Raul Aron: The main point is forgotten in tax debates
Raul Aron argues that Estonia's tax debates focus too much on tax hikes rather than economic competitiveness. He points out that rapidly growing state expenditures and tax burden have eroded business confidence and slowed growth.
Raul Aron, an author of a University of Tartu study, calls for a re-evaluation of the goal of tax debates in Estonia. He emphasizes that the primary objective should not be to reach the average European tax burden, but to ensure a maximally competitive tax system that fosters economic growth and generates additional state revenue.
According to Aron, Estonia's state expenditures have grown significantly faster than the economy in recent years. The government has taken loans and raised taxes, which in turn fueled inflation and reduced confidence among entrepreneurs and consumers. Estonia's tax burden has increased by 3.5 percentage points compared to the pre-war period, reaching 37% of GDP last year — the fastest increase in the European Union. An additional €1.5 billion was withdrawn from the economy compared to three to four years ago, which amounts to more than €1,000 per resident.
Although Estonia's tax burden remains below the EU average, it is already higher than the OECD average and higher than in other Eastern European EU countries, except Poland and Slovenia. This is crucial because Estonia competes in production and services directly with these countries, which have lower wages and a larger labor supply.
Aron notes that the government's explanation of financial problems – rising defense spending – is incomplete. While defense spending has increased by about €2 billion since the war began, the national debt grew by €3 billion over the same period. Tax revenues have increased by more than €1 billion annually over the past three years, exceeding the growth in the defense budget. Total state budget expenditures have risen by nearly a third over the last four years, while the economy grew only 15%.
According to Aron, policymakers should reduce other state expenditures rather than merely raising taxes. He recalls that last year's decisions not to raise income tax for individuals and companies, along with several legislative changes easing business conditions, helped revive the economy and create a slightly more optimistic atmosphere. However, the situation in Ukraine and the Strait of Hormuz remains tense, and destroying fragile economic trust with new tax hikes will certainly not improve living standards in Estonia.
