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SDE chair: Current coalition effectively preparing for progressive income tax

Lauri Läänemets (SDE).
Lauri Läänemets (SDE). Source: Siim Lõvi /ERR

The current Reform Party-Eesti 200-SDE coalition is, in eliminating the so-called tax hump, essentially paving the way for the introduction of a progressive income tax by eliminating the tax hump and ending the prevalence of the use of private limited companies as a way of avoiding taxes, Social Democrats (SDE) chair and Interior Minister Lauri Läänemets says.

Appearing on ETV politics show "Esimene stuudio" Wednesday, Läänemets said: "I would say from the point of a progressive income tax that if the right-wing parties remove the tax hump and render the income tax uniform, then in fact we are preparing for the advent of a progressive income tax."

Right-wing parties Läänemets meant in an economic sense and was referring to Reform and Eesti 200.

The tax hump, also known as bracket creep, is a situation where rising incomes lead people to pay higher average income tax rates each year. Removing it by putting in place an income tax-free threshold was a Reform Party pre-election pledge.

"This is something the Reform Party and Eesti 200 will do together with the Social Democrats, let's look at it this way," Läänemets said.

"First of all, if this tax hump remained in place but we wanted to put in place a normal, two, three or four-tier system, it would have proved expensive, costing several hundred million [euros]. This now only constitutes income for the state in the future, so it is very easy to enact," the SDE leader added.

"And the second thing I hope we will agree on is the end of OÜs."

An OÜ (Osaühing) is a private limited company, and setting one up with the express purpose of, among other things, avoiding taxation is common practice.

"In other words, given the many people who evade honest tax payment via a private company, if we close this loophole, all the prerequisites will have already been created for the introduction of a progressive income tax. This means, in my view, we are in effect preparing for the coming of progressive income tax in Estonia," Läänemets said.

What OÜs would be replaced with was not mentioned.

The SDE chair then said that when money in the state budget is lacking, for example in order to hike teacher or first responder wages, or for carrying out some other important task, then it has to be covered by progressive taxes and it cannot be collected solely at the expense of the poor.

"If money is needed to that end we can't take it from those people who, when imposing a new tax, end up having to request social benefits. An economic system whereby we create a taxation situation in which more people receive benefits, is not a reasonable one," he went on.

"In other words, for people who earn four, five, six thousand euros [per month], I think it is reasonable for them to contribute more, since, as a rule, many of them are business-people, and business also gets the fastest and greatest benefits when society and the economy as a whole are doing well. In short, if you invest in education with your taxes, you are in some sense actually also investing in your business, in your future," Läänemets continued.

Lauri Läänemets. Source: Priit Mürk/ERR

The car tax would not have been needed without the elimination of bracket creep

When asked whether his party would abandon the planned introduction of a car tax from next year, a move which Prime Minister Kaja Kallas (Reform) had recently referenced, Läänemets said that he does not support doing so.

"I think that the agreements we have, have to be seen through. I can't imagine what we could have instead of the car tax, maybe some other taxes? I don't think that is a good idea, so let's carry them out as planned. My understanding is that the prime minister did in any case not say that the Reform Party intends to withdraw from their own position."

Läänemets also said that the coalition opted to introduce the car tax in tandem with the policy of removing the tax hump.

"Plus this costs something from the state budget, so sources of funding are needed for that. Of course, various spending decisions had been made in the past, and money was needed for that as well. So you can say one way or another. But I have said, looking from behind the coalition table – and we also said that to our partner, to the Reform Party – that if we put off the elimination of the tax hump, we wouldn't have to make all these different tax amendments. We could basically continue to operate as a state but without any major changes to taxation," Läänemets said.

"There will be a hole in the state budgets in the ensuing years if we intend to change or leave something out of the budget strategy agreed this fall. Maybe our discussions will end up with us making certain corrections there, but in essence nothing would change."

The SDE leader added that the discussion held at coalition level a week ago, whereby each of the parties' positions were closely observed, gave him the feeling that maybe some minor changes would in fact be made to the budget (the state budget for the following year is drawn up in the autumn, in tandem with the state budget strategy for the next four years – ed.).

SDE are holding their own in the coalition

Commenting on SDE's recent rating surge, which has been ongoing for the past six months and has according to one pollster put it on par with Reform, Läänemets denied that his party's opposition within the coalition was behind this.

"Yes, we are accused of politicking, but I think that Estonian people are not that stupid. /.../ If we look at SDE's rating, it has been rising for more than half a year. Yes, it was certainly boosted by what happened in the Center Party, the movements within the Center Party. But we also said that in a situation where now the balance on the right-wing parties in Estonia is SDE, and in the future as well, and no longer the Center Party, so this is the natural course of things," he found.

Four former Center Party MPs including two former ministers recently left that party for SDE. On many issues, SDE and Center have historically had common ground.

Commenting on his actions during the recent teachers' strike, Läänemets said that SDE was already of the opinion in the summer that the issue of teachers' wages had to be resolved.

"I recall that we talked about this last summer, when we were drawing up the state budget strategy, when we handed it over to the Riigikogu with the government, when a teachers' warning strike took place. SDE said all along that we think it important to call off that strike, or when it started, to do so as soon as possible. So we haven't changed our position, in half a year."

Good relations within the coalition

Läänemets rejected presenter Andres Kuusk's claims that he, Läänemets, had been presenting demands in a "persuasive tone" within the coalition.

Läänemets said: "We also spoke in a persuasive tone half a year ago, when we formed up this coalition. In the spring, when the coalition evolved, we also said that it was very important quickly to raise the minimum wage, so that people do not get into difficulties."

"Even then there was a feeling that, well, how you Social Democrats want that type of thing! But in the end we came to an agreement. We are simply calm, but determined. I think that's how a coalition should be; if one party says something is very important for them, then we deal with it and try to find a solution, one-on-one. I don't think any party should just back down, and in this way, the best decisions get made," he said.

"The Social Democrats have also made a lot of compromises, and other political parties have done so too. So, in my opinion, we have a very polite attitude towards each other even behind closed doors," Läänemets found.

"I can say that we have had good interpersonal relations, even as we have worldview differences. Our worldview is on the left so we don't always have to concur with the right-wing political parties."

Lauri Läänemets (SDE). Source: Ken Mürk/ERR

Reform party's turf war does no good

Commenting on the criticism of the former chairman of the Reform Party, and former prime minister, Andrus Ansip on the current leader of that party, Prime Minister Kaja Kallas, Läänemets noted that Ansip may be right on one thing.

"In one sense, he was right that the government should not discuss things in silence, but rather the people of Estonia should know and be aware of how discussions go, what are the arguments, and why people think as they do," Läänemets said.

"I haven't had any contact with Andrus Ansip, but I think that this turf war on the party of the Reform Party does no one any good, and we have much more important things to discuss," Läänemets added.

He also denied that the quarrels in the prime minister's party pleased him. "No, what is good for SDE is when there is a strong coalition, with the largest possible mandate from the people."

"We have the feeling about the coalition that, in my opinion, the prime minister feels very confident, is very collected, he has her own plan, while I don't feel that the internal life of the Reform Party has influenced this government, in any way. And I hope it won't do so going forward either."

The SDE leader did not want to comment on the current situation in the Reform Party. "The Estonian people can give their assessment at the elections and on the Reform Party, according to whether their expectations are met or not."

The next election is to the European Parliament, in June.

Läänemets: We offered Ratas the chance to change Estonia

Commenting on former Center chair Jüri Ratas, a supporter of a progressive income tax, joining Isamaa instead, even as Ratas' joining the Social Democrats had also been discussed, Läänemets said that he was not sad about it.

"I can't say it was a setback for us because we didn't lose anything that we already had as it were," he said.

The SDE chair admitted that of course he had spoken with Ratas on this matter, adding that he cannot comment on what was behind Ratas' ultimate decision.

"Our offer was to transform Estonia, and our offer was that the Social Democrats have taken over the position formerly occupied by the Center Party, and that this is quite a big ambition to realize together," he said.

SDE would focus most on energy

As to an idea from the Eesti 200 ministers to borrow €200 million in order to create a personalized state, Läänemets said that if the state needs to borrow for investments, it can be considered, but his prioritizes renewable energy.

"The most important thing for the Social Democrats right now is to invest in energy; we have to significantly increase goals on renewable energy. If we can reduce energy prices, we will boost companies' export capacity, and we can also bring energy-intensive industry here," he said.

Whereas Estonia's plan is to increase energy consumption by 10 percent by 2035, in Finland the figure is 100 percent.

"Controlled capacities are definitely part of this energy plan. The Social Democrats have not said that the oil shale plants should be closed. No, they should remain in reserve for when times are difficult and there is no [renewable] electricity available for a lengthy period of time. We rely on research here, and not the party's office," he said.

On the idea from Economic Affairs ​​Minister Tiit Riisalo (Eesti 200) to raise immigration quotas in order to alleviate the labor crisis, Läänemets said that these quotas would not be hiked, but would render the current system more flexible and would involve employers and trade unions in decision-making.

Commenting on the fact that the current Center Party chair had taken part in a liturgical service led by Metropolitan Eugene, head of the Russian Orthodox Church in Estonia, who earlier this week had had to leave the country, Läänemets recalled that the chairman of the Estonian Council of Churches, Archbishop Urmas Viilma of the Estonian Evangelical Lutheran Church (EELK), was also present, albeit for religious reasons – the consecration of a new bishop.

"What the Center Party's values space is, what messages they want to present, is up to them. There is nothing wrong with that./.../ But if the chair of the council of churches is in attendance, it can be looked at in one way, while if a party chair is there, then it can be seen in a different light. But again, that can be done by the voters themselves," Läänemets said.

On the candidacy of Col. Andrus Merilo, nominated as next commander of the Estonian Defense Forces (EDF) on Wednesday, Interior Minister Läänemets said that defense circles and also the Defense League had confirmed to him that this had been a very strong choice.

Finally, SDE is going to try to retain its two MEP seats at this June's European elections, Läänemets said, adding that one of the current incumbents, Marina Kaljurand will again run as the number one candidate on the party's list.

Lauri Läänemets became SDE leader in February 2022.

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Editor: Andrew Whyte, Mait Ots.

Source: 'Esimene stuudio,' interviewer Andres Kuusk.

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