Siim Kallas: Instead of progressive income tax, start taxing assets

Siim Kallas.
Siim Kallas. Source: Siim Lõvi/ERR

On Monday Kallas said Estonia needs a real estate tax debate, a statement for which he was immediately criticized by members of his own party. Still, Kallas thinks such a tax could be an essential contributor to the income base of Estonia's local governments.

There was a broader issue at stake here that needed to be discussed, Kallas told ERR, and that is working towards the financial self-sufficiency of Estonia's local councils.

Several options were discussed in the early 1990s, when the current system was introduced, Kallas said. The present model, where two-thirds of a municipality's revenue comes out of income tax paid by its residents, had two problems that needed solving.

One of the problems is that plenty of residents of one municipality are actually registered in another. While that other municipality received money out of the residents' income tax paid, the place where the actually live has to supply the services.

The other problem is that the share of people's incomes that comes out of dividends is increasing, which is especially problematic in areas where a lot of entrepreneurs live, Kallas said.

"But dividends count as income of a legal person, which makes them income tax paid by the company that goes straight into the state budget, the local councils get nothing out of that," Kallas said.

According to Kallas, introducing a real estate tax would also connect businesses more closely to their local councils, as a share of their tax expenses would directly benefit the municipality they are based in.

The ultimate goal of Kallas' idea is to work towards financial independence for Estonia's local governments. This would mean that their income base needs to be increased, and that they need more autonomy in the way they handle their financial affairs.

"We don't need a progressive income tax, we need to tax assets," Kallas said.

Editor: Dario Cavegn

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