Tax cuts, mergers still in spotlight

  • 2004-11-25
  • By Aleksei Gunter
TALLINN - Res Publica continued to juggle the possible postponing of its promised income-tax cut last week with a potential and perhaps much-needed merger with the Reform Party.
"Should we pay more attention to conservative values or the interests of the poorest part of the society and families with children?" said Parts at a party meeting in Poltsamaa on Nov.20. "The discussion on this matter is going on but we cannot make such decisions in a hurry."

He added that "pressure for postponing the tax cut exists" and suggested that the Reform Party could come up with a proposal to delay the taxcut at its congress the next day "in order to become more social."

Should the Reformists not make such a proposition, "I think the right time to talk about [the tax reform] would be the first half of next year, when Finance Minister Taavi Veskimagi will put together the new long-term tax strategy," Parts explained.

The Reform Party, however, clearly went for the previously approved compromise.

Last year the ruling coalition of Res Publica, the Reform Party and the People's Union agreed on cutting the 26 percent income-taxrate to 20 percent in a step-by-step process. The Reformists pushed the tax cut into the coalition agreement, while Res Publica secured in the agreement their electoral promise to gradually increase the tax-free minimum.

Following demands from the People's Union last autumn, the first 2 percent tax cut was postponed for one year to 2005. By law, the income-taxrate in Estonia will drop from 26 percent to 24 percent in January 2005 if an amendment passes through Parliament.

Parts also said that he had reached a consensus with Reform leader Siim Kallas regarding the right-wing parties' cooperation that had resulted in January's memorandum, adding that he felt sorry that the Reform Party did not take the testament of its chairman seriously.

"I have been asked whether we should change the coalition now that the Reform Party has betrayed us. I think we should remain calm and there is no need to be insulted. The idea remains actual for us, we only have to realize that convergence of the right-wing forces will not take place before the next elections," said Parts.

Andrus Ansip, who was elected the chairman of the Reform Party on Nov.21 at the party congress, downplayed the seriousness of the possible tax-cut postponement last week.

He said that he would do whatever it took to keep the current coalition stable, regardless of whether any parties chose to unite.

In his speech at the party congress, Ansip said that Reformists supported both the tax-rate cut and the increase of the tax-free minimum, just as the coalition agreement provided.

He added that "Estonia does not need 180-degree turns in the government course" and that the tax cut would have a wider positive effect on the economy compared with the increase of the tax-free minimum.

Speculation in the local press has linked Res Publica's tax-cut dilemma with the Reform Party's refusal to follow the memorandum signed in January 2004 by Parts and then Reform Party Chairman Siim Kallas.

Res Publica, the senior coalition partner, reportedly wants to force the Reformists to count their interests.

"Res Publica still considers the merger of right-wing parties necessary for making the political landscape clearer. Today it is obvious that Res Publica and the Reform Party merger will not take place before the 2005 [local] elections. We'll see what will happen next," Res Publica Secretary General Ott Lumi said.

Urmet Lee, director of the Praxis think tank, said that there has been no reliable analysis of Estonian residents' expectations in connection with the government's promise to reduce the income tax.

"At this point, the majority of people are probably still maintaining the wait-and-see position on whether political forces will or will not actually reach a compromise," said Lee, adding that after the budget debates in 2003, it became clear that the taxreform would not be a smooth ride.

According to Lee, the country's middleclass, many of whom have taken a long-term mortgage loan and for whom the 6 percent income difference is essential, may face financial trouble if the extra tax-cut income remains unseen.

He added, however, that it was difficult to further analyze the effect of the tax reform due to a lack of proper analysis as to why the taxrate should be decreased to 20 percent. "If the size of the cut is based on the 'how-much-load-can-the-state-budget-take' principle, then it is, to put it mildly, feeble," said Lee.