Iceland: Nordic tiger

The rags-to-riches story of how Iceland's 300,000 citizens became some of the world's wealthiest people is a testament to capitalism's animal spirits. Only after it opened up the economy, privatised state companies and slashed marginal taxes did this once famine-plagued island become a Nordic Tiger, says the Wall Street Journal.

Happily, the government can't seem to get enough of a good thing. It convened a special task force in 2005 to look into ways of transforming Iceland into a financial hub. Headed by Sigurdur Einarsson, chairman of Kaupthing, the country's biggest bank, the committee recommended in November that the corporate-tax rate be reduced to 10 per cent from the current 18 per cent.

In fact, the benefits of low taxes are already on full display in Iceland, which provides an almost perfect demonstration of the Laffer Curve, says the Journal:

From 1991 to 2001, as the corporate-tax rate fell gradually to 18 per cent from 45 per cent, tax revenues tripled to 9.1 billion kronas (U.S. $135 million in today's exchange rate) from just above 3 billion kronas (U.S. $44.5. million).

Since 2001, revenues more than tripled again to an estimated 33 billion kronas (U.S. $490 million) last year.

Personal income-tax rates were cut gradually as well, to a flat rate of 22.75 per cent this year from 33 per cent in 1995; meanwhile, the economy averaged annual growth rates of about 4 per cent over the past decade.

But Iceland's tax competition isn't sleeping, says the Journal:

In addition to Eastern Europe's flat-tax movement, there is healthy rivalry from Switzerland, where individual cantons (territorial districts) can set their rates independently.

Even Germany, once critical of tax-cutting, recently announced that it will cut its corporate-tax rate to just below 30 per cent next year from the current rate of about 38 per cent.

Source: Editorial, Iceland's Laffer Curve, Wall Street Journal, March 8, 2007.

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FMF Policy Bulletin/ 13 March 2007