In Latvia, taxes are levied by both federal and local governments. Tax revenue stood at 28.1% of the GDP in 2013. The most important revenue sources include income tax, social security, corporate tax and value added tax, which are all applied on the federal level. Income taxes are levied at a flat rate of 24% on all income. A long range of tax allowances is given including a standard allowance of €900 per year and €1980 per year for every dependent.
Social security contributions are levied on all employment income and are mandatory for most workers. The employee pays 11% of the wage, while the employer contributes 24.09%. There was no maximum ceiling for social security in year 2013 because of the economic crisis, but the ceiling was reinstated in 2014 at €46,600 of yearly income. The standard rate for VAT is 21%; for medications and heating expenses, a reduced rate of 12% applies. Some goods and services are also exempt from VAT, this include education, medical care, financial transactions and rent.
Excise taxes apply on different luxury goods and things harmful to the environment. Wine is subject to excise duty of €64.03 per 100 litres. Coffee is subject to excise at €142.29 per 100 kg.
Taxation in Latvia have gone through major reforms since leaving the soviet union in 1991 and making a transition from a central run economy to a market economy. The fiscal system in Latvia after leaving soviet in Latvia was similar other former communist states with high public spending (45-50% GDP) and a tax system that relied in tax base definitions characteristic of central planning. Since then a long range of reforms have been made, including introducing a VAT in 1992 and Social Security Contributions.