Estonia’s recent political landscape has been marked by growing discontent and increasing frustration with the government’s inability to address pressing economic and social issues. Once lauded for its rapid post-Soviet transformation, the country now seems mired in a stagnant, ideologically driven political system disconnected from the realities faced by its citizens. As the economy shifts and the global landscape changes, Estonia finds itself at a crossroads, struggling to reconcile outdated economic policies with the needs of its residents.
This article appeared in Estonian in Maaleht on 4 January 2024.
In terms of domestic politics, Kaja Kallas’ governments likely have been the least effective in Estonia’s recent history. They have busied themselves with ideology and failed to connect their policies with Estonia’s political and economic reality.
The Riigikogu currently swings back and forth between deadlock and rubber-stamping coalition policy. State financial policy has become almost inactionable. Tax policy is a shambles. And Reform isn’t the only stagnant party—its junior partners are in trouble as well. Estonia 200 needed no more than six months to lose virtually all of its support and credibility, and the Social Democrats seem to be there only because otherwise there would be no social policy left.
To a foreigner like me, even after 17 years here, part of Estonia’s fascination is how well it came out of the 90s. The speed at which things were decided, and at which things changed, is almost incredible. But by now I really wonder, where has it all gone? Where is the initiative, the creativity, the awareness of what is happening?
And where is the common sense?
The Estonian state is constantly short of cash for a single reason: it doesn’t ask its companies to contribute. Imagine just two small changes to the current system: first, instead of paying you a net salary, your employer pays you a gross salary and the associated social tax directly. And second, you then pay social and income tax to the state yourself.
You get the same money. The state gets the same money. The only difference is that at this point, the companies haven’t paid any tax.
Same with the corporate income tax on dividends. Two small changes: first, instead of paying the corporate income tax itself, your company pays you the net dividend plus the tax amount. And then you pay the same percentage to the state.
Again: you get the same money. The state gets the same money. The only thing that has changed is that companies haven’t paid any income tax.
Forget the “tax debate” as you’ve seen it in Estonia so far. You, as a taxpayer, need to finally understand that in Estonia, businesses don’t pay their fair share. They pay tax for their employees, and a tax on dividends that otherwise the recipient would have to pay anyway.
During the Corona debate I remember seeing ex Swedbank CEO Robert Kitt on ETV’s Esimene stuudio. He said that no economy could work based on permanent subsidies. In his end of the year interview with ERR on 22 December, former prime minister and EU commissioner Siim Kallas said something similar. It actually made me laugh, because what is Estonia’s current tax system if not a single, gigantic, never-ending tax break, and a passive subsidy for its entire economy?
Think about it. Who pays for the education of the specialists the companies need? The state. Who pays for the infrastructure they need to transport their goods? The state. Who pays for the justice system that protects them, and the world-leading efficiency of administration they enjoy? The state.
And who pays for the state?
You do. The taxpayers.
I agree with Siim Kallas on a lot. I agree that EU subsidies have gone too far. I agree that a state’s budget should be balanced. And I agree with him that the constant whining drains us.
Now, I’m no communist, no socialist, no social democrat even. I own a company myself and understand perfectly well how important a good economic climate is for business.
But the state we currently live in—a state very much defined by Reform Party politics—isn’t that.
The Estonian understanding of economic liberalism and a free market economy is that of Reagan and Thatcher. When Estonia regained its independence in 1991, the common understanding of liberalism was, in essence, the trickle-down theory.
For a time, Estonia was the only place in the world that ever really made it work.
It built a brilliant system that, thanks to low wages, attracted a lot of foreign investment. The deal was that companies would come and invest, pay little to no tax on anything but labour, and instead pay the Estonian people, who could build lives for themselves.
This worked for a time because wages were low. Thanks to the boom Estonia experienced in the early 2000s, it continued to work right up to the 2007-2008 financial crisis. And even after that, the system continued to work, still propped up by the fact that plenty of businesses were foreign-owned, and because, as Siim Kallas points out in his interview, the EU pumped hundreds of millions into the Estonian economy through its subsidies and cohesion funds.
But things have changed. The low-wage economy is gone. There is no global boom. The EU has scaled back its payments. There is no free money anymore. What we are experiencing today is the system without new money being pumped into it.
That this style of economics has a direct impact on tax revenue is becoming increasingly obvious now. As a result, there isn’t enough money for infrastructure investments—and balancing the budget becomes a race to the bottom.
In Estonia’s case, this also drives inflation. If the only reliable income of the state is VAT, rising prices are the only way for the state to access an increasing income base. This means the government can’t introduce price controls, because it would lose too much income.
No amount of fine tuning can fix a system with a built-in flaw like that.
When the budget debate started a couple of months ago, I wondered what sum I might get to if I applied the lowest corporate tax rate I could find in my own country—Switzerland, a tax haven!—to the reported profits of Estonian companies, for example in 2021.
The lowest rate I found was 11.35%. I applied it to a total of 7.94 billion in reported profits in 2021. The result: 901.11 million euros. If Estonia taxed its companies at tax paradise levels, it would have almost a billion a year more!
And Estonia wouldn’t be a high-tax country at that rate. On the contrary, if it set that rate tomorrow, it would improve its position in the OECD’s corporate income tax ranking by no fewer than nine places, leaping straight into the top 10.
A modern state based on a Western liberal model costs money. Especially if it is supposed to be modern and comfortable for more than the top 20% of the population. Estonia could have that kind of state. But its economic dogma, perpetuated by Reform, Isamaa, and Estonia 200 keeps feeding the top 20%—and lets the rest pay for it all.
Again: I’m not a socialist. The way out I suggest was developed by Germany’s CDU, a conservative and capitalist party, in the 1960s. Somewhat confusingly named the “social market economy”, it focuses on increased social equality and security—not as an ideological imperative, but as a way to guarantee a powerful domestic consumer base.
This idea became part of Germany’s Wirtschaftswunder. It boosted domestic consumption without making leasing and payday loans universally necessary, and fostered economic development outside the top income groups. It is precisely this kind of potential that Estonia is lacking today, among other things because of Reform’s economic policies of running a balanced budget while granting the entire economy a permanent passive subsidy in the form of a de facto zero corporate income tax.
So what will 2024 bring? Since Kaja Kallas’ policies can’t succeed, she will go to Brussels as Kadri Simson’s successor. She might never get a chance at this kind of job again, this is her best shot.
Kristen Michal—or someone he controls—will become prime minister, and domestically will do a better job. Some of the louder Reform personalities will be interested in the 10,000-euro income and 10,000-euro expense accounts of an MEP, so the party will do what it can to win the European election. They’ll try to keep the “tax debate” as quiet as possible.
Isamaa’s good results will come back down as soon as they are forced to talk about solutions. They likely can’t offer anything else than a kind of Res Publica 2.0, taking their platform back to the sort of neo-conservative and technocratic ideology they purported in the early 2000s—which barely differs from Reform’s current dogmas.
Since nobody wants to talk about taxing companies’ profits, and no Gold-Ass will suddenly appear to leave a fresh pile on Mart Võrklaev’s desk, the tax and budget debates will go absolutely nowhere.
Inflation will continue, both because a Reform-run government will refuse to introduce price controlling measures, and because at soon 22%, the state depends on VAT like a junkie on his next hit.
Although there is one change one might hope for. Estonians are both intelligent and pragmatic, and I can only wish that this makes it through to the ballot box at the next elections. If the system is stuck beyond rescue, only the voters can change things.
You, as a voter, have the right to demand a better-working government. You have the right to speak your mind when you see that something isn’t working. And you don’t need to wait for an accredited expert to tell you that you have a point. The state is for the people, not the people for the state, and it’s time Estonian politics reflected that.
