Estonia, Financial Services, Taxation

The Foreign Investors Council in Estonia finds these proposals very alarming. Going that direction would destroy the "light" bureaucracy and "light" taxes that Estonia has nourished for itself over the last 17 years.

Estonia became the brave example of a light model of the Government for the countries and policy makers worldwide, the expert pointed out.

The Council called on the inhabitants of Estonia to appreciate and protect the important foundation of the Estonian Model, although times are not the easy one now.

From the very beginning the successful inflow of foreign investments, the success was rooted in the Estonian model of light government that is still very much valid today. It might by itself not be a sufficient answer to solve all economic problems but it is a precondition to it.

Martin Breuer stated that the Estonian Model is one of the few effective weapons that Estonia, being a small country, could employ.

"Politicians that call for a raise in tax play a dangerous game against the competitive position of the Estonian economy. The total tax burden on labor in Estonia is among the highest of developing economies in Europe already now. Many people forget that income tax on salaries is only a minor part of the total taxation on each kroon that was paid as a salary. In fact, the employer today pays additional 33.3% of taxes on top of the gross salary. This means that on each 1000 kroons, that are received gross, 549 kroons go to government at this moment", the expert said.

Investors in new jobs look at the total tax burden on income. Therefore Breuer opposes any increase in the income or social tax rates. He is convinced that if Estonia decides to raise the taxes, it might indeed be able to fool itself in the short term, but that happy party will only last for a year or two before the country will wake up with a major headache. Most foreign investors will have turned away by then and the uniqueness of the Estonian model will have lost all attraction.

The expert supported the goal to join the euro zone as soon as possible, which places an additional pressure to get the state budget deficit under control. The state has to (and also can) further reduce its expenditures. The current situation or austerity is not comfortable for Estonian citizens, but it is necessary, he said.

At the same time, the Council recommended the government to start introduction of effective measures against the widespread and increasing practice of tax evasion and salary paid under the table. This should have a higher priority over any proposals to increase taxes. If all companies and citizens pay their taxes fairly, the deficit problem would become a smaller one.

As to the nearest future, the expert forecasts entrepreneurs and citizens both to face a couple of tough years, and suggests at the moment not to throw away the values that have made Estonia so unique and special in the eyes of foreigners.