Banker proposes 5 tax reform ideas (2)

Indrek Neivelt (Postimees/Scanpix)
11/12/2014 9:45 AM
Category: Politics

Indrek Neivelt, the former CEO of Hansapank and current supervisory board chairman of Bank Saint Petersburg, said that the Estonian economy has stood still for the past seven or eight years, and changes to the tax system could get it moving again.

In an opinion piece for ERR, Neivelt said that Estonia's membership of WTO and the EU gives the nation few possibilities for independent economic policy, but the tax system is yet to be brought under the control of the EU.

“If we want to focus on something in the economy and contrast ourselves from others, then taxes is the field where we can do it, and the time is now to open debate, just before the elections. Otherwise, four more years will be wasted,” he said.

“Our tax system has been kept simple and consistent with few tax exemptions,” Neivelt said, adding that the world where that system was created, has moved on. He said that capital for businesses, for example, was not as widely available 15 years ago, but now sits in abundance.

“Capital moves to where it grows, or at least does not depreciate,” he said, adding that growth is either in quantity or quality. Estonia's population numbers are shrinking, thus more focus should be placed on people. “But labor is highly taxed in Estonia, something that is especially acute for low-paid workers.”

He added that capital, not people, should be taxed.

A number of philosophical questions should be reviewed, Neivelt wrote, such as the current scheme of financing Estonian cultural projects through gambling tax, Financing culture depends on how many people gamble. Or roads, which are maintained partly by local governments, meaning that each municipality, even those with less than 1,000 residents, must employ road experts. In Neivelt's opinion, the Health Insurance Fund should not collect funds only according to how much a person earns, but should also receive funding from tax on certain foods, such as sweets.

He said many people do not understand the total cost of the salaries, including all tax, to employers. Currently, social tax (at 33 percent) does not figure on a worker's monthly salary slip. Social tax obligations should be transferred to the worker, a move which would not change the end take-home salary, but which will give an employee a better understanding of his or her cost.

The five proposals are:

1. Cut health insurance tax from 13 percent to 6 percent (social tax is 33 percent, of which 13 goes to health insurance and 20 percentage points to the pension pot). The deficit should be covered by tobacco and alcohol excise duty and implement sugar tax (additional income of 50 million euros per year).
2. The lower health insurance tax should be replaced by income tax for businesses (maximum rate of 15 percent). That would mean an additional 350 to 400 million euros in tax revenues annually. The change would mean that the companies paying higher salaries would benefit, and those with few staff members but large profits would pay more.
3. Increase the tax free minimum to 400 euros (currently 144 euros per month), but increase the income tax rate to at least 24 percent (currently set at 21 percent, but will fall to 20 percent on January 1).
4. Restore land tax for homes.
5. Peg oil shale rock mining taxes to the world market price of petrol.

The adaption of the proposals would lead, according to Neivelt, to low-salaried employees taking home more, while the general tax level does not change. The tax system should tax output, not input.

He added that he and companies under his leadership would pay a total of 100,000 euros more each year in tax, if his proposals are implemented.

The Estonian tax system has been near universally considered by politicians, businesses and foreign experts to be something not to be tinkered with. The calls for change have become increasingly louder in the past year, and the government took a few steps to the left in a switch at the beginning of the year, when the Social Democrats joined. The change in a general mood means that changes, such as crossing over to a progressive tax system, or something similar, could be in the cards after the 2015 national election.


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