Estonia's flat-rate income tax takes centre stage at economic seminar in Tallinn

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Estonia’s system of a flat income tax rate became a key topic of debate in the Estonian capital Tallinn on Monday when key economic leaders from Finland pondered how Finland might continue to prosper.
      The event, called he Baltic Twins - What can Finland learn from Estonia? was organised by the Finnish Business and Policy Forum EVA. It brought about 100 Finnish participants to the Art Museum of Estonia, KUMU, along with a smaller group of Estonian politicians and international experts.
      The focus of discussion at the event proved to be Estonia’s flat-rate income tax system, which is the key difference in the economic policies of the two countries.
      For more than ten years, Estonia has levied the same income tax rate for all of its citizens, regardless of what they earn. In the view of Estonia’s Prime Minister Andrus Ansip and many others, the flat income tax has been the key to Estonia’s econmomic success and strong growth.
      The system is in sharp contrast with the progressive tax rate system that prevails in Finland, in which the tax percentage rises with the level of income.
     
Finnish Prime Minister Matti Vanhanen said at the outset that Finland has no intention of changing the system. "I see no possibility to switch over to a flat tax in the near future", Vanhanen said, repeating a view he has expressed on previous occasions.
      EVA has previously provoked discussion on the flat tax question.
      The debate boils down to different views on the roles of the state. Finland is a Nordic welfare state, with high taxation of income and a fairly large public sector. Estonia, meanwhile, has a more liberal economy, with a flat tax, and a smaller state role in services.
      One of the participants, business executive Joakim Helenius, said that the two models had both worked very well. However, he asked what would happen to the Finnish model in a global economy, where there is competition over those with skills and knowledge.
     
There are supporters of the Estonian model in Finland, and of the Finnish model in Estonia.
      On the practical level, there is debate on issues such as whether or not differences in income are a problem, and if education needs to be free. Estonia, with its low tax rate, does not invest nearly as much in education as Finland does.
      As for the question posed in the title of the seminar, there was no clear answer to what Finland could learn from Estonia, because no simple answer exists.
      There are also certain cultural and ideological differences in play.
      "I believe that the models will come closer", Vanhanen said, before leaving for talks with Prime Minister Ansip over a gas pipeline and the EU working hour directive.
      The concluding note of the seminar came from the opening statement by EVA Vice Chairman Georg Ehrnrooth, who said that Estonia offers Finland a good point of comparison. Professor Bengt Holmström summed things up by saying that Estonia forces Finland to reform and to renew itself.


Links:
  EVA news August 28th, 2006 The Baltic Twins - What can Finland learn from Estonia?

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