Government tax policy seems random

Photo: Marko Saarm

The government's hectic tax policy has finally been given a clearer outline: taxes that will enter into force next year have been decided. Experts say, however, that the big picture looks random, which will not make for a good end result.

The government decided to throw overboard the long-considered vehicle registration fee, or car tax during Wednesday's cabinet meeting. “I'm glad the cabinet supported my proposal to drop the vehicle registration tax, which would have hiked the tax burden of commuters,” said Minister of Finance Sven Sester (IRL). Incidentally, it was the finance ministry that came up with the plan and worked on tax ideas.

Experts critical

The government's tax package will also not include the initially planned banking tax that will be replaced with what could be described as corporate income tax for the financial sector.

The remaining taxes in the original package will most probably be introduced. The government's tax plans are now public and been given a more or less clear outline.

Tax experts and opposition politicians alike deliver a ruinous assessment of the package.

“The big picture seems completely random,” said head of taxes at KPMG Baltics OÜ Joel Zernask. “It is clear as day the entire tax package only exists to cover the budget hole created with the hike of minimum income from tax. The package does not include a single tax change to favor development of companies, export, influx of capital or brains to Estonia.”

Zernask said the package constitutes domestic redistribution, is put together hurriedly, and lacks effects analyses: for example one is left in the dark in terms of the effect alcohol and gas excise duty hikes and a road usage fee will have on manufacturers' export capacity and competitiveness.

Zernask added that this kind of rushing speaks of desperate attempts to try and pay for the hole in the budget created by hiking minimum income exempt from tax to €500 a month. “Reasons given for the new taxes are malarkey. I would not like to be in the shoes of Sven Sester or finance ministry officials right now, who have to patch that hole while giving convincing explanations of how it will benefit Estonia.”

Member of the board of the Estonian Taxpayers' Association Lasse Lehis said that the effect of the new taxes on the budget is quite modest, which is why tax collection and administration could end up costing more than the revenue they will generate. While Lehis does not have concrete figures, he wonders how many man-hours will it take to train new employees, design new forms, and answer questions sure to arise in connection with new taxes.

He also mentioned so-called moral damage. “When entrepreneurs are not happy with new taxes they will adopt more critical attitudes, ask more spiteful questions, look for ways to avoid paying new taxes, find cheaper alternatives etc.” Lehis said. Perhaps the most vivid example is the so-called lemonade tax – producers could start adding synthetic sweeteners instead of sugar.

Asked why he believes the government decided to drop the vehicle registration tax, Lehis said it was probably feared the tax's considerable area of effect would cost ruling parties votes.

Lehis also criticized the government's recent idea: a new 14-percent income tax obligation for banks. The prepaid portion of income tax would be taken into account when the bank pays dividends later. Sester said the government opted for this solution as it renders tax revenue from banks more stable, fits banking sector business logic, and considers the need for financial stability.

Banking tax at the expense of the future

Tax expert Lehis said the system constitutes borrowing from future tax revenue – banks are forced to pay income tax in advance.

“This means that the bank will not have to pay income tax on dividends because it has already paid it. In other words, the government wants to start spending future governments' tax revenue,” Lehis said.

This might be questionable from a constitutional point of view as it translates into a restriction of democracy and the right to vote: the next Riigikogu and government will have fewer options to change policy as the previous composition has spent some of the election period's revenue that will considerably restrict the freedom of drafting the state budget, Lehis found.

“It might also be a breach of the principle of equal treatment when a single area of enterprise, in this case the financial sector, and not even the entire sector, is forced to pay taxes differently,” the head of the taxpayers' organization explained.

Estonia's largest commercial banks were reluctant to comment on the new income tax system individually and passed the ball to the Estonian Banking Association. “The government's desire to find additional ways of paying for its policies is understandable; however, banks are clearly not overjoyed when it comes to this new tax obligation. That said, prepaid income tax is the least burdensome potential solution that comes with the fewest risks for the sector while providing a necessary contribution to the state budget,” said head of the association Katrin Talihärm.

Deficit looms

Even though experts doubt whether the new government's revenue can cover its expenses, Sester said at yesterday's government press conference that next year's budget is set and that everything in  it now fits. The minister said the cabinet has agreed the budget will see a deficit of 0.5 percent in the next two years, meaning the government can make use of reserves.

Sester also said the government will not use reserves from previous periods to cover day-to-day expenses or fulfill new promises but only for strategic long-term investments, like new roads, renovation of the Linnahall building, and development of the broadband network.

The finance minister is convinced the government's tax policy is integral and aimed at economic growth. “Tax policy changes will render the tax structure more friendly toward economic growth: reduce taxes on income and hike consumption taxes,” Sester said.

The government also agreed on 2018-2021 fiscal strategy principles that form the foundation of the state's financial plans for the next four years. Prime Minister Jüri Ratas (Center Party) said the government's four-year plan aims at four major goals: population growth, improved social well-being and cohesion, exiting the economic standstill, and strengthening the country's security.