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OECD: "Estonia’s tax system can be enhanced" - Estonia has earned a strong reputation for fiscal discipline, says OECD’s first Economic Survey on Estonia, since the country became a member of the Organisation for Economic Co-operation and Development, December 9th last year.

- However, with the benefit of hindsight, it is clear that the structural fiscal position deteriorated during the boom preceding the crisis, as cyclical revenues were used to finance an increase in structural public expenditure.

- Estonia’s tax system can be enhanced to support fiscal consolidation and economic growth, says the OECD Economic Survey.

- Estonia’s tax system is simple and transparent. The efficiency of the tax structure can be further improved by reducing labour taxes and compensating the revenue shortfall with less distorting taxes:

Labor taxes

- It is unlikely that the private sector by itself will be able to generate enough jobs in the short term to absorb the large pool of unemployed. Therefore, at least some temporary and well targeted wage subsidies should be maintained. There has already been some reduction in the labour tax wedge for low paid and disadvantaged groups.

- However, the labour tax wedge in Estonia is still relatively high and there is additional scope to reduce the tax burden on labour in general and in particular for low wage workers. Consideration should be given to cutting social security or unemployment contribution rates.

VAT

- The VAT system is relatively efficient, but compliance suffered during the recession. VAT efficiency can be further improved by strengthening administration, phasing out exemptions and by applying the standard rate to all goods and services for which the reduced rate is still in place.

- There is also scope for increasing the standard rate, which is below the rates prevailing in Nordic neighbors in particular.

Property tax

- Property tax receipts are lower than in all OECD member countries. Currently only land, and not buildings are taxed; land valuations are infrequent and are now out of line with market prices.

- The government should increase the share of property taxes by bringing land valuations in line with market rates. Consideration should also be given to introducing a property tax on buildings.

Environmental taxes

- Well designed environmental taxes both raise revenue and address environmental challenges. The share of environmental taxes in GDP has increased over the recent years and is above the OECD average, but below the average for the EU. Estonia does not impose a tax on the use of motor vehicles (except for heavy vehicles), nor on their registration. This is unusual and not in line with the environmental objectives, as the government itself recognizes in its Ecological Reform Programme.

- The government should continue with ecological tax reform, pursuing both environmental and revenue-raising objectives. It should consider introducing a tax on the use and possibly also on the registration of motor vehicles, differentiated by the air pollution and energy consumption characteristics.

More on the OECD Economic Survey on Estonia

A report on OECD’s Economic Survey on Estonia will be published in the June 2011 issue of the Chamber’s magazine focus, also available online at www.swedishchamber.ee.