Books on Estonia
Update No: 299 - (28/11/05)
New Estonian Cabinet begins work
Estonia acquired a new government this autumn. Addressing the new Cabinet,
President Arnold Ruutel said he was pleased that the coalition agreement
accentuated the Estonian people first and foremost.
"When I met with Mr. Ansip a dozen days ago, we agreed about valuing the
Estonian people as an urgent and complex task," the president was quoted as
saying by the presidential press service. "Now you have set as your
programmatic objective to be more caring to children and the elderly, encourage
the enterprising and support those who need help."
The government unites a right-wing force, the Reform Party, with two centre-left
factions, the Centre Party and the People's Union. Despite criticism that their
agreement represents an unlikely eventuality, the parties contain many
experienced politicians who have worked with each other in past coalitions, both
national and municipal. Still, overcoming the parties' varying platforms may
prove to be Ansip's biggest challenge.
Parliament confirmed the government in a vote. Fifty-three MPs supported the
Cabinet, while 40 voted against. The legislature has 101 seats.
Before the vote, Ansip told MPs, "I'm standing here before you as a
candidate head of government who sees his task in restoring working peace in the
executive branch for the state and the nation to be able to move forward in
their day-to-day work and development without a hitch."
According to the Reformist leader, his goal is to carry on valuable initiatives
of the previous government and come up with new initiatives whose common
denominator is a compassionate, objective social sphere.
Ansip dismissed doubts about the new governing alliance's compatibility and
ability to cooperate. As he sees it, liberalism, which his Reform Party
embodies, and the social aspect are mutually exclusive only for a limited
This was a barb against the trade unionists, demanding a higher minimum wage and
Debate ensues over minimum wage
Although Estonia has been doing very well, there are still plenty of poor
people who have not benefited from the economic miracle since 1991-2.
TALL, the confederation of Estonian trade unions, said it was not ready to
accept an offer to raise the monthly minimum wage to 2,900 kroons (185 euros)
next year. The central organization of employers proposed the increase. The
confederation, however, insists on a national minimum wage of 3,300 kroons.
Talks began on Oct. 18 to negotiate the 2006 minimum wage. The aim is to achieve
a binding agreement by the beginning of December, a confederation representative
In regard to labour-market policies, vocational education and a social-tax
increase, unions and employers have common interests and fairly similar views.
The two sides plan to cooperate on these issues and then turn to the government.
Both unions and employers consider it essential to raise the minimum social-tax
rate, bring the unemployed back to the labour market and put more emphasis on
Cabinet rejects two budget proposals
The government has rejected two drafts for the 2006 state budget put forward
by Finance Minister Aivar Soerd, since they both called for a deficit.
Both of the drafts handed to the Cabinet showed revenues at 57.1 billion kroons
(3.65 billion euros), with one of them setting out expenditures at 57.2 billion
kroons and the other at 58.6 billion kroons. The shortfall was expanded further
by a gap in the budgets of the medical insurance fund and local government
budgets in the amount of nearly 250 million kroons.
Government spokesperson Inga Jagomagi said the state budget has to be in
balance. "The Cabinet didn't discuss either option, having considered them
unprepared," Jagomagi was quoted as saying by the daily Postimees. "A
new blueprint of the budget will be submitted to the government that will
contain the budget's potential breakdown," she said.
In the more conservative blueprint, expenditures arising from the three-party
coalition agreement amounted to 2.1 billion kroons, while in the more lavish
draft they amounted to 3.5 billion kroons. Officials at the Finance Ministry
refused to say what expenditures provided for by the coalition agreement were to
be put off under the more conservative plan.
Estonia's IT development slowing
The rate of IT development in Estonia has slowed significantly due to poor
coordination, State Auditor Mihkel Oviir avers.
"Government legislation does not stipulate any ministerial responsibility
for the IT sphere's comprehensive development," Oviir said in a
Parliamentary address, reports The Baltic Times
Oviir added that the state lacked an overview of IT expenses. What's more, few
can be certain that money allocated to this sphere is being efficiently used.
"This is partly due to a disservice of previous governments. They amended
the state-budget act so that it's no longer possible to get an overview of
public sector IT expenses via the state treasury since 2003. The previous
Parliament included IT costs in the ministries' household expenses. Until 2002,
however, information technology expenses were viewed under a separate article in
the state budget," Oviir said.
The state auditor emphasized that, in order to keep and develop Estonia's
reputation as a leading IT country, the system would have to be improved for
citizens. "It is absurd for a person to run from one institution to another
in order to carry hard-copy printouts from one IT system to the next," the
state auditor said.
Flat-tax pays off handsomely
In 1994 the then-Prime Minister Mart Laar, who was 32 at the time, did
something which has changed history, and not just in his small country, he
introduced a flat tax on personal income. Now the Slovenes and others are
Eleven years later, he says he really didn't appreciate at the time the extent
to which the flat tax - one rate for everyone, with few deductions or exemptions
- was derided in the West as a right-wing fantasy, a boon for the rich at the
expense of the middle class, a throwback to the days before the affluent were
expected to pay a higher tax rate on the upper levels of their earnings, by Ken
All he knew, he says, is that he had read about the idea in a book by the
conservative American economist Milton Friedman, and it seemed fair to him. So,
over the objections of his own finance minister and the International Monetary
Fund, he pushed through parliament a single, 26 per cent income-tax rate with
just a handful of deductions.
These days, Estonia is booming, the flat tax gets a lot of the credit, and Laar
is considered the father of a tax-simplification movement that has swept through
the former communist states of Eastern Europe.
Flat-tax fever has now infected politicians in the prosperous West, and while
the idea has suffered political setbacks of late, it's clear that Eastern
Europe's success with the flat tax is squeezing Europe's rich countries to
re-examine their tax systems.
"There absolutely is competitive pressure," said Madsen Pirie,
president of London's Adam Smith Institute, a flat-tax proponent. "Nobody
wants to lose foreign investment, and nobody wants their bright, talented,
high-achieving entrepreneurial types to go and live in other countries."
Americans may recall that the flat tax was a centrepiece of billionaire Steve
Forbes' failed 1996 presidential campaign.
Backers argue that the flat tax, with its single-page tax return, is simple,
fair, and vastly more efficient than the systems now in place in most wealthy
countries. They say it reduces the temptation and opportunity to cheat, and
boosts incentives to work harder.
And they point to its success in Eastern Europe, where the nine countries that
have adopted it, including Russia, saw their economies grow at an average 7.6
per cent last year.
"The countries with the flat tax are doing better," Laar said in a
recent interview, pointing out that a progressive system with lots of loopholes
diverts resources to tax lawyers and accountants working to craft shelters.
Indeed, a recent US government study found that the total public and private
cost of complying with the American tax code is at least US$200 billion a year,
or more than the cost of the war in Iraq.
Critics say that the low-wage Eastern European countries would be growing under
any tax system, and that the benefits of simplicity are outweighed by the
unfairness of allowing million-dollar earners to pay roughly the same rate of
tax as those who pull down the average wage.
A flat tax would "attack the poor," said Nick Pearce, director of the
Institute of Public Policy Research in London, writing in the New Statesman in
The definition of fairness is a central issue. The idea behind graduated (or
"progressive") income-tax rates is that high earners owe a
greater-than-average debt to the society that made their wealth possible. Or, in
the socialist ideology, as it is phrased, "from each according to his means
- to each, according to their needs."
From World War II through 1964, the top rate in the United States was 91 per
cent. In 1964, it was reduced to 70 per cent.
But over the years, governments have learned that very high rates can create
aggressive tax avoidance. In 1969, a US congressional hearing revealed that 155
of the wealthiest Americans had paid no income tax.
Tax systems have been growing flatter ever since, even in Western Europe, where
the idea of wealth redistribution is more popular than in the United States. But
they have remained progressive and complicated.
One difference in the East is that the former communist countries had the luxury
of adopting the system practically from scratch, without the winners and losers
that would result if a flat tax were imposed in a developed economy with a long
history of progressive taxes. When the wealthy never did pay higher rates, a
single rate proved a far easier political sell.
Estonia is a case in point: It tried a graduated income-tax system after it
began moving to a free market in 1990, but it had no bureaucracy in place to
efficiently audit and collect taxes. Also, high inflation quickly moved most
taxpayers to the top rate, and a vast underground economy remained outside the
system. People were ready to embrace change.
These days, it takes a typical Estonian about 15 minutes to fill out a return,
and paying someone to do it is unheard of. There are only a handful of
deductions, including for mortgage interest, charitable giving and pension
There is no tax on the first US$1,576 of income, a not-inconsiderable exemption
in a country where the average annual wage is US$5,400. The top 10 per cent of
earners paid 42 per cent of the income taxes last year, according to the finance
ministry. In the United States, the top 10 per cent paid 66.7 per cent of
federal income taxes, according to the Congressional Budget Office.
Income-tax revenue in Estonia grew from US$142 million in 1993 to US$729 million
in 2004, the ministry says. The economy grew dramatically as well, so income
taxes as a percentage of Gross Domestic Product decreased slightly. Estonia is
now moving to cut the tax rate to 20 per cent by 2007.
The flat tax also makes Estonia an attractive place to do business, analysts
say, although an even greater factor was Estonia's decision in 2000 to do away
with its corporate tax on reinvested profits.
Most Estonians seem to like their flat tax. (It should be noted that like most
European countries, Estonia also raises revenue with an 18 per cent sales tax,
plus a 33 per cent employer-paid payroll tax that funds universal health care,
paid parental leave, and other social benefits foreign to Americans).
"I think the existing system is quite motivational," said Marika
Guralnik, a 30-year-old insurance-company actuary who earns a middle-class
Many a Western European politician has trekked to Tallinn, a gorgeously restored
medieval town on the Baltic Sea, to learn firsthand about the flat tax. But so
far it has proven a hard sell in the West, largely because it is so easily
criticized as a tax cut for the wealthy.
During the election campaign, German candidate Angela Merkel, who is now
chancellor, named a flat-tax proponent as her senior financial advisor. But he
quit after the idea appeared to cost Merkel votes in the election when the flat
tax was portrayed as a giveaway to the rich. Germany's tax system is complex and
progressive, with rates ranging from 15 to 42 per cent.
Still, Eastern Europe's flat-tax revolution has pushed the West to simplify. The
French government, for example, says it plans to reduce the number of tax
brackets from seven to five, lower the top marginal rate from 48.1 per cent to
40 per cent, and limit individual deductions.
And since European Union membership means that Germans and Frenchmen can easily
live and work in Eastern European countries, some observers believe the West's
high top rates can't last. Already, many residents of high-tax Finland are
setting up shop across the Baltic in Tallinn.
"My opinion is that progressive tax rates in the European Union might not
be sustainable, because richer people will move to where the tax is lower,"
said Erki Uustalu, adviser to the Estonian finance ministry.
Baltic presidents want to join Russian gas pipeline
The presidents of Estonia, Latvia and Lithuania agreed in a summit recently to
work together to be included in a proposed Russian-German gas pipeline under the
Baltic Sea that by current plans would bypass the three countries, Deutsche
Presse-agentur (dpa) reported.
The proposed pipeline has drawn criticism from Poland, and was one issue during
talks between Lithuanian President, Valdas Adamkus, and German Chancellor,
Gerhard Schroder, during a recent visit to Germany.
Adamkus met with his Latvian and Estonian counterparts, Vaira Vike-Freiberga and
Arnold Ruutel, to discuss regional cooperation at an annual rotating summit of
the Baltic states near the Estonian capital Tallinn.
The Baltic presidents cited the environmental dangers the proposed gas pipeline
would pose if laid under the Baltic Sea, and vowed to cooperate on the issue in
addition to others concerning regional infrastructure. "It is obviously
necessary for all of us to coordinate actions and properly represent regional
interests in the EU. To this end, it is important that cooperation be expanded
at all levels," Adamkus said at the summit. Cooperation is also planned to
implement a regional rail network, dubbed Rail Baltica, and a highway system,
named Via Baltica.
EMT uses Ericsson for 3G networks
Based on Ericsson 3G core and radio technology, Estonian mobile operators EMT
launched their commercial 3G networks recently, New Europe reported.
Ericsson as the sole supplier has delivered a complete 3G/WCDMA network and
related services. Ericsson's latest technology will enable EMT to offer their 3G
customers an exciting package of advanced multimedia and mobile broadband
services. Under the agreement, Ericsson will also provide its hosted
personalised music service and video service for EMT based on Ericsson Service
Delivery Platform-Media. EMT's 3G network currently covers Tallinn, the capital
of Estonia, and will make popular TV shows, news and traffic cameras accessible
on EMT's 3G handsets. Full length download of the popular music tracks will also
be available for 3G users.
Tele2 puts brakes on Baltics
Tele2 AB, the leading alternative pan-European telecommunications company,
announced that, based on the current regulatory environment in Estonia, Latvia
and Lithuania, it has decided to stop any further investments in its fixed line
operations in these countries, New Europe reported.
Tele2 intends to stop product development and marketing of fixed telephony in
Estonia, Latvia and Lithuania. Tele2 will continue servicing its existing
customers, but will not take on new customers. Tele2 will continue to offer
mobile telephony as one of the leading operators in these countries. Lars-Johan
Jarnheimer, CEO and President of Tele2 commented, "The implementation of
the new EU legal regulatory framework is very late and the necessary work
required to be done by the local regulatory authorities to ensure an open and
competitive market has barely started. We are not able, for example, to launch
broadband in these markets. Instead, we will focus on continuing to offer our
successful mobile products and services to our customers in Estonia, Latvia and