Ruling coalition determined to raise consumption taxes

03.05.2012, 16:17

Aivar Sõerd, member of the parliamentary finance committee for the Reform Party and former finance minister, says that the clear objective of the ruling coalition is to increase consumption taxation and lower the share of income tax.

„This is actually a global trend and not something developed in Estonia,” said Sõerd, speaking at Forum, a televised political debate on ETV yesterday.

According to him, the government’s new four-year budgetary strategy is to notably hike the alcohol excise duty.

„Despite of that, the tax system remains stable, is predictable and, at the end of the day, will bring the tax burden down from 32.9 percent in 2013 to 32.3 percent in 2016. The decision to cut the unemployment insurance contribution plays an important role in achieving this,” added Sõerd.

Sõerd added that taxation policy was an important means in increasing the country’s competitiveness.

„As for replacing the proportional tax system with progressive taxation, as proposed by the opposition, this has already been tested in other countries and most businessmen are not happy with it. Take, for instance, Sweden or Portugal. Or Spain that has a different ratio of consumption taxes and direct taxes, is it happy?”

Social Democrats: poor people affected

Rannar Vassiljev, deputy chairman of the parliamentary finance committee and member of Social Democrats, says that raising consumption taxes is going to affect especially lower-earning people who have no money to save and, therefore, raise of alcohol excise duty is going to increase their tax burden.

Responding to this criticism, Sven Sester, MP for IRL and chairman of the parliamentary financie committee, said that the big difference between the ruling coalition and Social Democrats is that the government strongly believes that instead of taxing income the country should tax consumption.

Sester added that the five-percent raise of alcohol excise duty over four years is very reasonable, especially in the situation where producers have a prior knowledge and can prepare.

Jüri Ratas, an MP for Centre Party and deputy speaker of the parliament, said that Estonia has had no serious tax debate for at least ten years.

„There are only bits and pieces that are tabled when elections are coming. One of such bits is about lowering income tax rates, while another speaks of introducing different tax levels. But there has been no discussion on the full package in the Estonian politics,” said Ratas.

Ratio of consumption taxation high in Estonia

Consumption taxes, ie VAT and excise duties, accounted for 43 percent of Estonia’s total tax revenues last year which is seventh-highest level in EU.
By the share of consumption taxes, the highest ration is in Bulgaria, followed by Hungary and Lithuania. Poland has fifth-highest and Latvia has eight-highest share of consumption taxes in total taxation.

The lowest ratio was registered in Belgium and Germany, with Finland having fifth-lowest share of consumption tax.

EU average for consumption taxes is 33 percent of total tax income.

In Estonia, the share of consumption taxes has been raising rapidly because in 2008, at the start of the recession, consumption taxes or so-called indirect taxes made up 38 percent of total tax intake.

In 2010, income from tax and social taxes accounted for 91 percent of EU public sector income.

Indirect taxes are production and import taxes, ie taxes charged on consumption, especially VAT and excise duties.

Direct taxes are income, property and capital tax, especially individual and corporate income tax.

Social taxes are, for instance, pension insurance, health insurance and unemployment insurance contributions.

Trasberg: raise in consumption taxes bad for economic recovery

Economics professor of Tartu University, Viktor Trasberg, believes that the government decision to increase the share of consumption taxation is going to make the recovery of the country’s economy more difficult.

“We have warning examples from Latvia where IMF recommended to implement strict measures to increase consumption taxation and lower income tax. This put the country’s economy into a coma. Estonia is doing the same, but without the IMF,” Trasberg has said.

According to the professor, higher taxation of consumption would increase prices and open the door for smuggling.

In addition, the tax burden will be gradually shifting from wealthier and more mobile population to poorer and less flexible classes.

Another problem is that the country’s public sector will become even more dependent on a certain type of tax revenues and consumption cycle, said the professor.