Options to Strengthen the Tax System in Estonia: Republic of Estonia

Estonia’s tax mix has been traditionally reliant on consumption taxes—especially VAT—whereas income taxes are a relatively small share of revenue. Recent and expected changes will further shift the tax burden in this direction. Consumption taxes are less distortive than income taxes, but higher spending needs may require a broader revenue base, reaching untapped potential. This Selected Issues Paper discusses alternative broad-based, growth-friendly options on how to strengthen income, VAT, as well as property taxes. Options to strengthen revenues include (i) addressing the personal income tax revenue (PIT) shortfall from the introduction of a uniform allowance by considering revenue neutral options, i.e., calibrate the basic allowance, the tax rates, and/or the tax brackets subject to the intended degree of progressivity; (ii) improving the capacity of the tax administration to analyze income statements and exploring alternative corporate income tax (CIT) regimes that would preserve the competitiveness of the current system while reaching a broader tax base; (iii) streamlining remaining VAT exemptions to broaden the tax base; and (iv) limiting exemptions on residential land and taking steps to introduce a modern tax on immovable property by developing a fiscal cadaster to ensure fair taxation based on value and use of property.