On Tuesday, the government decided that a 2 percent tax on corporate profits will take effect in 2026. According to LHV Group CEO Madis Toomsalu, this is the best solution under the circumstances, though he noted that no business owner is happy about the tax increase.

"There are around 150,000 active entrepreneurs in Estonia, and none of them would approve of a tax hike. It's a fact that taxes at a certain level in the economy start to hinder growth, but today, these are the choices we face," Toomsalu said on the talk show "Esimene stuudio."

"When the options are between bad and very bad, the choice has to be the best of the worst. No one is pleased, but this is the situation today. The choice is between taxing already earned value or taxing investments and capital before they are put to work," he added.

Toomsalu emphasized that economic policy should be changed based on impact assessments.

"Rail Baltica, for example, has socioeconomic analyses, which have been conducted over a long period. If we want to make changes to tax and economic policies, they can't just be decided on a few sheets of paper. In this context, this is the best of several bad options. Is anyone satisfied? I don't think so. But I would also stress that mediocre decisions are far better than indecision. I think every entrepreneur would agree with that. A mediocre or poor decision can be changed later, but we've been facing indecision for a bit too long now," he commented.

The government hopes to raise €150 million from corporate profit taxes for the 2026 state budget, though initially, the expectation was €200 million. Prime Minister Kristen Michal (Reform) stated that the calculations for the corporate profit tax also factor in so-called tax behavior, meaning some companies may not be willing to contribute additional funds to the state budget.

Toomsalu acknowledged that certain tax avoidance schemes are possible with profit taxes, but this would also be the case with property and equity-based taxes.

"There seemed to be an impression that profit taxes are particularly susceptible to such schemes. This impression arose because property and equity-based tax schemes haven't been explored yet due to a lack of analysis. Those who have thought this through know that just as much scheming is possible with capital and property taxes. So, I wouldn't get too caught up in the technical aspects of tax administration. The more important question is what the economic impact of these taxes will be on businesses," he explained.

Toomsalu believes that the government's calculations for this tax have simply become more precise.

"To venture into black humor, the government tends to misplace money. But I think the calculations have just become more accurate. I can't say where the €50 million went, but I believe the calculations and tax bases will get more accurate over time," he said.

"Of course, if the goal is to always improve the process, it would be good if these impact analyses were made public as well. We've seen public socioeconomic analyses for other issues, so why can't tax-related analyses be equally transparent? Then we might find out where that money went. But I believe it hasn't disappeared, rather the calculations have become more refined," the banking executive added.

Next elections could pave the way for major decisions

The government is also planning cuts amounting to one billion euros. According to Madis Toomsalu, this will not be enough in the view of entrepreneurs.

For example, indexed pensions will not be affected by the cuts, meaning pensions could increase by around 10 percent next year. Toomsalu believes that the state cannot afford this in the long term. This, he says, means politicians will have to start making major decisions.

"The state is very expensive, and the current deficit shows that, even without considering security expenses, spending exceeds revenue. This is a combination that, in my suspicion, won't hold up in the long run in an aging society. This debate needs to begin fairly soon, because the next Riigikogu elections should prepare us for making real, significant decisions. I don't think what happened last time – where half of the discussion was left unsaid – was the right approach. So, let's start preparing for the next elections either after or during this tax peace period," he commented.

The devil is in indexation

This week, entrepreneurs submitted a proposal to the government with suggestions for improving the economic situation. One of the key proposals was to halt the indexed growth of the state budget.

Madis Toomsalu, who also signed the letter, explained that indexing could quickly lead to problems.

"The suspension of indexing definitely needs to happen, because indexing contains several hidden dangers. It's possible to index above economic growth, and then you're basically facing a problem immediately. You don't need to be a highly intelligent scientist to understand that with indexing, things can spiral out of control quickly. All it takes is a few situations where some numbers go one way and others the opposite, and you find yourself in a situation that's deteriorated so badly that you have to reinvent all sorts of other solutions," he explained.

"Politically, it's difficult to bring this to the table, but those parties that dare to do so should be recognized. As we look toward the next Riigikogu elections, we need to tackle bold issues and make tough decisions. It's a bit ironic that Estonia has reached this point partly because we've been afraid to address big issues, and now those very issues are catching up with us. We're having to resort to all sorts of extreme measures to manage them," Toomsalu added.

Estonia back on top in Europe in three years

According to Madis Toomsalu, in a few years, Estonia's economy will once again be among the leaders in Europe.

"In the spring, I said we would continue to see layoffs and a rise in bankruptcies. This has indeed happened. I suspect that the near future will bring more news of this kind. However, when I look at the big picture, yes, the tax increases that will undoubtedly hinder economic growth opportunities are a downside. But on the other hand, if I may offer a bit of hope, I have a somewhat bold hypothesis. Let's say in about three years from now – 2027 or 2028 – I would venture to predict that Estonia will once again be one of the fastest-growing economies in Europe," Toomsalu said.

"At some point, the logic will fall back into place: our export partners will start to recover, interest rates will drop, foreign investment measures might start working, tax stability will bring consistency, optimism might return, we'll stop tearing each other apart and energy prices will come under control. When all these factors finally align and the base effect is lower, I dare say we'll climb out of the hole," he explained.

Toomsalu also noted that Estonia's nominal economic growth is solid, but the problem is that inflation has eroded purchasing power.

"When we eventually move into a better position, nominal economic growth combined with the recovery of purchasing power will mean that we have taken significant steps closer to Europe. But the picture today is far from simple – we have plenty of contradictions built into the situation – but I remain optimistic," he added.

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