Tarmo Tanilas, senior investment manager for Swedbank, proposes Estonia to abolish personal income tax and tax corporate profits instead. The following is the column written by Tanilas and published in today's Äripäev.
It's been twenty years since the time when Estonians had to tighten the collective belt to ensure that the country became free and successful. Fortunately, these times are over and the country is wealthier than ever, but a large proportion of working-age population earns their income abroad and many regions suffer from underpopulation.
Several politicians are promoting introduction of progressive income tax, but they don’t mention that personal income tax makes up less than 4% of Estonia’s budget revenues. Quick calculation shows that even if all taxpayers would pay 33% income tax, it would increase budget revenues only by about one percent.
I would say that Estonia can call itself successful only after there is a decent middle class and the country attracts workers instead of forcing them to look for employment abroad. In 2011, the state collected EUR 201m from personal income tax. At the same time the total annual profit of enterprises was EUR 2.8 billion. The figures forecast for 2012 are EUR 253m and 3.3 billion euros, respectively.
Since the tobacco and alcohol excise duty collected by the state is about 25% more than personal income tax, I suggest that the state could abolish personal income tax as a marginal tax source.
It would leave more than 300 million euros to people every year. To critics I would say that there are good replacement sources of revenue income for the state.
To do so, the state should start charging 10% income tax rate from domestic companies and 15% income tax rate from foreign-owned companies registered in Estonia.
This leads one to ask if this is fair treatment of businessmen who take risks to create jobs. I would say that such income tax rates would still allow enterprises to keep investing successfully, attract highly qualified workforce, improve workers’ satisfaction and still make a decent profit.
If Estonia were to abolish personal income tax, it would be a major incentive for the development of a proper middle class. Many people would get a possibility to save anything in reality in a long time or use the additional income for taking a mortgage loan which would breath new life into the local stock exchange and real estate market.
As internal consumption would increase, it would be a win-win situation for traders and the state that should collect more VAT. People would have more disposal income and could decide where to use it. One should not underestimate the public discontent with the state and that abolishing personal income tax would create a positive future outlook that would benefit the economy generally and enable entrepreneurs to be successful.
Talented people would come back to Estonia because, without personal income tax, people who are working abroad would return home because the gap in net wages between Estonia and abroad would shrink or disappear. This could make Estonia a Scandinavian Monaco and the state could introduce an annual quota for wealthy foreigners who could become Estonian residents and inject lots of money in the economy with their consumption habits.
It would be also a quality brand for the Estonian state if prominent people would be willing to bring their assets here. The world-famous tennis star Novak Djokovich may be in love with his home country Serbia, but he is still a resident of Monaco which does not burden him with personal income tax.
Perhaps also our cycling star Rein Taaramäe would decide to also return home Monaco. Today, personal income tax makes up most of the income of local governments, with the largest municipalities near large cities reaping the cream.
To put it simply, these are municipalities which executives of companies like Eesti Energia, EMT, Swedbank, etc have chosen to be their home. These people provide services all over the country, but pay their income tax to their home municipality. The trend where rich municipalities are becoming richer while may other municipalities cannot make ends meet has growth in the last decade. By abolishing personal income tax, the tax paid by companies from their profit could be distributed more evenly all over Estonia which would be much more effective from the regional policy aspect.
We would no longer have to worry if Lihula still has a police station or whether rural municipalities can pay their teachers salaries. Without personal income tax, middle class would flourish, people would be motivated to study and earn more and will be more responsible for their own financial situation.