Former economy minister: income tax isn't fair

Photo: Andres Haabu / Postimees

Instead of taxing income, taxes ought to be collected from use of recourses such as land or roads, thinks entrepreneur and former economy minister Meelis Atonen.

According to Meelis Atonen (Reform Party), now in charge of gold at Tavid, the exchange group, it is high time for Estonia to again get innovative when it comes to the tax system – like doing away with income tax altogether.

On a scale of five, how would you assess Estonia’s current tax system?

Compared to an ideal, a four, perhaps; comparing to what’s going on around us, I might give it a five. Even so, a good thing can always be improved.

What, then, could be improved with the Estonian tax system?

Once upon a time, as Estonia established its proportional income tax, it was an extraordinary thing. We stood out, and therefore probably attracted investments. The next level was 2000 when we said we would create another system for enterprises – then, also, everybody thought Estonia was somewhat special.

By today, we have been copied in places, some doing a better job at it perhaps. In the region, we no longer stand out – even in Russia, a private person’s income tax is lower. To get investments, to attract interest, we need to stand out. To stand out, things will have to be done a bit different. The entire developed society, the entire Europe, to be more precise, is accustomed to having to collect income tax. This is ubiquitous. At the same time, taxing income is not fair at all.

Why isn’t it fair?

Let’s say: two builders are doing their job. In eight hours, one gets a certain amount of work done, the other does twice as much. Why must the guy who worked harder pay more taxes? Doing more at his piece-work, he earns more for himself, but he’ll also have to pay more to the society.

But what should be taxed, then?

The operating on the market. I don’t mean that a single builder should be taxed; however, if a company wishes to operate on the market, it would have to pay a yearly operating licence or permit fee. And no one will be interested in income tax, because once the right to work and operate on the market has been purchased, how well one chooses to work is everyone’s own business risk.

It’s the resource that should be taxed – this could be used in regional politics, as well.

Income tax is a very bad means to finance local governments, as I live in Kiili [Commune] but I work in Tallinn. The income tax goes where one lives, not where jobs and market are created. Licence fee would indeed go where business actually happens.

Local governments should live more on payments by the inhabitants using local services – for the water provided, for the roads built. By paying land or real estate tax. Same with trading income tax: it’s not operating licence fee alone, one also pays for using resource like land, roads etc. Right now, we tax all that very low.

For service sector enterprises, which make less use of such resources – like banks and other financial services providers – licence fees can be applied differently, client or service based.

Also, exceptions can be made. For instance, the companies created to operate on the domestic need no exceptions, as for them the state has herded the people together; however, should a company be created for export, then the state could say: we will not tax the companies who sell some percentage of produce abroad, or we might charge them with a coefficient of 0.3.  

When it comes to social tax, we have no other option now; rather, this should rise. Our demographical situation will not let us bury our heads in the sand for long; hardly would anyone imagine us not caring at all for our parents on state level. Even so: social tax can only rise as we do away with income tax.

Taxing all kinds of indirect services would be much fairer. In the current situation, where we pay such a big share of the salaries anyhow, I also would not want a car tax to be added. But who wastes more resource: the one who walks to work, the one using public transport, or the one who also buys a car? A car owner will definitely use more resource.

Will this not make the tax system overly complex?

I don’t think this would be too complex. Absolute justice and simplicity do not exist. I don’t think that the areas where a coefficient would apply would amount to a thousand; perhaps these would be 50 or so. That would be known to all, publicly. It would be bad if this would be up to some occasional official to decide; but I think all this could be written in law.

I’m not a tax law maker; I’m just a thinker. Even so, I think that if finance ministry would set a task force to work at this, they would come up with all kinds of versions.

Wouldn’t licence fees scare away foreign investors?

Definitely the goal should not be collecting more money than we currently get with the various income taxes. At the same time, with a system like this, it is a lot easier to avoid all kinds of fraud.

Resource-based taxation cannot be cheated. How will a man say he has no salary, yet he lives in a house? The value of the land must be calculated by the state, setting it to work. This will create a situation where those who use resources also pay.

At the same time, in almost all rich old European states, progressive income tax is collected. How come we are wiser?

Graduated income tax is very easy to explain to voters. When you tell the voter that we will take 80 percent of tax money from 20 percent of the people, the 80 percent will clap their hands as they realise: somebody else will pay. At the same time, in all Europe the wealthier people are seeking ways to escape the high income tax.

I think that in a couple of years we will get to taste the progressive income tax, in Estonia. We will also see that it will not bring much added income as those from whom something can be taken will be optimising and seeking for ways to avoid it.

So Estonia is facing a left turn?

Yes, I think the next elections will mean a left turn for Estonia. The more a society develops and the richer it becomes, the more wealth there is to be redistributed. Meanwhile, a look at Europe will reveal where this urge to redistribute has taken us – into slavery of debt. This is the welfare society disease. As we are also about to arrive there, we will react the same way.

Why are we afraid of the tax debate?

Our tax debate is overly simplified, mainly based on income tax. Perhaps, this is because we fear to think broadly and innovatively. Our society itself is creating the grounds for our best sons and daughters to rather avoid politics – this is seen as something very dirty. Thus, professional politicians are created who will not think in the category of let’s take a bold decision and see what happens.

While we, in 1999 were freeing enterprise from income tax, there was a great pressure against it. But it was done, because we thought: this is the right thing to do and let’s see afterwards how it will affect the voters. Professional politicians will not do such sudden moves; rather, they are looking at popularity polls and counting potential votes.

The mentality, in a society, should be that in every eight or 12 years the people in politics change. New people would come from other walks of life, bringing new ideas.

After all this talk on the tax system, one will have to ask: are you intending to return to politics any time soon?

No. No [such] plans right now.