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CF&P Foundation Press Release

Center for Freedom and Prosperity Foundation

For Immediate Release
Thursday, August 9, 2007
202-285-0244
www.freedomandprosperity.org

Iceland's Flat Tax and Other Supply-Side Reforms Boost Growth, Generate Significant Laffer Curve Effects
CF&P Foundation Issues Fifth in a Series on Country Tax Systems

 (Washington, DC, Thursday, August 9, 2007) -- The Center for Freedom and Prosperity Foundation today released a report on the dramatic tax reforms that have taken place in Iceland. Entitled "The Iceland Tax System -- Key Features and Lessons for Policy Makers," the study is authored by Dr. Hannes Gissurarson a Professor of Politics at the University of Iceland and Dr. Daniel Mitchell a Senior Fellow at the Cato Institute. Gissurarson and Mitchell found that the flat tax, a low-rate 18 percent corporate income tax, a 10-percent flat tax on capital income, and repeal of the wealth tax have dramatically boosted Iceland's economy, reversing the stagnation and instability that plagued the nation in the 1980s.

The reforms in Iceland have yielded big dividends. Iceland is a rich and successful nation. Lower tax rates and supply-side policies have boosted growth, increased efficiency, and made the country more competitive. The three biggest reforms are the low corporate tax rate, the low-rate flat tax on capital income, and the intermediate-rate flat tax on labor income. The authors find considerable evidence that the first two reforms have been very successful. Indeed, they also find it is quite likely that the lower rates have generated significant Laffer Curve effects meaning the government collects more revenue at a lower tax rate. These observations and many others are discussed in CF&P Foundation's recent study on Iceland's tax system, which is the fifth research paper in a series of studies examining different tax systems from around the world

Link: The Iceland Tax System -- Key Features and Lessons for Policy Makers
http://www.freedomandprosperity.org/Papers/iceland/iceland.shtml

Below: Executive Summary and Key Observations

Comments on the study:

Andrew Quinlan, CF&P Foundation ~ "The CF&P Foundation study illustrates the wisdom of good tax policy. Iceland has slashed tax rates on productive activity and its economy is booming. The Center has undertaken this project reviewing the tax system of other countries in hopes that policy makers learn from the important tax changes that are taking place around the world."

Daniel Mitchell, The Cato Institute ~ "Iceland's supply-side reforms are further evidence that lower tax rates boost economic performance and create economic opportunity. If policy makers can build upon this success by further lowering tax rates and reducing the burden of government spending, there is every reason to suspect that Iceland will be one of the world's most prosperous nations."

Veronique de Rugy, Mercatus Center ~ "Politicians from high-tax nations such as France and Germany should visit Iceland and see that dramatic tax-rate reductions increase economic growth and boost job creation."
 

Note: Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next study will examine the tax system of Russia.  We also plan on issuing studies on the tax regimes of Ireland, France, and the United Kingdom. The four previous published papers in the series were on the tax systems of Sweden, Slovakia, Switzerland and Hong Kong.

Links to previous tax system studies:
http://www.freedomandprosperity.org/Papers/sweden/sweden.shtml
http://www.freedomandprosperity.org/Papers/slovakia/slovakia.shtml
http://www.freedomandprosperity.org/Papers/swiss/swiss.shtml
http://www.freedomandprosperity.org/Papers/hongkong/hongkong.shtml

Executive Summary

Iceland's economic renaissance is an impressive story. With lower tax rates leading the way, significant reforms have liberalized the economy, spurring growth and improving competitiveness. The shift in policy is noteworthy since Iceland experienced a period of misguided government policy. During the 1980s, the country suffered from an unstable currency, with the inflation rate routinely and consistently running at double-digit levels and, for a few months, exceeding 100 percent on an annual basis. The aggregate tax burden rose steadily, climbing from 26.2 percent of GDP in 1965 to about 40 percent today.  A value-added tax was adopted without the concomitant elimination of other taxes. 

Market-oriented tax policy has played a key role in Iceland's rebirth. Major tax reforms include slashing the corporate tax rate from 50 percent to 18 percent, abolition of the wealth tax, a low-rate 10 percent flat tax on capital income, and an intermediate-rate 36 percent flat tax on labor income. These supply-side reforms, along with policies such as privatization and deregulation, have yielded predictable results. Incomes are rising, unemployment is almost nonexistent, and the government is collecting more revenue from a larger tax base.

Key Observations:

  1. Iceland is now the world's fifth-richest nation according to both the International Monetary Fund and the Organisation for Economic Cooperation and Development.
     
  2. 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.
     
  3. 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.
     
  4. Iceland has implemented sweeping economic reforms. In addition to tax reform, the island nation has implemented personal retirement accounts, created property rights for fisheries, and privatized numerous state-owned industries.

Link to paper:
http://www.freedomandprosperity.org/Papers/iceland/iceland.shtml

PDF version of paper:
http://www.freedomandprosperity.org/Papers/iceland/iceland.pdf
 

For additional comments:

Hannes Gissurarson can be reached at hannesgi@hi.is
Andrew Quinlan can be reached at 202-285-0244,
andy@freedomandprosperity.org
Dan Mitchell can be reached at 202-218-4615,
dmitchell@cato.org
Veronique de Rugy can be reached at 703-993-4930,
vderugy@gmu.edu

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