The Praxis Center for Policy Research has conducted its own analysis of election pledges, finding that parties all realize the gap between taxation of labor and capital and that no matter who wins, social tax are bound to drop from the current 33 percent level. It also said that there is consensus on raising the tax-free minimum.
Estonian tax burden is fairly low – 32.5 percent of GDP. But half of tax revenue comes from personal income tax and the social tax. Taxes on capital are lower than anywhere else in Europe, Praxis noted.
“That means workforce is a much costlier resource than capital,” said Miko Kupts, an analyst with Praxis, who added that the situation was favourable for all companies whose main input is machinery but unfavorable for those that employ large workforces.
However, another Praxis analyst, Magnus Piirits, questioned whether lowering the social tax would have real effects, as lowering social tax by one percent would mean 70 million euros less in state treasury coffers, but only result in a gain of 1,000 euros for a company with seven employees. “That 1-2 percentage drop in the social tax rate is not the thing that will create motivation or means for companies to create significant jobs,” he said. A ten-percent drop would be required to show up in terms of job creation, he added.
Where can the shortfall for the state budget be compensated? “The tax burden on consumers (the country has a 20 percent VAT on most goods) is one of the highest,” said Kupts. “It would be quite unreasonable to increase them further. Yet capital has a very low tax burden and the Social Democrats, Center and the Free Party pledge to go the route of increasing it, while Reform and IRl are against it.” He identified that issue as one of the main dividing lines in the March 1 elections.