Although the major political debates ahead of the 2027 Riigikogu elections will likely not begin in earnest until after the presidential election this fall, it is already possible to discuss, in a nonpartisan way, what Estonia's tax policy should look like in the coming years.

The reason is simple. Once election campaigns truly get underway, tax debates often turn into a contest of slogans, polarization and quick promises. Meaningful discussion about what kind of tax system would help Estonia better cope with its real long-term challenges tends to fade into the background. That is precisely why it would make sense to establish at least some basic principles for shaping tax policy before the next election cycle begins.

The most recent Riigikogu elections demonstrated quite clearly that individual tax promises should not be viewed in isolation. A promise to raise the tax-free income threshold may end up being accompanied by higher value-added tax and income tax rates at the same time. Slogans about fairer taxation may simply lead to an overall increase in the tax burden, while taxes described as temporary often have a tendency to become permanent in politics.

The politics of recent years illustrates quite well why tax debates in Estonia so often drift toward slogans rather than the bigger picture.

The Reform Party entered the 2023 elections promising to raise the tax-free income threshold for everyone to €700 and to avoid increasing the overall tax burden. In reality, however, value-added tax, income tax and several excise duties all increased during the same period. A car tax was introduced, along with discussions about various temporary taxes.

Eesti 200 spoke of a smart and competitive state, yet it also participated in implementing broad-based tax increases. The Social Democratic Party was at least more candid, having already spoken before the elections about the need for a higher tax burden and stronger redistribution, although in its case as well, many of the most ambitious tax promises failed to materialize, at least while it remained in government.

This does not necessarily mean that all of those decisions were wrong. Rather, it demonstrates how cautiously pre-election tax slogans should be treated. Raising the basic exemption alone does not describe an entire tax policy. Likewise, a single slogan about fairer or lower taxation does not define the whole system. A person's actual tax burden is shaped by the interaction of the system as a whole.

The OECD and several European countries are paying increasing attention to more targeted taxation, the taxation of consumption, pricing environmental impacts and digital oversight systems. At the same time, they are trying, where possible, to avoid causing excessive harm to investment, entrepreneurship and higher value-added jobs.

Competitive advantage more than just low tax rate

Stability, simplicity and reliability are becoming increasingly important. This is precisely where Estonia should be especially cautious. We cannot compete with Germany or France in terms of market size. Estonia's advantage has been its simple and understandable tax system, efficient administration and a predictable business environment. If that disappears, one of the few genuine competitive advantages Estonia has in international competition will disappear with it.

The car tax is a good example of how poor tax design can harm both the economy and public trust. The purpose of the tax remained unclear to the public. Was it a climate tax, a road maintenance tax or simply a way to create a new source of revenue? At the same time, the car market reacted sharply and the decline in new car purchases also meant significantly lower VAT revenue from new car sales, not to mention the substantial shortfall in the tax revenue itself.

The problem was that the basis for taxation was not entirely logical. If the goal is to reduce environmental impact, a significant part of that taxation already takes place through fuel taxes, since using a vehicle with higher fuel consumption and greater emissions automatically results in a higher tax burden through excise duties and energy taxation. Linking the car tax additionally to a vehicle's climate indicators creates the impression of double taxation.

If, however, the goal is road maintenance and infrastructure upkeep, it would make more sense to tie taxation more closely to a vehicle's actual impact on roads. Roads are primarily worn down by heavier vehicles and studded tires also have a significant effect, damaging road surfaces and creating fine particulate pollution in the spring that has a direct impact on human health. In that case, the logic of taxation should be based specifically on those impacts.

Estonia could finally arrive at a more substantial debate

Tax policy works best when people understand what is being taxed, why it is being taxed and where the money is going. Once that connection disappears, trust in the system quickly disappears as well.

The same applies to the debate over progressive income taxation. Higher-income earners already contribute more because, even under a flat tax rate, a person earning a higher salary pays more income tax in absolute terms. The discussion should instead focus on what kind of tax system would help Estonia create more long-term prosperity, attract investment and reduce polarization within society. Tax debates become dangerous when they are turned into a moral conflict between different social groups.

Taxes should not become an end in themselves or the central ideological weapon of election campaigns. Taxes can only support the resolution of Estonia's real problems and those real problems have not changed. We are facing low birth rates, an aging society, rising defense expenditures and the need to increase productivity and attract investment. Taxes can only support well-functioning economic and social policy, while poor tax policy can make solving these problems considerably more difficult and expensive.

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