Individual taxation is one of the most important metrics in the International Tax Competitiveness Index (ITCI). It measures income tax rates and thresholds, how complex the income tax is, and the tax rates levied on income from capital gains and dividends. Whereas competitiveness means giving money to those who earned it. The latest issue of ITCI was published in November 2022.

Estonia, which provides both e-residency for business and digital nomad visas, is now a proven leader in effective taxation. The country, levies a top marginal income tax rate of 20% on wage income, the second lowest rate in the OECD. Estonia applies the top rate at 0.33 times the average national income, making it a relatively flat income tax.

The narrative to attack any tax cut and defend any increase in government size is recently reaching feverish levels. However, it is constant bloating government spending and increasing the size of monetary interventions are some of the causes of the widespread impoverishment of the middle class. And constantly increasing taxes and diminishing the purchasing power of the currency is wiping out the middle class in most developed nations.

In Estonia, individuals can raise income much more effectively. The policy also benefits employees as their wages grow faster. In 2021, average monthly gross wages and salaries in Estonia rose by 6.9%, while in 2022, a 10.1% increase was recorded.

Estonia’s labor tax payments are largely automated, resulting in one of the easiest income tax systems to comply with in the OECD, reports Tax Foundation. Simplicity is prioritized, and that is consistently evident throughout the tax code.

As Estonia differs vastly from other countries, it also affects its revenue structure. Famous for its strict fiscal policy and low debt levels, Estonia collects around 16,5% of the budget revenues from individual taxes compared to the 24% OECD average.

The state gains the rest of the money through indirect taxation (value-added tax, environmental taxes, etc.), social security contributions, and corporate income taxes. This allows the government to offer a more favorable environment for businesses and investors.

Also, due to Estonia’s cash-flow tax on business profits, there is no separate levy on dividend income, setting the dividends tax rate to zero percent. All of this put the country in first place in individual tax competitiveness from the 3rd place a year ago.

Tax cuts do not increase inflation, it is giving a bit more of the existing money to the ones who earned it. What increases inflation, always, is bloating government spending, perpetuating deficits, and monetizing it by printing constantly depreciated currencies.

Estonia’s simple and effective tax system is one of the main reasons the country has been so successful in recent decades. The corporate tax rate is 20% and the country has a territorial tax system, which means that only Estonian-source income is taxed. This makes the country an attractive destination for foreign investors. Most importantly, the country has 0% taxation on reinvested profits, which speeds up the growth of companies.