Friday, March 16, 2007


Mrs. Veronique de Rugy of the American Enterprise Institute wrote a thorough article describing how Iceland absorbed the lessons of its tax history and took it into account when the economy was at turmoil. Sagas and stories tell that Iceland was the very first place on earth that could be described as tax haven. This label is characterized in the historical case when king Harold unified Norway in 870 and tried to punish the Norwegians by imposing a vast tax. Vikings refused to pay the tax and moved to Iceland where (as they said) "men are free from assaults of kings and criminals."

Northern lights in Iceland
Mr. David Friedman writes:

"...medieval Icelandic institutions have several peculiar and interesting characteristics; they might almost have been invented by a mad economist to test the lengths to which market systems could supplant government in its most fundamental functions. Killing was a civil offense resulting in a fine paid to the survivors of the victim. Laws were made by a "parliament," seats in which were a marketable commodity. Enforcement of law was entirely a private affair. And yet these extraordinary institutions survived for over three hundred years, and the society in which they survived appears to have been in many ways an attractive one . Its citizens were, by medieval standards, free."

David Oddsson, the man who led Iceland through the period of rapid transformation has indeed very much in common with vikings. It seems that he has learned the lesson that king Harald couldn't: "overtax your people and they will fly away. Implement low tax rates and your country will become rich and prosperous."

Many economic policymakers would probably feel embarrased if someone told them that the wisdom of Iceland's Vikings was far ahead of their ideas full of high-tax schemes and high spending habits. Slovenia, the country where I live, is no exception. The outcome of Oddsson's economic and structural reforms was astonishing. After slashing the corporate tax rate from 48 percent in early 90s to 18 percent in 2002, the unemployment almost disappeared. After introducing the fiscal discipline, the spending was harshly reduced and consequently, the tax revenue skyrocketed. As the flat tax was recently implemented, Iceland's economy is on a good way to benefit from tax competition as an international financial hub. In 1990, the 48 percent corporate tax rate collected 0,97 percent of GDP. When the rate was dropped to 18 percent, the tax collection reached 1,25 percent of the GDP. The economic growth averaged 5 percent on a 10-year basis. The efforts of entrepreneurial sector resulted in a growing number of Icelandic multinational companies such as Actavis, Kaupthing and Atlantic Petroleum.

Further readings
David FRIEDMAN; Private Creation and Enforcement of Law, A Historical Case
Daniel MITCHELL: Iceland Joins the Flat-Tax Club, CATO Tax&Budget Bulletin, February 2007
Veronique DE RUGY: Putting Taxes on Ice, TCS Daily, June 24, 2004
Rok SPRUK; Laffer Curve Works Incredibly Well - The Case of Iceland, Capitalism & Freedom, March 11, 2007
Rok SPRUK; Iceland Joins the Flat-tax Revolution, Capitalism & Freedom, February 10, 2007
Rok SPRUK; Silent Promises, Shining Performance - Why Tiger Economies Roar Louder, Súkromné vlastníctvo, February 5, 2007
Rok SPRUK; Cool Sights from the North, Súkromné vlastníctvo, February 19, 2007

1 comment:

Anonymous said...

And now Iceland is a failed country.