Progressive tax debate revived

  • 2002-12-05
  • Aleksei Gunter

The old debate on whether Estonia should implement a progressive income tax was pulled off the shelves and dusted last week, as ex-President Lennart Meri advised the country's right-wing parties to slate it in the electoral campaign next spring in order to take votes from the ruling Center Party.

Meri, who is non-aligned, suggested that Juhan Parts, chairman of the Res Publica party, introduce one more income tax rate to the party's electoral platform, the Eesti Paevaleht daily reported.

Parts said that to some extent Meri's ideas were close to Res Publica's, which has supported the idea of increasing the minimum monthly income tax deductible from 1,000 kroons to 2,000 kroons.

Estonia currently has a flat 26-percent income tax rate for private individuals and legal entities' distributed profits.

The idea of a progressive income tax used to be a brainchild of the Center Party, which had unsuccessfully tried to have it adopted in the mid-90s.

Both national coalition partners, the Center and Reform parties, claimed the recent revival of the progressive income tax was not connected to the 2003 national budget deficit of some 300 million kroons due to state subsidies for the pension reform. Rather, they considered it as a button issue for upcoming elections.

Prime Minister Siim Kallas stated last week in a radio interview that the Reform Party would stick to its old idea of cutting the current income tax rate to 20 percent instead of implementing a progressive tax scale.

Although the state would lose some 800 million kroons as a result of the tax rate decrease, the Reform Party is not planning to raise other taxes as a compensation, according to Kallas.

"We are looking for possible cost cuts, not a tax increase," the prime minister said.

Kallas claimed that world practice showed that the excessive taxation of rich people has not been effective because they are few and can easily hide their income.

The progressive tax debate could become a litmus test for Estonian society, which might end up voting for the party with the most favorable tax policy.

According to Olev Raju, MP for the Center Party, the party would implement the progressive income tax if there were a major victory in coming elections. Furthermore, the centrists would try to impose the social tax (currently 33 percent) on dividends so that entrepreneurs would cease trying to re qualify their income from salaries to dividends.