Income Tax as a Revenue Source for Estonia’s Local Governments: Practical Problems
The necessary tax base for ensuring quality public services and the inseparably connected issue of income tax revenue are among the key problems of Estonian local governments.
Because income tax is the biggest source of income for local governments (accounting for 43% of local budgetary revenue in 2006) issues related to this tax are as salient as they can be. As the analysis by the authors of this article shows, Estonia’s recent economic growth has left an effect on the revenue base of local governments, primarily on income tax receipts. The analysis also showed that despite vigorous development in the poorer counties, regional disparities in income persist, pointing among other things to the need to reform the local government budget equalization fund. Another thing to consider is that in the general climate of economic growth, an increasing number of taxpayers are able to allow themselves to make tax deductions. Due to this fact, the authors propose the setting of an income level, beyond which deductions are not permitted.