Raul Aron: Tax debate overlooks crucial competitiveness issue
Raul Aron argues that Estonia's tax debate should focus on competitiveness rather than raising taxes to the EU average, noting that the tax burden has increased the fastest in the EU and government spending has outpaced economic growth.
Economist Raul Aron writes that the goal of Estonia's tax debate should not be to raise taxes to the European average, but to ensure a competitive tax system that can finance public services effectively. He points out that in recent years, state spending has grown significantly faster than the economy, the government has taken on debt and raised taxes, accelerating inflation, while public finances remain unbalanced.
Since the start of the war in Ukraine, Estonia's tax burden has increased by 3.5 percentage points to 37% of GDP, the fastest growth in the EU. This meant that last year the economy was drained of €1.5 billion more than three or four years ago — over €1,000 per resident. Although still below the EU average, Estonia's tax burden is higher than the average for developed OECD countries and most other Eastern European EU members (except Poland and Slovenia).
Defense spending has increased by about €2 billion since the war began, but government debt has grown by €3 billion over the same period, while tax revenues have been more than €1 billion higher annually for the past three years. Aron argues that politicians have failed to cut other expenditures sufficiently; state budget spending has grown by nearly one-third over four years, while the economy has grown only 15%.
Frequent tax changes have reduced consumer confidence and weakened entrepreneurs' trust in Estonia's business environment, leading to postponed investments and sluggish growth. Last year's government decisions to abandon income-tax increases for individuals and companies, along with legislative changes easing business concerns and revived foreign demand, have helped the economy recover. However, Aron warns that additional tax hikes could undermine this fragile confidence and harm Estonia's well-being.
