Mait Raava ⟩ The new finance minister still has one last chance to act in a statesmanlike manner

The finance minister of the new government is Jürgen Ligi. Photo: Madis Veltman

• It is certain that a higher income tax will reduce economic growth.
• Irreversible decisions must be made slowly and carefully.

The minister of finance must come up with a tax solution that increases economic growth, Mait Raava (The Right), management consultant at Pro Konsultatsioonid, finds.

Finance Minister Jürgen Ligi is aware that raising income tax will inhibit economic growth, but despite this, he agreed to such a step.

Since the consequences of raising the income tax are irreversible and negative, the minister of finance must definitely take the time and create a thoroughly thought-out and evidence-based tax solution that will make the Estonian economy grow and then present it to the government for substantive discussion and decision-making.

It's not too late

The new finance minister, Jürgen Ligi, is absolutely right when he says that raising the income tax hinders the economy and inhibits investments-enterprises directly (PM, July 22), as this is confirmed by several scientific studies. For example, in OECD countries, a 10 percent reduction in corporate income tax increases GDP growth by 0.9 percent, and a 10 percent reduction in personal income tax increases GDP growth by 1 percent. Similarly, it has been found in EU countries that raising corporate and personal income taxes has a negative impact on economic growth.

In fact, ignorant decisions like this are unlikely in medicine, however, ignorant decisions should also not be made in state governance, including finance.

This means that, in raising the income tax, Jürgen Ligi has knowingly agreed with a decision that is irreversible and has negative consequences. His hope that we will fix the budget first and then make the economy grow has no cover, as the increase in income tax will definitely lead the Estonian economy from its current bad state to an even worse state.

Amazon.com founder Jeff Bezos told shareholders in a 2016 letter that the consequences of some decisions are irreversible or nearly irreversible — like «one-way doors» — and that these decisions must be made methodically, carefully, slowly, with great deliberation and consultation.

For example, imagine you go through a door and you don't like what you see on the other side of the door, but you can't go back to where you were before. Fortunately, most decisions aren't like that – they're changeable, they're two-way, and then you don't have to live with the negative consequences for too long. Because you can open the door again and go back.

Bezos emphasizes that managers must clearly distinguish between the first and second types of decisions and, accordingly, either make very slow and carefully considered decisions when they have irreversible consequences or make quick and more superficial decisions when they are reversible.

That this method of decision-making works very well has been confirmed by the extraordinary success of Amazon.com under the leadership of Bezos. In addition, the nature and great importance of slow decisions (slow thinking) has also been proven and explained by the renowned Nobel Prize winner Daniel Kahneman. In other words, Jürgen Ligi has a reliable method for solving the current difficult situation. And it is his responsibility to use it. Or resign.

President Alar Karis appointed the government led by Kristen Michal to office in Kadriorg. Photo: Eero Vabamägi

Ignorant decisions

It is clear that the responsibility of raising the income tax that inhibits economic growth, i.e. making a decision that is very harmful to Estonia, lies with the finance minister, whose task it is to propose a thoroughly thought-out and evidence-based tax solution to the government. After all, it is the task of the finance minister to prepare evidence-based decision projects in finance, explain the options, lead a meaningful discussion, and finally, reach the best possible decision.

Unfortunately, in this case, the new finance minister is behaving identically to the previous finance minister, who flailed around with his flash opinions because he lacked evidence-based decision projects.

If the finance minister now superficially goes along with the coalition agreement and agrees to the increase in income tax, he is behaving as harmfully as, for example, a surgeon who knows based on evidence that bariatric surgery is the most effective treatment for a specific overweight patient, but still decides against it because doctors of other specialties believe that the overweight patient in question could be prescribed medication.

In fact, ignorant decisions like this are unlikely in medicine, however, ignorant decisions should also not be made in state governance, including finance.

While individual patients suffer and die from wrong decisions in non-evidence-based medicine, then with non-evidence-based public finance decisions, including income tax decisions, the minister of finance will damage the lives of all 1.3 million people of Estonia, as he has not done thorough preliminary work in preparing evidence-based decisions. Meaning the finance minister has not done the necessary preparatory work. Which is completely irresponsible.

For a better future

Therefore, the new finance minister has the obligation and, fortunately, still the opportunity to take his time, submit a thoroughly thought-out and evidence-based tax decision project to the government, explain the benefits and harms of one and another tax option in it, create a favorable atmosphere for an open and meaningful debate in the thorough discussion and consideration of the options, and, through that, jointly reach the best possible decision in the coalition.

By acting in this way, the finance minister and the government will most likely come to the decision that the best thing the state can do is to lower the current corporate and personal income tax, for example from 20 to 18 percent (or 10 percent). As a result, the GDP would increase by 2 percent, which, of 43 billion euros, would make up about 860 million euros per year. And if income tax were to be lowered to 16 percent instead, the economy would grow by 1.72 billion euros per year.

These predictions are based on scientific results. And so on in each subsequent year. True, these results will come after a couple of years, but they will definitely come. In the meantime, it is necessary to dare to take a loss, cut public spending significantly and live with a negative budget, no matter how big it is. It is absolutely possible and worth doing for a better future.

Based on scientific results, it is highly likely that lowering the income tax will increase economic growth. In other words, the risk is minimal here. This kind of knowledge of the benefit/risk ratio could help the finance minister and the government to behave in a statesmanlike manner when it comes to the tax solution, including lowering the income tax. So please do this.