Margus Tsahkna: Time caught up with the ‘tax hump’ in Estonia

The “tax hump” in Estonia is a throwback, Incoming Minister of Foreign Affairs Margus Tsahkna (Eesti 200) says. Tsahkna says that while the phenomenon, also known as bracket-creep, arose during his time in office when he was leader of Isamaa (then known as IRL), it is now outdated, hence the need for the tax reforms being put in place by the new coalition.

ETV politics head-to-head “Esimene stuudio” presenter Mirko Ojakivi noted that the tax rate which is now seeing bracket creep – when rising wages push more and more people into the next tax band – was set in place under Jüri Ratas’ (Center) premiership, in late 2016 when Isamaa/IRL entered office with SDE.

Tsahkna, appearing on Thursday’s “Esimene stuudio”, was chief negotiator for Eesti 200 in the coalition talks with Reform and the Social Democrats (SDE), and said in response that: “At that time, in 2016, when we changed the government and we changed the tax policy, this was the best solution at the time.”

“After all, this was when we were dealing with wage poverty, but also from a global point of view, we had to choose between a strictly progressive income tax rate, which the Center Party has always pledged, or the tax reform of the then-IRL, [former prime minister] Juhan Parts side. All in all, at that time the tax hump did work; he provided people with some relief.”

The problem arose as it was left un-indexed, that is, it remained tied to the €1,200-per-month wage level. Nowadays, it has simply been overtaken by the times, and there was no other solution that to carry out a tax reform,” Tsahkna, a former defense minister and now incoming foreign minister, went on.

According to Tsahkna, the state of the national finances is far worse than was the case in the 2008-2009 economic crisis, while now the time has come for paying off the bill incurred by the party, in the festive sense.

He said:  “The day has now come when the bill must be settled for a party where champagne, cognac and five desserts were ordered, yet it is not the political parties who have to foot the bill. The people do.”

“The good news is that, in the long term, the state will be getting a real revenue base, with which it will be possible to really start providing better quality services,” Tsahkna added.

The minister-to-be forecast that the debates ahead of the next Riigikogu elections will already focus more on taxes, and political parties will very likely pledge tax cuts. At the same time, Tsahkna stressed that it is not viable to guarantee the current level of services provided, if continuing with a smaller tax base.

The current public consternation about the announced tax hikes – 2 percentage points added to income tax and to VAT, plus likely excise duty hikes and an all-new car tax – arises from the fact that these came as a shock, Tsahkna added.

“Ahead of the elections, no one was talking about how bad the situation had become. Before the elections, the political parties still talking popular themes,” he said.

Now, the people of Estonia must be told honestly why these tax increases are required, Tsahkna said.

Should SDE leave the coalition for any reason – Eesti 200 and Reform are by their public pronouncements on the same page on most aspects of taxation, but SDE have favored a more progressive system and a raised minimum wage – a Reform-Eesti 200 bipartite alliance would still have a majority, 51 out of 101 seats, at the Riigikogu, Tsahkna noted.

There was a precedent for SDE leaving a coalition, he said, referring to 2009 when that party left the coalition headed by Andrus Ansip (Reform), over disagreements on how to respond to the economic crash.

“They have the most difficult time in this coalition, in terms of worldview,” Tsahkna said.

Nonetheless, Tsahkna expressed a hope that the Reform-Eesti 200-SDE coalition would last the whole four years, until the 2027 Riigikogu election.

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