Hundimägi: Lower VAT Back to 18% ({{commentsTotal}})

Aivar Hundimägi
Aivar Hundimägi Source: Photo: Postimees/Scanpix

With its 20 percent VAT rate on food, Estonia is among the leaders in the EU. The VAT on our grocery bills is much bigger than in Finland, Sweden, Germany, to name just a few. High VAT may also be one reason that groceries here are relatively expensive.

Different supermarket chains have now been arguing that if VAT were lower on food and staple goods, prices would drop in Estonian stores. The Finance Ministry counters that it is not reasonable to reduce tax on foodstuffs.

The ministry says the state would lose out on hundreds of millions of euros that could be used to dispense benefits. The minister says it is naive to expect that food prices will drop as retailers are the final link in the chain and they can't guarantee that the prices will fall if tax rates do. The tax system would also become more complex and the risk of tax fraud would increase.

The Finance Ministry's arguments seem partly like demagoguery. It is unclear that lowering VAT would not help lower prices. Naturally prices depend on many factors, but taxes are a major component and at least Estonia's recent past has shown that if taxes go up, so do prices.

It is not quite correct to argue that the state would lose out on hundreds of millions of euros. Data from the Agriculture Ministry shows that the state earns 18 percent of its VAT revenue off of food. Last year the figure was around 260 million euros. If Estonia gave food a tax break and cut VAT, like Finland, to 14 percent, the amount that the state would lose - and which business people and consumers would win - would be much smaller.

That is also the reason that I don't consider it right to establish a lower VAT rate on food. But I do think Estonia should reduce the general VAT rate back to 18 percent. The government raised the rate to 20 percent in the summer of 2009 very rapidly, serving it up to the public as a critical step for responding to the economic crisis. Now the crisis is behind us. If the governing coalition doesn't want to restore the old rate, it should at least explain to the public why, because the decision four years ago was made without thorough public discussion.

A number of arguments speak in favor of lowering VAT. For example, it would help check inflation and improve purchasing power among the population. It would also ease the rise in household expenses, which has claimed an increasing stake of consumer revenue.

The revenue part of the state budget would suffer, but it would force the Cabinet to subject expense line items to more scrutiny. Such belt-tightening would be useful before the next general elections, when politicians might be tempted to start distributing sweeteners to their own electoral district.

Lowering VAT would also reduce the amount of ill-gotten gains from tax fraud. Estonia has a local underworld specializing in tax fraud, which keeps on coming up with new schemes. A few years ago it was fuel, now it is food.

The goal of lowering VAT cannot and should not be alleviating poverty. There are more effective tax policy instruments for that. The most positive result of lowering the rate of all is that the revenue of both the state and the criminal world will decrease and the amount of money retained by households and businesses will increase, which they can then use according to their own discretion for improving their situation.

 AIvar Hundimägi is the deputy editor-in-chief of the business daily Äripäev. This piece was originally a weekly commentary on Vikerraadio.

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