Reform makes electoral pledge to abolish 'tax hump'

Reform Party election advertisement close to the Center Party's headquarters in Tallinn.
Reform Party election advertisement close to the Center Party's headquarters in Tallinn. Source: Priit Mürk/ERR

The coalition Reform Party says it wishes to eliminate the so-called "tax hump" and raise the income tax basic exemption to €700 per month.

Reform's board has approved the finances section of its manifesto, which contains these policy aims, ahead of the March 2023 general election.

The party also wishes to focus on taxing environmentally harmful activities, for instance, as opposed to taxing people's legitimate income and work, its deputy leader says.

Part of the "tax hump" issue relates to the fact that the current income tax system was set up five years ago, when average wages, and rates of inflation, were lower than they are nowadays.

This means that with rising wages and the current soaring inflation, more and more people are hitting the "tax hump", sometimes referred to as "bracket creep," as they move beyond the income tax basic exemption threshold.

The current system sees tax-free income gradually fall in the €1,200-2,100 salary range to reach zero at a monthly salary of €2,100.

The basic income tax-free threshold currently stands at €500 per month, rising to €654 per month in January.

In these cases, salaries are boosted nominally, but in real terms have often not risen significantly.

The party will not have time in office in which to make any amendments ahead of the election on March 5, 2023 – choosing instead to unveil its plans with the next electoral cycle coming up.

Prime Minister and party leader Kaja Kallas says that a uniform income tax system would be easier and fairer than the existing set-up, and would also leave more money to the middle-classes, the demographic most affected by bracket creep.

The proposal will also add €340 million to the state budget, the party says.

Party deputy chair and former finance minister Jürgen Ligi says that Reform's main aim, financially speaking, is to restore the sustainability of finances during the elections, and to avoid any poorly targeted decisions.

Ligi said at present there are, in general: "A huge number of proposals to alleviate the tax burden across a life-span, to make exceptions, to complicate the tax system, and in short, to drag down finances."

"Additional tax benefits tend to bring this issue: They are picked up by people who don't actually have any social problems. It is preferable to give freedom to all, rather than to cajole by taking away the tax-free minimum starting from a certain income level," he went on.

Political parties' call for a debate on taxes is a euphemism for raising them, he added.

While Reform opposes hiking taxes: "However, it is clear that even at European level and internationally, the environmental issue brings out the fact that harmful environmental effects must also be countered via taxation. We must do this in a way which would curb the tax burden at the same time," Ligi said.

"These results probably most likely won't be attained within four years (ie. by the time of the general election following that in 2023-ed.), but it is clear that even internationally speaking, harmful effects will more than likely be taxed, which is also our point. We prefer the taxation of consumption and of harmful effects to the taxation of income and of work. This is also key from the point of view of economic growth," Ligi added.

Reform is traditionally a party which champions laissez-faire, free market ideals, as well as balanced budgets, but the current economic realities have put the latter out of reach for the foreseeable future.


Follow ERR News on Facebook and Twitter and never miss an update!

Editor: Andrew Whyte, Barbara Oja

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: