TALLINN – Estonia's tax burden is significantly lower than the European Union average and the tax changes enacted by the government of late reduce the taxation of labor and increase the taxation of consumption, the European Commission says in its Country Report Estonia 2018.
"Estonia's overall tax burden stands at about 35 percent of GDP, below the 40 percent average for the EU. In 2017, indirect taxes are projected to have amounted to 15 percent of GDP, compared to 13.5 percent for the EU, and direct taxes to about 8 percent of GDP, against 13 percent for the EU," the report says.
In 2018, the personal income tax tax-free allowance will increase significantly from 180 to 500 euros per month, adding an element of progressivity to Estonia's income tax system.
"Still, the level of progressivity remains relatively low and contributes little to reduce overall disposable income inequality. However, the reform should help to reduce the previously relatively high tax wedge for low-wage earners and benefit both low- and medium-earner groups," the report says.
Estonia taxes property and transport much less heavily than the EU average. Recurrent property taxes, which are least detrimental to growth, amounted to 0.3 percent of GDP in 2015. Total revenue from property taxes stood at 0.4 percent of GDP in 2015. This is the second lowest in the EU and considerably lower than the EU average of 2.6 percent.
In 2016, environmental taxes amounted to 3.1 percent of GDP, above the EU average of 2.4 percent. Most revenues come from taxes on energy. However, Estonia does not have any vehicle taxation apart from a circulation tax for heavy goods vehicles and, beginning in 2018, a new heavy goods vehicle road usage charging scheme. As a result, receipts from transport taxes, excluding fuel taxes, amounted to only 0.06 percent of GDP, the second lowest in the EU.
"At the same time, new vehicles purchased in Estonia are the most environmentally unfriendly in the EU, with average CO2 emissions of 134 grams per kilometer, above the EU average of 118 grams in 2016, according to the European Environment Agency.
Estonia has a comparatively efficient tax administration, which is supported by information and communications technology to facilitate tax compliance. Between 2013 and 2015 the VAT gap, or the difference between the amount of tax actually collected and the estimated amount of tax that is theoretically collectable based on tax legislation, narrowed by over two thirds in Estonia. At 4.9 percent of the VAT total tax liability in 2015, it was considerably lower than the EU average of 12.8 percent, according to the report.