Pros and cons of Neivelt's tax reform ideas
The fact that the tax system needs to be revised, is logical. The tax system must be stable, so that market actors can make long-term plans. But it must also be in tune with changes in the economy. Principal tax system changes must be done systematically. I think that a number of Indrek Neivelt's tax change proposals are very constructive, others too ambitious.
The Health Insurance Fund currently receives the main slice of its income from the health insurance segment of the social tax [third out of the 33 percent social tax. The remaining two third goes into pension pots], which amounts to a little under 900 million euros per year. A huge compensation source must be found if we were to lower health insurance premiums by nearly half, as Neivelt suggests. Increasing excise duties and implementing a sugar tax would not be enough. Excise duties do not make up a large part of the budget. Increasing duty on alcohol and tobacco quickly will lead to an increase in bootleg trade. At the same time, a sugar tax is a very sensible idea.
Salary increases have led to higher labor costs for businesses and they are hiring increasingly fewer staff. Compared to many other nations, the lack of income tax on retained earnings has made life easier for our businesses. At the same time, companies are weighed down by the burden of having to pay social tax. Implementing income tax for businesses [on profits, not only dividends] would have to be compensated not only by decreasing health insurance payments, but other social taxes as well.
The current system of income tax exemptions has favored investments. This motivates businesses to replace workers with robots and machines. Foreign investments to Estonia and investments made by Estonian citizens far outstrip other Baltic nations, and the percent of investments in relation to GDP is higher. Larger investments, especially into production equipment, help boost efficiency. Eliminating tax on dividends, or taxing dividends with only the difference between legal and physical entity income tax rates would lead to more money being taken out of companies at the cost of more investments. There are many businessmen and many specialties in Estonia where the majority of income comes from dividends.
If we want to decrease salary disparity, then Nordic nations have achieved this via a higher tax rate, which has been redistributed using a progressive income tax system. But the question does not lie in the size of tax rates or how progressive they are, but in the redistribution of income from tax. I agree that there is no point in taxing income which is subsidized anyway by the state. Benefits geared towards low-salary employees, increasing the minimum wage and the tax-free minimum would work well to decrease wage disparity. But theses methods should not be rushed. The statement by the Estonian Institute of Economic Research that one in 10 people receive unrecorded salary, should be considered alongside the proposal to increase the tax-free minimum to 400 euros [current rate is 144 euros per month]. This does not figure in official statistics, but increases the salary of many workers, who officially receive a low salary, changing the assessment of their earnings.
The original article in Estonian can be found here. Tõnu Mertsina is the Chief Economist at Swedbank.