Who stands to gain and who to lose from income tax changes? Calculations show that statements aimed by Manuela Pihlap of the Center Party at the government are unfounded: the proposed measures actually spare the wallets of low-wage earners and the middle class when considered together. The wealthiest, profitable companies and banks will contribute more to the state budget.

Let's start with the numbers. How much will the net salary of an employee actually change in 2025 and 2026 after the income and defense tax changes take effect, provided their gross salary remains the same?

To recap: in 2025, there will be a 2 percent increase in income tax, the tax-free minimum will rise from €654 to €700 per month, and in 2026, this will extend to all wage earners along with the implementation of a 2 percent defense tax on all incomes.

It should be noted that the calculations assume the employee is enrolled in the second pension pillar and contributes 2 percent of their salary to it. Unfortunately, we must recall the plundering of the second pension pillar approved during the coalition of the Center Party, Isamaa and EKRE, which was unacceptable to the Social Democrats. This resulted and will continue to result in smaller future pensions, a temporarily overheated economy and reduced liquidity of funds, which now hinders long-term investment products and economic recovery. Bad decisions have long-lasting effects.

But back to the real impact of the tax changes. It turns out that compared to 2024, the net income of those earning between €1,369 and €4,415 per month will actually increase in January 2026. The biggest beneficiaries are not the ultra-wealthy but those earning around €2,100. Moreover, by 2026, the average salary is expected to exceed €2,100, according to the forecast by the Bank of Estonia, thus eliminating the tax hump (Estonia's gradual basic exemption reduction scheme – ed.) will benefit those earning below the average salary.

Those earning €4,416 or more per month will pay more taxes due to the combined effect of the tax changes in 2025 and 2026. Essentially, this means that the impact of the tax changes is slightly progressive: a larger contribution is asked from those earning more than twice the average salary. The higher the salary, the greater the amount of income and defense tax the wealthy will have to pay starting from 2026 compared to now.

Indeed, only considering the income tax changes, those who are not affected by the elimination of the tax hump will lose a bit. The maximum loss is less than €20 per month, and for those earning less than €1,000, the loss is less than €10 per month. However, in reality, their incomes will not decrease because the minimum wage will increase by about €200 over two years. The previous increases in the minimum wage have proven that this positively affects not only minimum wage earners but all salary groups up to the average wage.

When the Social Democrats, Reform Party and Eesti 200 discussed forming a new government a year and a half ago, there was lengthy debate over raising the minimum wage. We demanded that it increase from the current 39 percent to 50 percent of the average salary. Our condition was that if any tax even slightly negatively affects low-wage earners, it must be compensated for them.

This point was included in the coalition agreement and later confirmed by the agreement between the government and social partners, according to which the minimum wage already rose this year to 42 percent of the average salary, or by €95. Next year, the minimum wage must rise to 45 percent, in 2026 to 47.5 percent and by January 2027 to 50 percent of the average salary.

According to the Bank of Estonia's forecast, the average salary in 2025 will be €2,053 and in 2026 will be €2,149, meaning the minimum wage will increase by about €104 next year and by about €97 in 2026, surpassing the symbolic €1,000 mark.

Incidentally, the Center Party promised a substantial increase in the minimum wage to €1,000 already in the 2015 Riigikogu elections, repeating this promise in both the 2019 and 2023 elections. However, during the coalition of the Center Party, Isamaa and EKRE, the minimum wage was not raised at all.

Returning to the calculations, what is the net wage increase for a minimum wage earner considering the impact of income and security taxes? This will be about €75 next year and an additional €67 the following year, which will go directly into their pockets! Even accounting for the VAT increase from 22 percent to 24 percent, minimum wage earners will still be approximately €64 and €55 better off in 2025 and 2026, respectively.

Therefore, the coalition agreement must be viewed as a whole: the increase in income and defense taxes is offset for the middle class by the elimination of the tax hump, while low-wage earners will see a significant benefit thanks to the rise in the minimum wage. Considering that despite the opposition from Parempoolsed and some of our coalition partners, pension indexing continues and pensions are not frozen, it can be confidently stated that the incomes of low-wage earners, the middle class and old-age pensioners will grow. This is largely thanks to the Social Democrats and our efforts during the coalition negotiations.

The notion that tax cuts increase tax revenues is absurd. The experience of the United States during Donald Trump's administration showed that tax cuts exacerbate a country's fiscal problems. A recent analysis confirmed that Trump's tax cuts have already increased the U.S. debt burden by $8.4 trillion – low taxes reduce tax revenue. Who could have guessed? This is clear to anyone who isn't spreading right-wing populist falsehoods.

The Center Party broadly mirrors the rhetoric of Isamaa, EKRE and Parempoolsed. Mihhail Kõlvart and the party leadership even announced that they do not support the reintroduction of corporate income tax. This is very strange, as "reintroducing classical corporate income tax" is clearly stated in the Center Party's program. Do Kõlvart and Pihlap not know their own program, or is cheap populism more important than principles?

Reintroducing corporate income tax allows the state budget to collect hundreds of millions of euros from the wealthiest in society. Thanks to this compromise, the Social Democrats were able to dismiss an even greater VAT increase of more than 2 percentage points, with 4 and 5 percent also considered. Reform Party Finance Minister Jürgen Ligi has already stated that he would have preferred an even larger VAT increase over corporate income tax. We, on the other hand, believe that everyone must contribute to fixing the state budget and national defense.

We continue to work towards a modern Estonian tax model, where the wealthier parts of society contribute more to the state budget. This will allow for future reductions in VAT and the introduction of lower VAT rates on food products.

--

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