As everyone knows, a new VAT rate of 24 percent came into effect on July 1. Judging by societal reaction, it seems our rulers have crossed a line this time.

People feel that it isn't fair. For many among us, it's also unaffordable. A citizen-initiated petition to lower VAT on food has already gotten more than 50,000 signatures. Society is simmering at a fairly high temperature already — and the crowd onstage even spontaneously broke into the well-known "Rebels' Song" [from the classic Estonian movie "The Last Relic"] at the end of the Song Festival on Sunday.

High taxes — especially a high VAT — are a hot topic everywhere today. We feel that the VAT is too high. And 24 percent is indeed one of the highest in Europe.

Yet if we look at our tax burden relative to GDP, it's at the low end of the European scale. According to Eurostat, this figure was still below 35 percent in 2023. Based on the 2025 budget, the share of tax revenue relative to GDP is 35.9 percent. The European average, both historically and currently, is above 40 percent. Even with the tax hikes, we're still not reaching the European average.

So why does it feel like we're overtaxed when, in reality, our tax burden relative to the size of our economy is well below the European average?

Not the rates — it's the system  

If our overall tax burden is at the lower end in Europe but our VAT is among the highest, the issue is clearly with our tax structure.

We have a high VAT with few exceptions and high excise duties, while property taxes make up only a small part of the budget. On top of that, we're one of few countries without a progressive income tax or traditional corporate income tax. Compared to other European countries, our system favors those who own more assets and those who don't spend all their income — in other words, the wealthy and higher income earners. And our tax policy changes over the past 25 years have only amplified this.

Younger people may not even remember that just 20 years ago, our VAT rate was 18 percent, while our income tax rate was 26 percent. Then came the push toward "Tax-Free Fridays," which tended in a "temporary" VAT hike to 20 percent.

Today, our VAT is 24 percent. The income tax rate is currently 22 percent, which will rise to 24 percent next year.

I bring up these old tax rates to show how, just two decades ago, our tax system was significantly more equitable. An 18 percent VAT and 26 percent income tax worked out better for lower income earners than today's setup does.

It's also telling that politicians have consistently sought an electoral mandate for tax cuts. The same can't be said for tax hikes. No mandate has been sought for those — they've been implemented hastily, without any broader public debate.

Without this meaningful public debate, we've ended up with a tax system that is regressive by nature.

A regressive tax is one where the effective tax rate decreases as taxable income increases. For example, VAT is inherently regressive because lower income earners spend a larger share of their income on consumption — and thus pay a proportionally higher share of their income in taxes than higher income earners.

Our current land tax is also regressive in nature. No land tax is paid on residential land up to 1,500 square meters, regardless of whether that land has an apartment worth €50,000 or a million-euro villa on it. The one with the more expensive property benefits more from this.

Our corporate income tax system is regressive in practice as well. Companies only pay income tax on distributed dividends. This should not be labeled an exemption for investment income, but rather a tax on dividends.

Regardless of whether and where you invest, companies only pay income tax on dividends. If a company pays out €100,000 in dividends, the tax owed is the same whether the company turned a profit of €100,000 or €10 million.

Even our social tax is regressive in nature. The state allows part of the tax — 4 percent of wages — to be personalized rather than paid as tax, which mainly benefits higher earners. This, in turn, means that higher income earners end up with a lower effective tax rate.

Based on these examples, it should be clear that our tax system was significantly more equitable just a quarter of a century ago. By sowing fears of a progressive income tax, we've created a tax system that places too heavy a burden on lower income earners. This is where many of today's societal issues find their root.

What should be done, then?

The path forward is clear: lower the VAT and raise income and property taxes. We should even consider going back to the tax system we had around the turn of the century.

But first, we need to accept that there's a problem.

--

Follow ERR News on Facebook, Bluesky and X and never miss an update!