There is likely no more complex situation than the one reflected in Estonia's state budget. At least, that's how government politicians have presented the large and hefty budget deficit to the public.

The new coalition agreement includes several new taxes and levies, some of which break historical tax dogmas. Unfortunately, with his recent proposal, the legendary Minister of Finance Jürgen Ligi (Reform) is leading the state further into an economic downward spiral, rather than remedying the budget deficit.

The state has a clear task: we are in the most complex security situation in recent history, and to ensure our statehood, significant investments are necessary to improve defense capabilities. Every individual, whether they are an entrepreneur, teacher or bus driver, understands this and is undoubtedly ready to contribute to keeping our home safe and secure. However, people and businesses want to understand how the tax money collected from them is being spent.

Government politicians should take responsibility, as communication with the public has been, to put it mildly, confusing.

A good example is the car tax blunder. Instead of clearly stating that the additional revenue collected from the car tax would provide competitive salaries for essential state workers – teachers, rescuers and doctors – vague rhetoric was used about the need to increase the environmental sustainability of the vehicle fleet. Clear objectives and their explicit articulation should be an integral part of tax policy.

The coalition agreement signed about a month ago included a groundbreaking decision to introduce a classic corporate income tax for companies, albeit on a very limited scale. In the 1990s, the absence of a corporate income tax was undoubtedly a very sensible tax solution to facilitate the construction of a transition economy. Now, however, investment decisions are far more influenced by the availability of qualified labor, the tax burden applied to it and input costs, particularly in energy.

The state's tax policy goal should be to create an economic environment that allows businesses to operate profitably here.

Jürgen Ligi's proposal to replace corporate income tax with an additional labor tax is the opposite of the right solution, as it makes the most critical input for business in Estonia, labor, even more expensive. Ligi's plan hits the hardest in sectors with a larger workforce. Excluding employees largely on the state payroll, 60 percent of Estonia's 540,000 employed people work in four major sectors: manufacturing, trade, construction and transportation.

Ligi's new tax ax will especially strike a painful blow to the manufacturing sector, which has the largest number of employees and last showed a growth trend in August 2022. Since about two-thirds of the manufacturing output is exported, the additional burden will also reduce our companies' competitiveness and decrease the state's export revenue.

When ministers responsible for the well-being of our economy come up with such proposals, it's no wonder why Estonia is the only European country where the economy has been in decline for two years. Essentially, Ligi is imposing a loss tax on manufacturing instead of a corporate income tax on profits.

Unfortunately, all Estonians will feel the so-called Jürgen Ligi effect in their wallets. It is more than certain that the additional burden collected from labor will also impact labor-intensive sectors like trade and services, and prices in shops, cafes, buses, trains and elsewhere will continue to rise. We'd still be striving towards the ranks of the five most expensive countries in the European Union.

Challenging times require bold and wise decisions, and unfortunately, the minister of finance demonstrates that the burdens of the past have not been released, and the path of least resistance is still taken. Instead of devising a system to ask for more contributions from the more successful – who would certainly not refuse – the Estonian economy is once again being shot in the foot, and the wallets of our people are being targeted.

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