TALLINN - Speaking on the eve of the 15th anniversary of de facto independence, Prime Minister Andrus Ansip defended the country's flat tax system, saying it has helped keep growth rates high and the Estonian economy in the top position among EU nations.
The prime minister said that the income tax rate had now fallen to 23 percent and would continue to drop by one percentage point a year until it was 20 percent. "It benefits our economy and every employee wins by this system," Ansip said.
The flat tax 's Estonia was the first to introduce it in the 90's 's has recently come under fire by the Center Party and the People's Union, center-left parties that share power with Ansip's liberal Reform Party.
The two parties, which are cooperating to elect the country's next president, signed a strategic agreement earlier this month, in which they decried the flat tax and budget surplus, two key elements to Estonia's current economy.
Ansip said that the Center Party has been speaking about a progressive income tax since 1992, yet when the Centrists "ended up one government with the Reform Party, they supported the present simple and effective system."
The prime minister even mocked the idea of a progressive income tax, saying it permitted the government to keep the highest tax rate as long as possible 's at 33 percent 's and then lowering it when voters become dissatisfied so that politicians come off as being magnanimous.
"And the people will say 'thank you,'" he said ironically.
Ansip added that the present system was simple, understandable for everyone, transparent and most importantly permitted effective collection of taxes, thus ensuring fast growth of the economy and the budget.
Meeting with International Monetary Fund officials last week, Ansip said that the government would not use the budget surplus to finance moves aimed at boosting domestic demand and inflation.
"In the present situation, thoughtless spending of the budget surplus should be avoided by all means," the prime minister was quoted as saying. "An increase in consumption will inevitably lead to a further rise in prices, which in its turn would jeopardize the meeting of the Maastricht criteria required for accession to the eurozone."
The mission backed the prime minister's stance, saying that in finding use for today's extra revenue one should first and foremost think about the needs of the future.
Last week, Ansip criticized the two party agreement, saying it painted "a dark picture" of the future and threatened "to turn Estonia's success" on its head. On the other hand, he added, the agreement brought clarity and now everyone could see what Estonia had to look forward to if the Center Party and the People's Union should manage to take control of the government.
Another sign of danger, Ansip said, was that in order to observe the agreement, Estonia should drop out of NATO and jettison its present defense policy.
"Such a scenario has been written into the point, which says that members of the Estonian defense forces take part in international missions only on the condition of a United Nations mandate," he said.
Still, he added that if all parties stuck to their coalition agreement promises, the coalition would survive. "But if there are violations, nothing can be ruled out," he said.