Report: The role of labour taxes in financing public spending will decrease in the future

“The tax burden in Estonia is one of the lowest in the European Union and tax derogations form 1.1% of the gross domestic product,” expert of the Foresight Centre Magnus Piirits said. “The state budget of 2021 includes tax incentives and exemptions in the amount of 301.9 million euro. In terms of percentage of GDP, this puts Estonia among the three member states of the European Union with the least tax incentives and derogations. At the same time, having few exceptions ensures the simplicity and transparency of the Estonian tax system.”

The largest tax expenditures or tax incentives and exemptions in the state budget of Estonia are lower tax rate on the regularly distributed profit of companies (79 million euro), lower value added tax rate on medicines and medical equipment (70 million euro), more favourable excise duty rate on diesel fuel for specific purposes (31 million euro) and lower value added tax rate on accommodation services (31 million euro).

Piirits explained that in comparison to the European Union average, consumption taxes played a bigger role, labour taxes had a similar role, and capital and property taxes had a considerably smaller role in Estonia. “During the last two decades, the structure of tax revenues has stayed very stable in the European Union. However, in Estonia we have moved from taxation of labour towards greater taxation of consumption,” Piirits said. “Estonia stands out by effective collection of VAT. Compared to other countries, the Tax and Customs Board is capable of collecting a major part of potential tax obligations and the losses incurred through evasion, tax fraud and exemptions are small.”

Piirits underlies that digital development, ageing of the Estonian population and changing of work formats will reduce the role of labour taxes in financing public spending even more in the future. “If the expenses remain on the same level or increase, these changes will inevitably make us look for additional financing sources. For example, taxes on capital are three times lower in Estonia than the European Union average,” Piirits said.

Taxes on capital include, for example, property taxes (land tax in Estonia), income tax of companies and taxes on income from dividends and rent.

The brief report “Tax Trends in Estonia and in the European Union” can be downloaded HERE.

In 2021, the research projects of the Foresight Centre include “A future-proof tax structure”, which seeks solutions for covering the costs in an ageing society, and the opportunities to change the tax system over the next 15 years.

The Foresight Centre is an advisory board at the Chancellery of the Riigikogu that analyses long-term developments in society and economy. The Centre conducts research projects to analyse the long-term developments in the Estonian society, and to identify new trends and development directions.