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Cutting Taxes to Increase
Prosperity: Turning Iceland
into the Nordic Tiger
Reykjavik, Iceland – July 26, 2007
Three Key Questions
Should Iceland embrace – or escape –
the Nordic Model?
What is the goal of good tax policy?
Have Iceland’s reforms moved policy in
the right direction?
The Nordic Model
What is the Nordic Model?
Open markets and laissez-faire policies,
but a big welfare state and
concomitantly high tax rates.
Does the Nordic Model Generate better
results?
There certainly is a perception that the
Nordic Model is successful.
Praise for the Nordic Model
A study published by a government-subsidized think
tank in Brussels asserts: “…the ‘Nordic’ and the
‘Anglo-Saxon’ models are both efficient, but only the
former manages to combine both equity and
efficiency.”
An article by foreign-aid advocate Jeffrey Sachs
states: “…the Nordic countries outperform the AngloSaxon ones on most measures of economic
performance.”
The head of the Tax Policy Centre for the
Organization for Economic Cooperation and
Development (OECD) bragged that taxes are twice as
high in Sweden as they are in the United States, but
that growth is twice as fast.
Real-World Data
Faster Growth in America
3.5%
United States
United States
Annual Economic Growth
United States
3.0%
Nordic Nations
Nordic Nations
2.5%
Nordic Nations
2.0%
1.5%
1.0%
OECD (1981-1991)
OECD (1992-2006)
IMF ((1981-2006)
Americans Enjoy More Economic Output
$50,000
United States
$45,000
Per Capita GDP
United States
$40,000
Nordic Average
United States
Nordic Average
Nordic Average
$35,000
$30,000
$25,000
World Bank 2005
OECD 2005
IMF 2006
Per Capita Disposable Income
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Iceland
Source: OECD
Norway
Denmark
Sweden
Finland
USA
Private Consumption per Capita
200,000
180,000
160,000
Danish Krone
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Norway
Source: Danish Finance Ministry
Denmark
Iceland
Sweden
Finland
United States
Why the Gap Between US and Nordics?
Burden of Government Spending
60%
55%
Share of GDP
50%
45%
40%
35%
30%
25%
20%
Denmark
OECD Fiscal Indicators, 2006
Finland
Iceland
Norway
Sweden
United States1
Government Revenue
65%
Total Receipts (2006)
60%
Tax Revenues (2003)
Share of GDP
55%
50%
45%
40%
35%
30%
25%
20%
Denmark
Source: OECD
Finland
Iceland
Norway
Sweden
United States
Top Tax Rate on Personal Income
70%
65%
60%
With Employee Share of Payroll Tax
Personal Income Tax
55%
50%
45%
40%
35%
30%
25%
20%
Denmark
Source:OECD
Finland
Iceland
Norway
Sweden
United States
Good News About Nordic Nations
They grow faster than most other
European nations.
They rank highly in both Economic
Freedom of the World and the Index of
Economic Freedom.
Low tax rates on capital.
Economic reforms such as personal
retirement accounts.
What is Good Tax Policy?
Tax Income at one low rate, ideally no more
than 20 percent.
Define the tax base correctly, taxing Income
only one time.
Tax all income alike, since neutrality ensures
economic criteria rather than tax provisions
determine resource allocation.
Tax only income earned inside national
borders, the common-sense notion of
territorial taxation.
Why Have a Low Tax Rate?
The marginal tax rate – the burden on the
next increment of income – must be kept low.
A low marginal tax rate rewards productive
behavior. People will work more, save more,
and invest more.
Incentives to hide, shelter, under-report
income are lower when the marginal tax rate
is reasonable.
Research indicates that the marginal tax rate
should be no higher than 20 percent.
Why Tax Income Only One Time?
Many nations impose multiple layers of tax
on income that is saved and invested.
This is the wrong definition of the tax base.
Taxes on interest, dividends, capital gains,
and inheritances are examples of the
discriminatory treatment of capital.
This is a self-destructive policy since it harms
the activity – capital formation – that all
economic theories agree is necessary for
economic growth and rising living standards.
Why Neutrality?
Government should not pick winners and
losers.
Special preferences and penalties distort the
allocation of capital and undermine efficiency,
leading to lower incomes.
Special preferences and penalties also
encourage taxpayers to squander time and
energy in search of political advantage
instead of concentrating on productive
behavior.
Benefits of Tax Reform
There are many reasons to adopt a flat tax,
including:
Liberty
Simplicity
Prosperity
Opportunity
Equality
Privacy
Enforcement
Revenue
Tax Competition
The ability of jobs and investment to cross national
borders is a powerful constraint on politicians.
Tax competition is a powerful force for economic
liberalization, one that should be celebrated rather
than persecuted.
The rewards for good tax policy have never been
greater.
If the “goose that lays the golden eggs” can fly
across the border, governments must behave more
responsibly.
Tax Competition
Today’s global economy makes good tax
policy much more important.
Lower tax burdens is one reason why the U.S.
is doing much better than the E.U., with
faster growth and more employment.
Good tax policy is especially important for
smaller jurisdictions, which necessarily are
more open to the global economy.
Iceland’s Supply-Side Tax Reforms
Low-rate corporate income tax
Low-rate flat tax on capital income
Minimal death tax
No wealth tax
Medium-rate flat tax on labor income
Other pro-growth reforms include
personal retirement accounts and
property rights for fisheries
Positive Results
Iceland is now the world’s fifth-richest nation
according to both the International Monetary Fund
and the Organisation for Economic Cooperation and
Development.
Iceland now ranks as the world’s 9th freest economy
according to Economic Freedom of the World and the
15th freest economy according to the Index of
Economic Freedom.
Lower tax rates have generated a supply-side
feedback effect. The government is collecting
substantially more corporate tax revenue with a rate
of 18 percent instead of 50 percent. Revenues from
the 10 percent tax on capital income also have been
robust.
Per Capita GDP
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
1990
1991 1992 1993
1994 1995 1996
1997 1998 1999
2000 2001 2002
2003 2004 2005
2006
1.6%
55%
1.5%
50%
1.4%
45%
1.3%
40%
1.2%
35%
1.1%
30%
1.0%
25%
0.9%
0.8%
0.7%
20%
Corporate Tax as Percent of GDP
Corporate Tax Rate
15%
0.6%
10%
1985
1990
1995
Source: OECD Revenue Statistics, Iceland Ministry of Finance
2000
2003
Corporate Tax Rate
Revenue as Share of GDP
Lower Corporate Tax Rate:
Higher Corporate Tax Revenue
Remaining Challenges
Lower the rate of the flat tax, which is
higher than the highest rate in the US
system.
Lower the corporate tax rate, building
on earlier successes.
Control the size of government, learning
from nations such as Ireland and New
Zealand.
Conclusion
Iceland’s reforms are impressive and
have generated large benefits.
Other nations are competing and
implementing their own reforms, so
Iceland must continue to reduce the
burden of government.
With any luck, Iceland will serve as a
role model for the United States!