Pessimists argue that Estonia's economy has entered the longest period of stagnation since the restoration of independence, while optimists hope the worst is behind us. Despite downgraded growth expectations due to the conflict in the Middle East, Estonia's overall economic health is still generally considered good and stronger than a year or two ago. This view, however, is deceptively calm, as pressure on the state budget and the need for new revenue sources have not disappeared.

The global tax debate is diverse, and there is growing reference to the necessity of wealth taxes. This is not only due to economic inevitability, but also as a means of reducing wealth inequality.

Estonia's tax system also favors those who own more assets—in other words, wealthier individuals. This has in turn created a situation where the wealthier segment of society pays proportionally less in taxes relative to the size of their assets than the rest of the population.

The model that has so far relied mainly on labor and consumption taxes is increasingly exhausting. Population aging, rising social expenditures, and geopolitical developments compel us to seek new solutions. This is also emphasized by the OECD's March 2026 interim report "Testing Resilience", which recommends that, in an uncertain economic environment, countries identify effective and structurally sustainable revenue sources to cope with long-term spending needs.

A progressive income tax does not solve the problem

Tax changes in recent years have hit lower-income households the hardest—households that are already socioeconomically vulnerable. Sooner or later, we need a restructuring of the tax system that shifts the focus away from labor and consumption to other sources, without stifling economic activity or exacerbating wealth inequality.

Current, rather modest public statements on tax reform tend to get stuck in the ideology of a progressive income tax. Although a progressive income tax is a strong argument for protecting people with lower incomes, it does nothing to address growing wealth inequality or to stimulate economic activity.

With a progressive income tax, we tax higher labor input and income growth while ignoring wealth that has already been accumulated and lies passively idle. In other words, we penalize professional effort and create a glass ceiling for ambitious specialists, while leaving passive wealth untaxed. A recent OECD analysis warns countries against tax measures that increase uncertainty and suppress private consumption.

Inequality arises from wealth, not wages

Take, for example, a physician who earns €5,015 per month. Income tax is withheld from this amount at the time of payment, and the employer pays social taxes. The doctor is "successful," yet may not have accumulated any assets.

Moreover, a study on wealth inequality among Estonian households points to the so-called "motherhood trap," where income declines following childbirth hinder female professionals' ability to accumulate assets (Meriküll & Rõõm, 2025). In contrast, those who are already wealthier can easily report low income or structure their assets in such a way that they do not generate day-to-day taxable income. If wealth is not realized, no tax liability arises.

This paradox has also been highlighted by economist Gabriel Zucman, who notes that today's system disproportionately burdens those who are still trying to build savings and wealth through their work, while existing wealth remains untaxed.

In the Estonian context, this issue is particularly acute. The main driver of growing wealth inequality is the ownership of business assets (Meriküll & Rõõm, 2023). Additionally, analysis by Meriküll and Rõõm (2025) shows that actual wealth inequality in Estonia is as much as 10–12 percent higher than previously estimated.

Do we tax labor or wealth?

Compared to other euro area countries, Estonia's tax system is more regressive and amplifies inequality. So far, we have relied mainly on labor and consumption taxes, but population aging, rising social spending, and geopolitical developments force us to look for new solutions.

Probably none of us want new taxes, but the state's need for revenue will only intensify in the coming years. We already rank among the European Union countries with the highest standard VAT rates and bear a higher-than-average labor tax burden.

Our habitual first counterargument is that any new tax scares away investment and, ahead of parliamentary elections, costs votes. But if we are seeking new revenue sources, then at the individual level a progressive income tax penalizes effort and has a negligible effect on reducing wealth inequality.

Wealth taxes, by contrast, are by their nature proportional or progressive with respect to wealth and primarily affect wealthier individuals, helping to reduce inequality. In addition, taxes linked to assets are much harder to manipulate than taxes levied on income. Well-designed wealth taxes are also among the least harmful taxes in terms of economic growth.

Geopolitical uncertainty, energy deficits, and economic pressure are not going away. The resilience of our economy requires smart and bold choices. The choice is ours: whether to continue with an old, exhausted model that focuses sharply on taxing labor and consumption, or to find new, sustainable sources of revenue.

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