The government coalition formed after the elections has finalized a coalition agreement which, among other things, provides for a tax increase and a new tax, the car tax, starting from the summer of 2025. During the year prices have increased, people’s purchasing power, i.e. domestic consumption, has decreased. The economic forecasts published by Eesti Pank just before Christmas also show a decline in the economy. As a result, Finance Minister Mart Võrklaev withdrew from the ambitious tax increase plan, meaning there is no agreement even on the budget strategy for the next four years.
Before the spring elections there was no talk of a tax increase, but the program of the Social Democratic Party envisaged the increase of income tax under the name of national defense tax, the introduction of a progressive income tax and taxation of dividends with social tax. Other coalition partners talked mostly about expanding the income tax-free minimum to wealthier people. So there wasn’t even a debate about taxes.
However, the new Finance Minister Mart Võrklaev (RE) has started talking about fixing state finances, about the 750 million euro hole, which is not enough to cover the expected cuts of half a billion, and that additional funds could be obtained to increase taxes.
“There is no point in putting the tax to a referendum, these are the decisions that politicians have to make when they see that the country is in a difficult situation,” he said.
According to Lenno Uusküla, chief economist at Luminor Bank, a budget deficit has developed in recent years.
“We didn’t lower tax rates, tax collection went down. The amount of taxes as a percentage of gross domestic product (GDP) went down in a couple of years. It’s just that the activities we were doing were taxed less. a typical example is platform work, which may not be very different in content from what was previously done as paid work, but as platform work it is less taxed”, explained the analyst.
Someone will also have to pay for the subsidies distributed during the pandemic and in relation to the war in Ukraine. Even after the tax burden is eliminated, you will receive less money, so you have to find a replacement somewhere.
The first and most important part is the increase in VAT from 20% to 22% starting from January 1st. Its volume is estimated at 235 million euros. The government justified this by increasing the country’s defense spending, and everyone would contribute in this way, explained Ernst & Young partner, tax expert Ranno Tingas.
“VAT is, by its nature, a tax that most affects those people who, figuratively speaking, take most of their salary to the shop. Those who save, invest, do not pay VAT on this money. It’s true that everyone contributes, but it is clear that low- and middle-income people receive a proportionately higher contribution than wealthier people,” he explained.
Therefore prices that could fall in a context of general economic recession will not fall, because traders have already silently inserted the VAT increase.
Much more complicated is the 2025 budget, where it already awaits a planned but unimplemented tax increase of 400 million euros. Part of this would be covered by raising income tax by 2% for both individuals and businesses. Along with this, numerous advantages will disappear.
“Regarding income tax, it’s actually written in the law that in 2027 we will look at how this increase in tax-free income and the increase in income tax has actually worked and whether or not anything needs to be changed. So it was left a trial period,” Tingas said.
The head of the Chamber of Commerce and Industry, Mait Palts, said the sudden tax increase represents a bad surprise for companies, especially because there is no clear target to reach. Rather, you need to look at where we are compared to other countries in the region in terms of taxes.
“Regarding the sales tax there are no problems: with 22% we do not stand out in the region. The sales tax is still a tax on the final consumer and since prices are rising anyway, the pressure on wages it will certainly increase.” will increase and consequently the competitiveness of companies will also be affected”, explained Palts.
As economic forecasts have worsened, which also means lower-than-expected tax revenues, the gap could even narrow to 600, 800 million or more.
According to Lenno Uusküla, chief economist at Luminor, the challenges are many, but there are also solutions.
“What could decrease is the social tax. Precisely because this tax base is reduced, making competitiveness in a certain sense more difficult, precisely because the taxation of labor and work costs us more and more and we compete more and more in competition on prices on the world market. The other part is perhaps made up of primary consumer goods, whose VAT may decrease in the future. If the general VAT increases, it is rather the tax of the poorest person, but to compensate for this, the countries often have lower VAT on basic food products,” he said.
The increase in unemployment to the expected 9% will lead to a decrease in the collection of taxes on consumption and labor. According to Uusküla, we have left part of the economy untaxed, and now those who can must start increasing tax rates. According to him, we need to move more from labor taxes to general income tax and property taxes.
“Not increasing the social tax, but increasing the income tax rate is exactly what reduces the burden of the social tax and makes this tax base more uniform. It does not matter whether you pay it as an employment tax or as business income And then the effect that OÜ should – or something like that, hide their income,” Uusküla said.
“Another movement that’s happening is the taxation of vices. Environmental vices, health-related vices, then the so-called sugar tax, so that people buy more salad instead of candy. So they make sugar-related products more expensive. And exactly the same with the environment, to punish those who pollute the environment by consuming more than one where the environmental footprint is smaller and the car tax is included in that. Perhaps it is not clear at the moment whether it is a wealth tax or of an environmental project,” – added the economist.
To date the government does not agree on this. There is a difference of opinion on which exemptions to add to car tax. The car tax is expected to bring 200 million euros to the budget in 2025, and from there another 10% per year in subsequent years. It is essentially a property tax, although according to the explanation it is an environmental tax and the main purpose of this tax is to reduce the number of cars.
The car tax requires you to own it, not drive it, Ranno Tingas says.
“If we look from the European point of view, this car tax is quite a standard item in this menu. It’s not a surprise, but how you get from zero to 230 million in a year is a very sudden collection of money from car owners,” Tingas said.
“Of course, time will tell what choices people will make, and the paradox of such taxes with an environmental purpose is always that the better they serve their purpose, the less taxes are collected. The example of Britain, where electric cars were initially exempted from car tax, electric cars will soon also have a normal car tax, because their budget is already big enough, but the state still needs money,” he added.
Lenno Uusküla said the car tax is linked to the fuel excise tax and finances the roads cars need.
“If we go towards electric cars, electricity is not currently taxed in a special way, so we can finance it from there. We have to find this money elsewhere. If there are enough electric cars, then we have to collect more tax or we have to create a new electricity tax electric cars,” Uusküla said.
In September the Estonian Association of Car Owners symbolically delivered the message “No to car tax!” to the president of the Riigikogu, Lauri Hussar. 77,442 digital signatures collected during the petition.
According to Ranno Tingas it is reasonable to introduce taxes that society swallows.
“There is also a theory that has been calculated according to which the will to tax is starting to decrease. It is clear that if years ago we had a VAT at 18%, then it is 22 against 18, there will certainly be a greater motivation to evade the time will tell when, well, the tax office can control the shadow economy so that things don’t end up in cash or foreign accounts or whatever,” Tingas said.
Finance Minister Mart Võrklaev made a change before Christmas, saying that he may not propose a tax increase in the agreed amount, and the coalition was divided on this issue. Estonia 200 and the Social Democrats see that the reformist party has withdrawn part of the agreement and that the budget strategy for the next four years is open again.
Eesti Pank holds the new government’s fiscal plan accountable. The fact that people will have less money in their hands when they come into force is inevitable.
The coalition is expected to begin discussing changes to the country’s budget strategy early in the new year. A detailed fiscal plan is expected after the spring economic forecast. When the new European Union budget rules come into force, the budget deficit will not be able to exceed 3%. So we don’t know what taxes are in the air and how they will play out.
2023-12-31 16:08:00
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