Expert: Estonia should axe bigger basic exemption instead of income tax hike
Aivar Sõerd (Reform), a member of the Riigikogu Finance Committee, criticized former Finance Minister Mart Võrklaev's claim that higher defense spending makes it impossible to scrap next year's planned income tax hike. According to Sõerd, the government has a choice: either raise the basic exemption or abandon the tax increase.
Aivar Sõerd wrote on social media that in an interview published Friday on ERR's Estonian news portal, former Finance Minister Mart Võrklaev (Reform) claimed that the sharp increase in defense spending makes it impossible for the state to scrap the income tax hike planned for next year.
"This claim is only partially true, because one could just as well argue that the income tax hike cannot be scrapped since raising the basic exemption to €700 per month along with abolishing the so-called tax hump system is a significant cost to the state budget. The figure is around €500 million. That amount was also presented in the same interview. This refers to the annual cost to the state budget, which will vary in the following years for technical tax reasons, but the yearly scale of the expense is still considerable when looking at the overall state budget," Sõerd wrote.
Sõerd pointed out that eliminating the tax hump system does not necessarily require raising the basic exemption to €700 per month; it could also remain at its current level of €654.
"Raising the basic exemption reduces tax revenue for the state. Let's recall that not too long ago (under Taavi Rõivas' government) the basic exemption was raised in €10 steps, from €170 to €180 per month. Even a €10 increase in the basic exemption was carefully considered at the time, since it has a significant impact on the state budget. With the introduction of the so-called tax hump in 2018, the exemption rose to €500. If the tax hump system were eliminated starting from a €500 exemption, the cost to the state budget would be significantly lower. This would make it possible to consider canceling next year's income tax hike," Sõerd noted.
In his words, the issue comes down to priorities — whether to raise the basic exemption or lower income tax.
"Previously, the Reform Party's priority was reducing income tax. Over the years, income tax fell from its former level of 26 percent to 20 percent. But now there has been a shift in direction. The general income tax rate rose to 22 percent this year and will climb to 24 percent next year," Sõerd said.
"In conclusion, I want to reiterate the message of my earlier post: the prime minister's proposal to roll back next year's income tax hike should be welcomed," he added.
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Editor: Valner Väino, Marcus Turovski
