The competitiveness of the tax system is critically important for the functioning of the economy. Major employers and top executives surveyed in a recent University of Tartu management study therefore consider changes in Estonia's near‑term tax and economic environment to be their biggest concern. In recent years, state spending has grown significantly faster than the economy, the state has taken on debt and raised taxes, which in turn has accelerated inflation — yet public finances remain out of control.

This has come at a cost. Frequent tax changes have reduced consumer confidence and weakened entrepreneurs' trust in Estonia's business environment. This means postponed investments and sluggish economic growth. Debating which tax to raise next may be easy, but it is the wrong path.

All the more so because Estonia's tax burden has increased by 3.5 percentage points compared with the pre‑war period and reached 37 percent of GDP last year (it is lower this year due to the removal of the tax hump). This was the fastest tax‑burden growth in the EU and meant that last year the economy was drained of €1.5 billion more than three or four years ago. That is more than €1,000 per Estonian resident — money that could have been used for investment or consumption.

Although Estonia's tax burden is still below the EU average, we pay more than the developed OECD countries on average and more than other Eastern European EU members (except Poland and Slovenia). Yet we compete in manufacturing and services precisely with Eastern European countries, where both taxes and wages are lower and labor supply is larger.

Is the European average an advantage for Estonia? Hardly

If we lose or weaken yet another competitive advantage, what will distinguish us positively from other countries and motivate investors to establish companies in Estonia, where the tax burden is rising? A tax burden below the EU average and a simple income‑tax system are not something we should be ashamed of.

Therefore, the tax debate must focus on economic growth and competitiveness, because these bring more money into the country and make it possible to pay pensions, salaries for teachers and doctors, and invest in national defense. One of the most cited studies on economic impact was conducted during the global financial crisis, when states needed extra revenue but did not want to damage the tax base — economic growth. According to that study, Estonia's tax system broadly supports growth: income and capital taxes are lower, consumption taxes higher, and the system is relatively simple with few exceptions.

Defense spending has increased — but not only

Although the government has explained fiscal problems through rising defense spending, the numbers do not support this narrative. Since the start of the war in Ukraine, defense spending has indeed increased — by about €2 billion more than in 2022 — but government‑sector debt has grown by €3 billion in the same period. Meanwhile, the tax burden has increased and tax revenues have been more than €1 billion higher annually for the past three years. That is more than the increase in the defense budget.

Investing in defense is justified right now, but at the same time other expenditures should be cut. Politicians have not been able to do this sufficiently. As a result, state budget expenditures have grown by nearly one‑third over the past four years, while the economy has grown only 15 percent. There is no plan to reverse this — but one is urgently needed. It would be unfortunate if the plan once again relied on significantly higher taxes for residents.

Let's not suffocate the economy again

Last year's government decisions to abandon income‑tax increases for individuals and companies, several legislative changes easing business concerns (for example in planning and labor matters), and the revival of foreign demand have helped the economy grow again and created a slightly more optimistic atmosphere. Tensions related to Ukraine and the Strait of Hormuz keep the situation fragile, and undermining this delicate economic confidence with additional tax hikes will certainly not improve anyone's well‑being in Estonia.