Tõnis Saarts: Unlikely tax debate and the burden of path dependence

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Tõnis Saarts. Source: Priit Mürk/ERR

The Reform Party is likely to meet the looming tax debate with arguments to defend its neoliberal legacy from the 1990s. Fresh and radical ideas are hardly in the pipeline, political scientist Tõnis Saarts finds.

The government has decided in favor of cuts and to aim for fiscal balance. This will impact more vulnerable social groups and so-called soft domains: schoolchildren and hobby education, culture and the clergy in the case of the Defense Forces. While the ruling parties are trying to come up with mitigating arguments, it is not looking good from the outside.

The why of it

Minister of Finance Keit Pentus-Rosimannus (Reform) says that the cuts are aimed at not having to hike taxes in the near future, which is what living beyond the state's means would inevitably lead to. That said, the ruling (Center and Reform) parties are promising a serious and substantial tax debate leading up to Riigikogu elections – apparently, Estonia needs a new tax model.

I have no doubt there will be a tax debate, while I remain less hopeful in terms of the promised substance and plurality of ideas. Major parties, especially the Reform Party, cannot make about-turns and break free of their recent dogmas so easily.

In short, a party that has for the past 30 years promised us "tax-free Fridays" and sold everyone on "Estonia having the best tax system in Europe" will very likely lack the courage and motivation needed to veer from that path.

This kind of inertia and unwillingness to change is known as path dependency in political science.

In order to better understand it, let us imagine having to climb a tree to reach its fruit. You pick out a branch that seems the most bountiful. For Estonia in the 1990s, the market liberal model with a low and uniform tax burden and lack of property and enterprise taxes seemed to be just what the doctor ordered. And so, right-wing parties chose that branch.

And indeed, juicy fruits were plentiful at first. The economy was doing well, investments followed, voters rewarded parties promoting low taxes and market freedom and other states commended Estonia for its success. The fruit became less bountiful after 2008, while hope remained that things would improve after the financial crisis.

By now, even right-wing parties have begun to realize that it is harder and harder to meet the expectations and demands of 21st century citizens using the neoliberal tax policy of the 1990s. The fruit on the branch they chose is becoming increasingly small and sour.

The problem is that turning back and choosing a new branch would require too much effort. Interests and ideologies also tend to crystallize around one's chosen path in politics.

Having spent decades talking about low tax burden and fiscal balance, dismissing off the bat property and enterprise taxes and convincing your sponsors and voters that it is all in their interests too, changing gear now would require a good dose of selflessness and courage to take risks. Head of the Reform Party Kaja Kallas does not seem to have the will, mettle and support from her party this would require.

This is why the Reform Party is likely to meet the looming tax debate with arguments to defend its neoliberal legacy from the 1990s. Fresh and radical ideas are hardly in the pipeline.

In truth, other parties are no better off. They are also suffering from path dependency. The Center Party will have to cling to progressive income tax, with all other proposals only there to support this core tenet. Isamaa will not be able to talk about property taxes because its past struggle against land tax, while the Conservative People's Party (EKRE) is not yet credible enough in matters of taxes and the economy to really participate.

Eesti 200 and the Social Democratic Party (SDE) have more freedom when it comes to proposing out-of-the-box ideas, while both parties are currently too weak to play first fiddle in the tax debate.

The result

We will very likely only see cosmetic tax changes following the 2023 elections, with the new government forced to maintain the course of austerity in the name of fiscal balance. There exists the danger that people of modest and medium income will feel they are being treated unfairly. Income inequality and feelings of deprivation will continue to grow.

Political scientists have long since noticed that stratification, feelings of injustice and the rise of populism are closely related. Therefore, it is quite likely that the longer one continues with the neoliberal austerity ideology and a tax system that tends to favor the wealthy, the more wind EKRE will catch in its sails.

Perhaps the national conservatives winning the next elections or the ones after that is the shock that is needed for mainstream parties to shake their path dependency and take a fresher look at economic and tax policy.

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Editor: Marcus Turovski

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