Despite the wide range of models that have been developed, they are often found to be too costly or complex for frequent use by policy analysts. However, micro-simulation models have proven to be an exception. EUROMOD micro-simulation model was used to study the tax-benefit system in Estonia in 2005. It was done in three main parts: direct taxes, indirect taxes and benefits. Additionally, the study presents some statistics and history of Estonian tax system.
Tax system in Estonia has been relatively innovative already since the re-independence. It is a combination of six state taxes: personal and corporate income tax, social tax, VAT, excise tax, land tax. There were two important changes to social tax revenues and corporate income tax in early 2000s. Joining the EU, however, did not influence the system significantly, as all necessary reforms had been implemented before.
In Estonia, taxes amount to 82% of the government general budget revenue. Approximately 1/3 of this are indirect taxes and the rest direct taxes. Indirect taxes are mostly a combination of social tax and income tax. When applying micro-simulation model, it is important to note that the income tax is proportional and accompanies several deductions and reliefs. Social tax supports the state pension- and health care system and is paid on various types of income. VAT is the most important indirect tax, constituting a third of all indirect tax revenues. Additionally, there are excise taxes and local taxes.
The social insurance system in Estonia is based on several benefits. Almost of them are granted as various state pension, mostly old-age pension. But health insurance benefits are also granted from social taxes revenues. Other benefits are family and child benefits, disability, work incapacity and unemployment benefits. There are some taxes that cannot be simulated in the EUROMOD micro-simulation model. Mainly due to lack of data.