This week EU finance ministers discussed labour tax reductions which, according to Estonia’s Jürgen Ligi, ought to come by cutting tax exemptions – above all.
«Some [European] states have even dared to say it, but when it comes to social justice tax exemptions are the cruellest,» said Mr Ligi. «Estonia belongs to what Europe has gotten used to calling socially unfair. All kinds of home loan interests and other such lowered VAT rates are not distributed in socially effective ways, especially not in countries where wage levels are lower and percentage of consumption higher regarding income.»
According to Mr Ligi, all tax exemptions might be done away with, except the tax-free minimum and the pension pillar. «With the others, hard indeed to find a justification,» he added.
As explained by Mr Ligi, in some cases it is vital to compensate for tax exemption such as with families with children, so people less well-to-do would not suffer. «The money, however, should still be given back into the same sector, but in a manner more effective than thro tax exemptions,» said the minister.
Exemption or support
Estonian Chamber of Commerce and Industry director-general Mait Palts basically agrees with the proposal to alter labour force tax load and positively views doing away with the tax exemptions; however, with the latter specific tax exceptions should be considered and international competition kept in mind.
He singled out tourism: 24 EU states have imposed lower tax rates on accommodation services and in New Year one more will be added. Should Estonia opt to waive the exemption and accommodation prices thus rise as compared to neighbouring countries, we would lose foreign tourists and domestic tourism would drop. Thus, it would not just be the hotels that lose in income but lots of related services and trade as a whole would suffer with it.
Estonian Taxpayers Association board member Lasse Lehis said that Estonia has few exemptions as it is. Therefore, cutting these not much extra money would be gained – especially considering that some part of the extra money should be handed back to the target group as support.
«There may be various ways of looking at tax exemptions. Some dream of the so-called clean tax law not «polluted» by social policy. Others think about making it easier for Tax Board to do its work. Some, maybe, want more power and control i.e. more money to «allocate» and hand out as support,» he said.
According to Mr Lehis, tax exceptions need to be looked at case by case, assessing whether it is easier and more expedient to provide tax exemptions or hand out support. «Especially in light of former experience where finance ministry first vows to replace the abolished tax exemptions with extra support, but afterwards they «forget»,» said he.
According to finance minister Mr Ligi, to compensate a cut of labour taxes, it would be prudent to also raise value-added tax, asset taxes and consumption taxes generally.
Estonian Trade Union Confederation chairman Peep Peterson agrees that labour taxes should be lowered; however, he is opposed to VAT rise. He thinks it’s ownership that should be taxed, so as to make owners of large corporations and real estate to pay more i.e. those with more money.
Mr Lehis said taxpayers union neither supports rise of any taxes nor new ones being added. According to him, Estonia has alternatives enough both with cost-cutting and more effective collection of existing taxes.
«Rather, we might give certain tax exemptions which would promote establishment of new companies and creation of jobs in Estonia – out if that, we’d also have additional tax revenue,» said Mr Lehis. «In other words, we don’t need to rise tax rates; rather, we need to enlarge the tax base. Because as people’s income increases, consumption and income of VAT increase as well.»
Fair competition a must
This week, incoming European Commission president Jean-Claude Juncker said Europe should impose common tax rules and do away with unfair competition regarding corporation tax which makes some states, Estonia included, tax havens.
Mr Palts, the Commerce/Industry Chamber head, does not believe that a common corporate tax system will ever come into being – with a functioning international competition in place, a positive feature.
According to Mr Lehis, fighting abuse and tax evasion is vital indeed but that does not necessarily imply levelling tax laws of all states. According to him, it must be ensured that tax competition between states is fair i.e. states’ tax systems may differ but the differences may not be abused.