TALLINN - A rift has formed in Estonia's ruling coalition over whether to reduce income taxes, a key pre-election promise made last year by the Reform Party that, according to critics, threatens to exacerbate the country's shaky public finances.
The Social Democrats, a junior partner, say further reductions in the income tax should be halted due to the worse than expected economy, while the Reformists believe that lowering taxes is needed to stimulate economic development.
"The continued reduction of the income tax rate is not a good idea in the present situation, because people actually benefit little from it while the public sector loses a great deal," Peeter Kreitzberg, a leading Social Democrat, told the Postimees daily.
Postponing further cuts, he added, would signal a defeat for the governing coalition but would be a sensible way to behave in the current circumstances.
Estonia's economy is currently undergoing a rapid slowdown 's some would even argue a hard-landing 's and revenues over the first three months are lower than expected, which is likely to force the government to enact spending cuts.
The Social Democrats, who could find support from the Pro Patria and Res Publica Union, a right-wing party, have suggested that the personal income tax remain unchanged at 21 percent for at least three years.
Keit Pentus, head of the Reformists' parliamentary faction, said this position was incomprehensible. Putting the brakes on the tax rate cuts will hamper economic development instead of boosting it, she explained.
The Reform Party's key election promise last year, the so-called "tax-exempt Fridays," was implemented immediately after the parliamentary election in March 2007. Under the law, the income tax rate is supposed to tick down to 20 percent in 2009, 19 percent in 2010 and 18 percent in 2011.
The tax-exempt monthly income is poised to rise from 2,250 kroons (144 euros) to 2,750 kroons over the same time frame.
Mart Laar, chairman of the Pro Patria and Res Publica Union, did not rule out supporting the Social Democrats' proposal, suggesting the idea shouldn't be discarded without discussion.
Meanwhile, the Estonian Employers' Association said it is strongly opposed to the idea, arguing that a rise in the tax burden is not a suitable solution when economic growth is slowing and labor costs are on the rise.
"Entrepreneurs have taken into account the planned reduction of the tax burden. Changing the plan at the drop of a hat means that the government has deceived entrepreneurs. Such a change also contradicts the principle of legal certainty," Tarmo Kriis, head of the association, said.
In his words, "The expenses of our government sector make up more than 40 percent of gross domestic product, which is considerably above the European average. The government must immediately initiate public service and administrative-territorial reforms to restore economic growth and save the Estonian economy."
The public sector should be reduced and unjustified investments such as the Freedom Monument and a new building for the Estonian National Museum put on hold, Kriis said.
