Friday, November 28, 2008

Estonia Plans to Reduce its Flat-Tax Rate

March 26, 2007

By Alvin Rabushka


Estonia was the first country in Central and Eastern Europe to enact a flat tax on personal and business income. Taking effect on January 1, 1994, the rate was set at 26%. Since then the rate has been lowered to 22% and the corporate profits tax abolished, except for distributed dividends that are taxed as personal income at the flat rate.

Estonia held its most recent national election on March 4, 2007. The Reform Party of Prime Minister Andrus Ansip secured the most votes with 27.6% of the electorate, many of whom voted on line in Estonia’s highly-wired society. The parties holding coalition talks include the Reform Party, the Pro Patria Party of former Prime Minister Mart Laar, the Green Party, and the Social Democratic Party.

The Baltic News Service reported on March 13, 2007, that the four Estonian parties agreed on tax reform that would reduce the flat-tax rate to 18% and raise the monthly tax-free allowance to 3,000 kroons ($254) by 2011.

The leading Reform Party does not plan to stand still at 18%. On page 35, in an article published in the Finnish business magazine Talouselämä on March 9, 2007, Secretary-General Kristen Michal of the Reform Party stated that it was Prime Minister Ansip’s goal to lift Estonia to one of the five wealthiest countries in Europe. How was this to be done? The first item in his list of economic measures was to reduce the flat-tax rate to a much lower 12%.

Estonia’s budget has been in surplus in each of the last five years. Revenues are growing at double-digit rates. At a conference held in Tallinn on August 28, 2006, sponsored by the Finnish Business and Policy Forum EVA, Prime Minister Ansip was asked if he would like to add extra brackets to the country’s tax system to make it more progressive like Finland. Ansip replied that his government’s revenues had increased 22% and 15% respectively in the past two years, which made it difficult for him to complain about Estonia’s flat tax. Indeed, his biggest problem was how to spend public money wisely, without waste.