No change to income tax 'bracket creep' to happen ahead of general election

Aivar Sõerd (Reform) on Friday's edition of 'Terevisioon'.
Aivar Sõerd (Reform) on Friday's edition of 'Terevisioon'. Source: ERR

An income tax system set five years ago when average wages, not to mention inflation rates, were lower than they are today is seeing more wage-earners hit a 'tax hump', sometimes referred to as 'bracket creep' when their salaries rise than was previously the case ERR reports.

The issue is likely to be one in the lead-in to the general election next March; there is insufficient time to overhaul the system between now and then.

At the same time, pressure is rising to increase the salaries of teachers and other key workers.

Reform Party MP Aivar Sõerd, who also sits on the Riigikogu's finance committee of the Riigikogu, says that while the current system has been in effect for five years, each year more and more people see their rising income entering the income tax "hump" zone, which brings them an additional tax burden.

Sõerd told ERR that: "Since this tax curve was fixed in euros, it is not suitable for conditions with rapid inflation and wage growth."

As to why the classically liberal, free-market supporting Reform Party had not changed a system created by the Center Party, in office with the Social Democrats and Isamaa at the time, Sõerd replied that the system is currently being tweaked a little, albeit from the wrong end; boosting the income tax-free threshold looks nice on paper and nobody seems to lose out, but at the same time the "hump" effect only accelerates.

"The problem is that more and more people in the middle- and lower-end of the salary scale move into this tax bracket with their income, and become part of the higher taxation rate," Sõerd continued.

"We can see that even with a salary of €2,100, tax-free threshold evaporates. There are more and more people from whom tax-free income is taken away. This system works a bit curtly in this way."

Rapid inflation and wage rises have accentuated the effect, though the Reform-led government said it has no plans to amend the income tax system ahead of the March 5 2023 general election.

The tax-free threshold is highest for those earning below €1,200 per month gross per month – a few hundred euros below the present-day average full-time monthly wage – while the threshold falls in increments between €1,200 and €2,100

The "hump" effect has come into sharper relief at a time when proposals are being made to up the average gross monthly wage of schoolteachers to €2,000, which would see a larger proportion of teachers' gross pay being consumed by income tax.

While the Ministry of Finance is preparing a bill which, should it pass at the Riigikogu, would boost the fully income tax-free threshold from €500 to €654, per month, this would not affect the tax "hump" and would not shift the tax curve.

The prime minister recently criticized the current system, telling news portal Delfi (link in Estonian) that: "If the salary goes up, they receive less," she said. 

"It would make more sense [to] fix the income tax rate. Earning more would then not be penalized," Suutre

 "The topic of income tax will probably be in focus in the next elections," finance ministry spokesperson Siiri Suutre said.


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Editor: Andrew Whyte

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