Martin Helme said in front of the Riigikogu that when he was building a house in the country, he enlisted the help of contractor Urmas whom the finance minister said seemed like a man who has never paid taxes in his life.

Helme added that he does not ask his handyman whether he fills out his tax return or not. The finance minister added he believes declaring income is the business of the worker and not their employer.

It would be sensible to change the current principle

It seems to me that a lot of people in Estonia, myself included, believed the same until this week. In truth, the law sees transactions between individuals very differently.

If an individual has another individual do a job for them, like cleaning their home, washing their car, fixing things, babysitting or chopping firewood, both the party commissioning the work and the worker are responsible for making sure taxes are paid.

The Tax and Customs Board explained that the employer is also responsible for tax discipline when they hire a worker, including in a situation where both are private individuals. If an individual has another individual do a job for them, they must register the work in the employment register and declare payments made to the worker, subtracting social and income tax.

When the working relationship is based on the law of obligations, uses an authorization agreement, where the worker is an independent service provider, the latter is responsible for paying income tax, while social tax and the mandatory pension payment must still be made by the employer.

The board admitted that awareness of the law and the enterprise account system created to better monitor such obligations is poor at best.

The reason is probably that the obligation seems harebrained and bureaucratic to a lot of people and that the tax board has not made it a priority as missed tax revenue would likely pale in comparison to what the agency would have to spend on enforcing it.

I believe it would be sensible to change the current principle either by rethinking the rules or for the board to continue turning a blind eye.

It is insensible to require people to register someone they pay to chop firewood in the employment register and educate themselves on the finer points of how the lumberjack's basic exemption should work. Every person should be held responsible for declaring their own income and paying taxes.

Two solutions

Two solutions have been proposed in Estonia that would help improve tax discipline. These ideas could be dusted off and weighed against each other.

One proposal would hold the employee responsible for making sure taxes are paid. This means that all employees would be paid in full, applicable taxes included, and would be responsible for paying taxes to the state.

People could also be given greater freedom in channeling their tax money. For example, people could have greater say in how the money is used regarding the contribution for sickness insurance.

While the current situation where the employer deducts income and social tax and the person has virtually no say over where their social tax goes is simple and convenient, its weakness is that people have no clear idea of how much of their income the state takes away in taxes.

The other problem is that use of tax money is ineffective as it lacks market logic in a situation where people who pay medical service providers and people who receive treatment are not the same.

Considering that Estonia has an employment register, moving the tax obligation from the employer to the employee should not be an overly complicated task. Every person's bank or tax account would have to have a tax calculator that would calculate tax obligation per every sum received and automatically transfer it to the state.

The latter idea has been supported by the editorial of Äripäev for a very long time. Similarly to Finland, people's tax contributions could also be public in Estonia in the form of public tax sums in people's income tax returns.

Disclosing people's tax contributions is a much more effective measure for improving tax discipline than the current obligation placed upon employers to register handymen in the employment register and deduct taxes.

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