Monday, June 16, 2008

Shenanigans Protracted

Had to spend two and a half hours in a doctor's office for my semi-annual labour law checkup. (A backdoor way of getting Estonians in to see the doc at least occasionally, I suppose.) Came across the Center Party leaflet inside the morning's Postimees, and gave it a pass. Apparently though today is a slow news day, so the Postimees website is bitching about it. (They have no qualms about taking Savisaar's money for distribution; and in fact, I imagine they used the deal to prepare indignant commentary once the paper edition makes the rounds.)

Savisaar's big idea this time is to a)recognize Russia as a modern, positive-thinking state so they give us the oil transit back, and b)restrict food prices, pegging the cost of groceries to the national average salary and/or creating municipal grocery stores with below-market prices.

The latter is a page directly out of Vladimir Putin's book, so blatant it's startling. Without the sort of control that the Russian government has over its businesses, and without the pile of oil cash that the Russian government is sitting upon - and even then - artificially restricting food prices will only lead to a shortage in official channels and an overpriced black market - because the producers will not sell at below cost. Besides which, this is an authoritarian move far beyond anything even Ansip has ever concocted. In a free state with a free market, it is inexcusable. For a country that prides itself on successfully disentangling itself from the monster of Soviet plan economy and undertakes to teach others, it is a suggestion whose mere utterance is shameful.

On the other hand, the paper edition did include a curious little op-ed from Keit Pentus of the Reform party (I keep wondering if she's related to Sten Pentus, the racing driver - I'm sure one of the readers knows?). She proposes to cap the income subject to social tax.

If you don't know how the Estonian tax system works, here's the point. The salary number you get in your employment contract is subject to income tax; the cash you get in hand is that number minus 21% (and dropping), and a couple of other minor deductions like the mandatory, regulated, but private pension fund. Additionally, the employer pays 33% of the contract amount in social tax. So the cost to the employer is actually a third higher than the negotiated salary. The employee gets about 57% of what the employer spends. In the spirit of E-stonian E-fficiency, here is a handy online calculator for employment costs.

For income tax, there is a deductible minimum: the first 2250 EEK you earn each month is not subject to income tax. (If your spouse does not work and you file a joint tax return as a household, his untaxable minimum can also be counted against your income.) What Miss Pentus proposes for social tax is the obverse: a deductible maximum. The employer would only pay social tax up to a maximum; let's say a contract number of 30,000 EEK. In that case the cost to the employer is 40,000 EEK, and the employee receives 23,000 EEK after all deductions. The employer pays 9900 EEK in social tax and 5600 EEK in income tax. (This is Estonia, you don't have to do your own taxes unless you're doing something uncommon.)

But if the employee then gets a raise to, say, 40,000 EEK a month, the employer keeps paying social tax up to the maximum. Only the 9900 EEK top band gets tacked onto the contract amount. The cost to the employer is 50,000 EEK. The employee gets 31,000 EEK after all deductions. The employer pays 9900 EEK in social tax and 7700 EEK in income tax. No matter how much the employee's salary is; the employer will never pay more than 33% of 30,000 EEK in social tax.

I'm not absolutely convinced that this scheme will work, but it sounds like it could. It limits the employer's costs in creating highly skilled, highly paid jobs in Estonia, which is what we want to do. It works on the same principle that has served Estonia extremely well in the past: limit the amount of money you're making from each source, and use that to get more sources. This is why McDonalds is worth more than De Beers.

Similar tax cap schemes exist in neighbouring countries. As much as it pains me to admit that the Latvians have done something right, maybe we should give this idea a try?

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Bonus story: Bank of Estonia says the worst is behind us, and we can now start our long slog up to prosperity.

8 comments:

karLos said...

how can Savisaar sleep at night with all that noisy laughing, i wonder...

Giustino said...

Savisaar keeps seeming more and more out of touch with reality. The economic populism, I get -- there are a lot of poor people in Estonia. The municipal grocery stores? Don't we already have low-budget stores, like Säästumarket?

AndresS said...

Flasher - what do you think of the governments decision not to change the law in respect to removing taxes on individual stock investments?

Flasher T said...

Initially I couldn't see what the big deal was, since they only tax the profit. Now it seems that there's a difference between investing in a fund, and actually trading stocks privately.

In the latter case, it seems that you need to pay tax on the income that you get from every single sale. You can't take income from that sale and reinvest it into more stocks, and only pay tax when you actually take cash out of the deal.

The difficulty here is that for a private person, concluding every deal leaves you with cash in hand. The investors have been lobbying for a legal definition of an investment account, where you could keep your operational moneys, but at that point I don't see that much of a difference between it and investing in a mutual fund.

The government's motivation seems to be purely fiscal, in that they don't want to lose the tax revenue (projected to fall from 200 million to 45 million EEK a year if this goes through). On a conceptual level, I think this is folly; on a personal level, I cannot get particularly upset over the fate of these people. If you're doing enough trades for this to be a serious problem, just incorporate yourself - it's nigh-on effortless already.

AndresS said...

I wonder if we'll get to the point where everyone in Estonia just incorporates themselves and all monetary transactions are done via your company?

I personally don't have a company but am looking into it in order to organize some business matters as it seems to make sense to do a lot of things via your company.

Anonymous said...

To answer the most important of the questions put forth in your piece: yes, Keit is Sten's sister.

Kristopher said...

What's with the labour law medical exam? It scared me away -- I was working in the public sector for a while in 2006. It wasn't a bad gig the hours weren't working out for me, and the impending exam expedited my departure. I wasn't going to stick around for what sounded like an enema.

There was a long list of procedures, which weren't optional? I thought my co-workers were putting me on (well, at other places where I have worked, people have made jokes about "deep probing" and things like that around the water-cooler so I didn't think that much), but apparently a grain of truth.

Flasher T said...

Heh, no, it's a pretty standard physical. Blood pressure, eyesight, reflexes, blood test, urine test. Nothing untoward.

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