Government backs down on taxing bank accounts

TALLINN - Estonia's parliament has axed an idea from the Cabinet to cover the deficit in next year's budget with an income tax of 26 percent on interest on individual bank deposits, which would reap an additional 50 million kroons ($2.9 million) to the budget.

"The government rejected the idea to impose the tax, and the interest will not be taxed next year," said Priit Poiklik, government spokesman, on Aug. 22.

The intended sum of the 2001 budget is 29.5 billion kroons. The Cabinet decided to increase the budget by 574 million kroons after the Ministry of Finance revised the economic forecast on Aug. 15. The balance would have been provided by amendments to the income tax law, including taxing interest on individual deposits.

Daniel Vaarik, adviser to the Ministry of Finance, said Minister of Finance Siim Kallas did not support the idea of taxing the interest on deposits.

"However, the tax is a better way to cover budgetary expenses than a loan, for example, because the budget would remain well- balanced. The ministry recommended another budget revision to find additional possibilities to save funds," Vaarik said.

"The prior budgetary expenses needing coverage are teachers' salaries, building a [national] art museum and donations to disabled people," said Piret Mannilaan, Reform Party representative.

"Our party will do everything to prevent the ratification of the tax in Parliament, because it threatens the stability of the tax system that is so important to investors and private persons," Mannilaan said.

The agreement of the ruling coalition, signed by the Reform Party, the Moderates and the Pro Patria Union, says that the general tax burden in Estonia should decrease. Vaarik said the tax would comply with the agreement, because the tax burden would decrease next year by about 1 percent.

"The tax burden will decrease from 35.6 percent of GDP to 34.7 percent next year, and that is a good result," explained Mannilaan.

Kalle Kagi, secretary of the Estonian Taxpayers Association, said the tax burden in Estonia is not as high as in Scandinavia, but exceeds American or Japanese standards.

ETA thinks the idea of assessing the interest is quite illogical, and that it would be better to revise the expenses once again without imposing the tax on the interest on deposits.

"Even if the idea receives approval in Parliament, it is necessary to set a minimum sum of taxable interest. Otherwise assessing the interest could overcome the tax collected," Kagi said.

Other amendments to the income tax law consider the amount of tax-free income, connecting it with the number of children per family from January 2001. One parent would be able to deduct the amount of one tax-free income per each child up to 17 years old, starting from the third child.

Talking about the effect of imposing income tax on interest, Sven Kunsing, director of Uhispank's analytical department, said the tax would end the incentive to keep cash on deposit.

"Interest is about 5 percent on deposits and about 7 percent on promissory notes. This might make promissory notes more popular, although those may seem more complex to an average depositor," said Kunsing.

According to Kunsing, so-called active investors do not keep their money as deposits, and that is why the taxation would affect regular private depositors only. Banks would not suffer from the tax.

As to depositors from abroad, their share has been relatively constant at Uhispank and made up about 15 percent of all the deposits. Non-residents' deposits were 4.7 billion kroons in June, Kunsing said.