The article was published on 25 May 2026 by ERR.
Tax policy works best when people understand what is being taxed, why it is being taxed and where the money goes. When that connection is lost, trust in the system can quickly disappear as well, writes Tõnu Kolts.
Although the major political debates ahead of the 2027 parliamentary elections are likely to begin only after the presidential election in the autumn, it is already possible to discuss, in non-partisan terms, what Estonia’s tax policy should look like in the years ahead.
The reason is simple. Once election campaigns properly get under way, the tax debate often turns into a contest of slogans, confrontation and quick promises. A substantive discussion about what kind of tax system would help Estonia deal more effectively with its actual long-term challenges tends to fade into the background. This is precisely why it would be worth agreeing, before the next election cycle begins, on at least a few principles to guide tax policy.
The most recent parliamentary elections demonstrated quite clearly that individual tax promises should not be viewed in isolation. A promise to raise the tax-free allowance may ultimately be accompanied by higher VAT and income tax. A slogan about fairer taxation may simply lead to a higher overall tax burden, while taxes described as temporary often have a tendency to remain in place.
Recent years have shown quite clearly why Estonia’s tax debate so often gravitates towards slogans rather than the bigger picture.
Reform Party went into the 2023 elections promising to raise the tax-free allowance to €700 for everyone and to avoid increasing the overall tax burden. In reality, VAT, income tax and several excise duties increased during the same period. A motor vehicle tax was introduced, alongside discussions about various temporary taxes.
Estonia 200 spoke of a smart and competitive state, but likewise participated in implementing broad-based tax increases. The Social Democrats were at least more open about the need for a higher tax burden and greater redistribution even before the election, although many of their most ambitious tax promises were not realised either, at least while they remained in government.
This does not necessarily mean that all of those decisions were wrong. Rather, it demonstrates why pre-election tax slogans should be treated with caution. Raising the tax-free allowance alone does not describe an entire tax policy. Nor does a single slogan about fairer or lower taxation describe the system as a whole. A person’s actual tax burden is determined by the combined effect of the entire system.
The OECD and a number of European countries are paying increasing attention to more targeted taxation, consumption taxes, pricing environmental impacts and digital control systems. At the same time, efforts are being made, where possible, to avoid excessive harm to investment, entrepreneurship and higher-value-added jobs.
A country’s competitive advantage is not only a low tax rate
Stability, simplicity and reliability are becoming increasingly important. Estonia should be particularly careful in this respect. We cannot compete with Germany or France in terms of market size. Our advantage has been a simple and understandable tax system, efficient administration and a predictable business environment. If that disappears, Estonia will lose one of the few genuine competitive advantages it has in the international arena.
The motor vehicle tax is a good example of how poor tax design can damage both the economy and public trust. The purpose of the tax remained unclear to the public. Was it intended as a climate tax, a road maintenance tax or simply a way of creating a new source of revenue? At the same time, the car market reacted sharply, and the decline in new car purchases also resulted in substantially lower VAT revenue from new car sales, quite apart from the significant shortfall in the tax revenue itself.
The problem was that the basis for the tax was not entirely logical. If the aim is to reduce environmental impact, a significant part of that impact is already taxed through fuel, because using a vehicle that consumes more fuel and produces more emissions automatically results in a higher tax burden through excise duties and the taxation of energy products. Linking the motor vehicle tax additionally to a vehicle’s climate-related indicators creates an impression of double taxation.
If, however, the objective is road maintenance and infrastructure upkeep, it would be more logical to link taxation more closely to a vehicle’s actual impact on the roads. Roads are primarily worn down by heavier vehicles, while studded tyres also have a significant impact by damaging road surfaces and contributing to fine particulate pollution in spring, which has a direct effect on human health. In that case, the logic of taxation should reflect precisely those impacts.
Estonia could finally move towards a more substantive debate
Tax policy works best when people understand what is being taxed, why it is being taxed and where the money goes. When that connection is lost, trust in the system can quickly disappear as well.
The same applies to the debate on progressive income tax. People on higher incomes already contribute more because, under a flat tax rate, a person earning a higher salary pays more income tax in absolute terms. The discussion should instead focus on what kind of tax system would help Estonia create more wealth in the long term, attract investment and reduce divisions within society. Tax debate becomes dangerous when it is turned into a moral conflict between different groups in society.
Taxes should not be an end in themselves, nor should they become the central ideological weapon of an election campaign. Taxes can only support solutions to Estonia’s actual problems, and those problems have not changed. We face a low birth rate, an ageing population, rising defence expenditure and the need to increase productivity and attract investment. Taxes can only support sound economic and social policy; poor tax policy, however, can make addressing these challenges considerably more difficult and more expensive.
