Estonia’s famous flat tax system comes under pressure

In 1994, Estonia became the first country in Europe to introduce a so-called "flat tax", replacing three tax rates on personal income, and another on corporate profits, with one uniform rate. 20 years later, this simple system is under pressure – and not anymore from only the Left. The opposition centre-right party IRL has proposed cutting tax for monthly salaries that are under 500 euros.

The current tax-free minimum is set at 144 euros in Estonia. According to plans proposed by IRL, the tax reform would affect 300,000 people and those earning fewer than 500 euros would be 69 euros better off per month.

However, the three other political parties in the Estonian Parliament accuse IRL of false pretence, ahead of the next year’s parliament elections.

The left wing parties, Centre Party and Social Democrats, claim that IRL is actually proposing to introduce progressive tax system – something that these parties have been advocating for years.

"Effectively, the IRL has put forward an idea for progressive tax system - but instead of increasing the taxes on higher income, the tax-free minimum would be raised instead," Rannar Vassiljev, Social Democrat MP, said to Eesti Päevaleht.

The Reform Party, once IRL’s partner in the centre-right coalition, rejects IRL’s calculation for the cost of potential tax reform – 120 million euros.

"The cost would be approximately 250 million euros, not 120 million," Jürgen Ligi, Estonian Finance Minister from the governing Reform Party, said in an interview with Eesti Päevaleht.

"For comparison, for 250 million euros you can pay the salaries of our teachers or cover most of the defence budget," Ligi added.

But the IRL´s idea also found support.

"The proposition is absolutely fair," Indrek Neivelt, a prominent Estonian banker who recently proposed to introduce a nationwide minimum wage of 1,000 EUR per month, said.

"It should have been done five to ten years ago, but better late than never."

Ironically, it was IRL´s former chairman Mart Laar who introduced the current flat tax system in Estonia, during his tenure as the prime minister in 1994. The simple tax system has also found praise from the free market proponents around the world.