Riho Terras: Policy of taxing people into poverty must be ditched

Riho Terras MEP.
Riho Terras MEP. Source: Priit Mürk/ERR

In going ahead with planned tax increases, the coalition is setting up a perfect storm which can fuel further inflation yet at the same time slow down economic growth, Isamaa MEP Riho Terras writes.

U.S. think tank the Tax Foundation in its tax competitiveness index once again picked the Estonian tax system as number one in the world, for the tenth year running. Alas, this is likely the last time we'll be able to maintain that top spot. The tax changes due to enter into force next year and the following year will place a massive tax burden on the shoulders of people and of companies, in an economic recession.

IMF statistics show that Estonia is in Europe at red alert in terms of economic growth: The 2.3 percent economic decline is several times higher than that of other EU countries. The worst performing area is in reduced demand and falling exports. The latter is of particular concern, given it has shown strong growth in the past.

In conditions like these, you must not then come up with dozens of different tax hikes. 

Unfortunately, the Reform Party, along with its smaller coalition partners, do not listen to businesses, so for this reason unemployment is forecast to rise, and exports from Estonian firms to fall.

Mait Palts, director of the Estonian Chamber of Commerce and Industry (Eesti Kaubandus-Tööstuskoda) said only recently that the government has no comprehensible economic development strategy which takes into account the changed circumstances. I have no option but to agree with him, though I would stress that massive tax increases are not an issue for companies alone.

It is clearly the case that every new tax increase is indirectly paid for by the consumer. The planned car tax directly impacts upon the transport sector and service companies, which have no choice but to pass it on in prices.

An increase in VAT meanwhile not only raises the final product price, but also those of all production inputs. The same applies to all types of excise duty and environmental and packaging fees. Going ahead with the tax hikes currently planned will thus create a perfect storm which will reignite inflation yet slow down economic growth at the same time.

This anti-economics budgetary policy must be reversed, and it is high time for the government to understand that the funds in the state budget derive from economic growth and business activities. The policy of taxing companies and people so they are poorer, must be surrendered.

A simple principle should apply in economic policy as follows: The state should intervene as little as possible, yet as much as necessary. For example, providing support to Estonian businesses during the coronavirus and energy crises was inevitable. The Reform Party was not a supporter of these interventions, and yet for some reason they are ready to intervene with outrageous tax hikes at a time when the Estonian economy is in decline.

It would represent common sense to boost state investments, instead of hiking taxes. EU funds must be utilized more quickly, while investments in various road and construction projects must be increased, in order to help our construction sector survive the downturn.

At a recent State Budget Control Select Committee session, Keit Pentus-Rosimannus, who now sits on the European Court of Auditors, admitted that in respect of the new period of refinancing, it is required that funds reach the economy. Unfortunately, the problem remains that a large part of these funds are is unspent. All this in a situation where the funds would help us soften the recessionary period.

At this point, the question also applies to industry more widely. Estonia needs domestic industry. Taking into consideration the international situation, we need to play to our own advantages.

The question of the new oil plant in Auvere and the hundreds of jobs that would come with that are directly related to all this. Unfortunately, the government has created uncertainty on this issue as well, in so doing violating the simple principle that in the case of any large-scale investment, the continuity of the government's decisions must be maintained. 

If this does not happen, very soon no large-scale investments will arrive in Estonia soon.  This means granting the necessary permits to the Auvere plant is not only a matter for Eesti Energia, but for the entire business environment.

In the long term, Estonia's approach to "green transition" is central to this. We must not continue establishing new rules and requirements without analyzing how they affect the performance and competitiveness of the Estonian economy. Unfortunately, at the moment, it seems that such a common sense approach is not being sought, however.

The Estonian government needs a wake-up call. Once a competitive tax environment is lost, it is difficult to restore the competitiveness of companies themselves.

We need to reduce bureaucracy in Estonia, to support industry and increase the volume of investments by utilizing EU funds, and to avoid tax increases that stifle business. I urge business organizations to listen, because they know firsthand where such a tax policy as the one on the table is taking us.


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Editor: Kaupo Meiel, Andrew Whyte

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