Tax debate picks up momentum

Tax debate. Photo: Artur Kuus

If the Center Party launched its fall local elections campaign with a tax hike plan, one of the leaders of the Reform Party, Minister of Finance Keit Pentus-Rosimannus proposes the opposite.

Asked by Postimees what she thinks about Center’s plan to introduce a care insurance tax and a social tax on dividends to ensure long-term care and healthcare services funding, Pentus-Rosimannus said that instead, Estonia should cut the income tax rate from the current 20 percent to 13-15 percent.

“The tax debate will be a key part of the 2023 Riigikogu elections, while it should not be boiled down to listing all existing taxes and debating which ones should be hiked and how soon,” the finance minister told Postimees in a written reply.

Minister mistaken

Pentus-Rosimannus said that labor taxes are too high as it is in Estonia. “Estonia is no longer on the winning side in international competition with such a labor tax level. Merciless competition between states for investments that create jobs requires us to find ways to lower labor taxes, while making sure healthcare and social expenses are covered in an aging society,” the minister noted.

It needs to be said that the minister is mistaken in claiming that Estonia is not competitive in terms of labor taxes as the latter’s share in salary expenses is lower in Estonia than in most European countries.

Pentus-Rosimannus said that the system should be seen as a whole, instead of picking out individual taxes. In any tax debate, a set of goals should be agreed as the first thing.

“I deem it important for the tax system to support the green and digital turns, generating revenue and investments and hindering pollution, misuse of resources and excessive consumption,” the minister wrote.

Pentus-Rosimannus said that taking care of the elderly is among the most urgent problems.

“We could discuss how to boost local governments’ revenue base to allow them to ensure care for the elderly without laying down a new tax. One option is to boost local governments’ revenue base using what is currently the central government’s income tax share. The general income tax rate is currently 20 percent. One option is to slash the income tax rate to 13-15 percent (local governments currently get 11.96 percent) and allocate all of it to local governments. The change would also reduce labor taxation to a considerable degree,” Pentus-Rosimannus remarked.

The minister said that the healthcare funding problem should be solved by rendering the system more effective and boosting the contribution of employers by hiking sums exempt from fringe benefit tax that can be invested in employee health.

Critical of the competition

Pentus-Rosimannus criticized the Center Party’s [current] income tax exemption system where the sum exempt from tax becomes smaller based on a person’s income. “We got an income tax ladder made up of thousands of steps in 2017 courtesy of the Center-Isamaa-SDE coalition. It was not a good idea,” the minister noted. “At first, many saw it as a good way to act out class hatred – let those who make more money pick up the tab. However, it has become irrefutably clear by now that tax rungs do not reduce inequality and will eventually get to those who need supporting instead.”

Pentus-Rosimannus said that over 200,000 pensioners will have to pay income tax on their pension next year, while most of them only receive average pension. “At the same time, the OECD points out that pensioners are at great risk of poverty in Estonia compared to other countries. Where is the logic? Not to mention rescue workers, doctors and teachers who have been caught in the gears of tax rungs.”

“I believe that one of the most important questions put to politicians during tax debates should not be “How will you redistribute?” bur rather “How does your tax policy support economic growth?”,” Pentus-Rosimannus said.

Meanwhile, Minister of Social Protection Signe Riisalo (Reform) says that social insurance would immediately require another €150 million a year.

Deputy leader of the opposition Social Democratic Party (SDE) Lauri Läänemets said that slashing income tax by 5-7 percent would rob the treasury of €400-560 million. Läänemets also sees the proposal as contributing to regional injustice as Tallinn and Tartu would benefit the most from additional funds.

“The minister fails to provide cover for the hole this would leave in the budget. The biggest problem with slashing income tax is that it mostly benefits the wealthy, while the middle class and the poor stand to gain virtually nothing, considering that education and bus fair for children would become more expensive,” Läänemets said.

“The tax system needs to be fair,” he said. “We need to tax the wealthy and being wealthy.” Läänemets added that corporate income tax should be restored. “Estonia is wealthy enough for corporate income tax the rate of which could start at 5 percent,” Läänemets said.

Average labor taxes

Chairman of the non-parliamentary Eesti 200 party Kristina Kallas said that what is needed is inventory of state budget expenses. “The ruling parties’ tax debate is crooked, misdiagnoses the problem and only addresses finding new revenue. What public administration needs is a thorough review of costs. We do not know which expenses are justified and which should be changed, hiked or slashed,” Kallas said.

“Laying down new taxes or moving tax rates around inside the existing system to give the illusion of change is the simplest thing,” Kallas added. “A tax debate needs to focus on managing the economic environment rather than finding ways to boost revenue.”

Chairman of the coalition Center Party Jüri Ratas said before Midsummer Day that Estonia needs to lay down a care insurance tax, a social tax on dividends and consider property taxes. Head of Center’s tax policy working group, Minister of Health and Labor Tanel Kiik published an opinion in the Saturday issue of Postimees where he writes that talking about taxes is dangerous in Estonia as many people believe it is the only perfect thing in the country.

“The tax system will need to be changed quite thoroughly in the near future as Estonia’s tax revenue and public sector expenditure are among the lowest in Europe that makes it impossible to offer universally available healthcare and social services,” Kiik wrote.

“To oppose the idea of a care insurance tax, it is claimed that Estonia already has high labor taxes. In truth, Estonia stands out in the European context with high consumption and low capital taxes,” Kiik noted. “Labor taxes are rather average in Estonia, including what is a much lower flat income tax rate than in many other European states.” The Center Party has proposed a 2 percent care insurance tax split between employers and employees.