ÜLO VIHMA ⟩ In a matter as critical as the tax reform, rushing is not an option

Photo: Erakogu

• Members of parliament should be more proactive.
• Resolving crises requires money.
• Business brings money to the state budget.

The public wants to see the government take budget cuts more seriously. Unfortunately, cutting expenditures alone will not bring about a structural change in fiscal policy, entrepreneur, management consultant and coach Ülo Vihma writes.

The Reform Party, which forms the core of the governing coalition, has adopted a stance of confidence and bold decision-making. So show that you have the courage to make big, structural decisions. Live up to your name. Your former leader's claim in her resignation speech that corporate income tax should never be imposed is now merely the personal opinion of one individual member.

Some basic truths about taxation should be ingrained in every politician's mind, but perhaps they need to be repeated yet again. For example, when labor and consumption are taxed at a flat rate, lower-income earners end up paying a larger share of their income in taxes compared to higher earners.

Or, when an Estonian company has a subsidiary abroad, taxes are paid there, and the personal income tax on dividends is also collected abroad.

The average person might be confused by what, for instance, the Foresight Center considers corporate income tax: a distributed profit tax, advance tax for financial institutions, or fringe benefits tax. Referring to the first as corporate income tax is misleading because the main debate—whether to tax profit or company income—does not strictly refer to corporate income tax but rather tax on business earnings. In Estonia's case, this is still 20 percent. We all know this rate applies to business earnings, meaning dividends.

The government is struggling and debating over the new budget. But Toompea is not just Stenbock House; it also includes the parliament. Given that the Foresight Center is a think tank analyzing future social and economic trends under the parliament, it is no wonder if the explanations mentioned earlier have confused party members, particularly MPs, which could influence internal party dynamics, affecting the government as well.

Since the pandemic, global tensions have risen significantly. Fighting the pandemic alone led to massive costs for society and stress for individuals. Now we face other crises, all of which are consuming vast amounts of money. We do not have enough electricity, nor enough ammunition and equipment to defend ourselves effectively. Projections for the growth of public spending clearly indicate that we are living beyond our means.

These pressures understandably push the government to act, but, for some reason, there is relative silence in parliament. Members of parliament, the supreme power holders and representatives of the people, are paid salaries based on the Salaries of Higher State Servants Act (currently around 6,000 euros), but they seem to have gone into hibernation. There is also no word from their many advisors, whose job it is to assist MPs in parliamentary matters. Each committee also has consultants, often more than one, representing a significant pool of expertise. Journalists have ample opportunity to ask them questions.

An asset tax would reduce the incentive and capacity to invest. Many rapidly growing companies with large equity reserves still do not have significant income from which to pay this tax, as their revenue is being reinvested into development.

Honorable MPs, earn your titles and defend your dignity. Are you really just sitting idly by, waiting for the government to propose bills so you can discuss them? Show some backbone. Use your resources to commission studies and expert opinions. Form your own views on the tax system, not just based on the Foresight Center's analysis, and express them publicly, clearly, and concretely. Otherwise, you will forever be stuck bickering about trivialities, like colleagues accused of being paid off by the Chinese government, or debating minor issues like expense allowances or salary adjustments for future MPs—issues that do not address the main challenge of our time, which is a lack of funds.

State revenue comes from business. Naturally, then, changes to taxes that directly impact businesses take center stage. The main competitors among the current proposals are corporate asset tax versus corporate income tax.

An asset tax would reduce the incentive and capacity to invest. Many fast-growing companies with substantial equity do not yet have the income to pay this tax, as they reinvest in development. An asset tax would be fundamentally at odds with the oft-repeated political goal of supporting investment.

Corporate tax, on the other hand, is paid only on profits, which means the business is viable and capable of contributing to society. The perceived weakness of corporate tax is the potential for accounting manipulation. But is our government's administrative capacity really so poor that we cannot minimize this, as other countries with corporate tax do?

Politicians seem very anxious right now, understandably so. The current financial shortfall is a pressing reality, and at the same time, next year's budget negotiations are underway. Some politicians seem to be thumping their chests, proudly claiming they have the courage to make unpopular decisions, like raising taxes. But perhaps they should also listen to the public's demand for more significant cuts next year. However, it is worth remembering that crafting an annual budget and changing the tax system are different tasks. They may coincide, but they do not have to. When it comes to something as critical as a tax reform, rushing is not an option—especially when aiming to maintain legal certainty while making long-term, fundamental fiscal policy decisions, such as a structural tax reform. Parliament has the final say in these matters, and its members must prepare for this every day.