax system formation, identified by scholars who are researching tax systems, their effectiveness and tendencies of optimization in different countries. Before joining the EU, the Lithuanian government undertook major changes in the tax system of the country. Most attention was paid to the level of the assessment of enterprises’ income. As the results of budget formation have shown later, lowering of profit tax rates has led to positive results with respect to growth of economics. Inflow to the State budget increased due to profit taxes, while the level of shadow economics decreased. For the present being, projects for optimization of tax distribution are being carried out so that assessment of work may be reduced. The present article displays Lithuanian experience with respect to acceleration of the economic growth and formation of investment-friendly business environment for foreign investors. The positive rearrangements of the tax system have had a decisive influence to the fact that the rates of economic growth in Lithuania during 2004-2006 were higher than the rates of economic growth in EU countries.