The Nordic island surrounded by water is an incredible example of a country that went from being one the poorest and most devastated to one of the richest in Europe. 18 percent flat tax on corporate income recently conquered the island in the North of Atlantic ocean. Since the reforms were launched in the early 90s, Icelandic economy transformed itself into dynamic and fast-growing international hub admired by many companies coming in Iceland and establishing their holdings and headquarters.
The Wall Street Journal reports how incredible the Laffer Curve works in Iceland.
The Iceland's story of galvanized economic success started when a group of enthusiastic, fiscally conservative and socially liberal reformers under the leadership of David Oddsson and Geir Haarde launched an ambitious set of features, including the trade liberalization, monetary stabilization, tax cuts and the privatization of state companies.
Marginal income tax rates were slashed to rock-bottom level. Individual income tax rate fell from 33 percent in 1995 to 22,75 percent in the recent tax cut implementation. Corporate tax rate, for example, was cut from 45 percent in 1991 to 18 percent in 2001. The benefits of tax competition are fully displayed and the results are flattering. Iceland is a perfect example of Laffer Curve demonstration. As the corporate tax rate gradually fell to one of the lowest levels in Europe, tax revenues trippled. When high tax rate on corporate income led companies to hide their revenue to avoid paying such a high tax, the amount of collected tax revenue was 3 billion kronas. When the rate fell far below the confiscatory level, the amount of tax revenue hit 9,1 billion kronas. Since 2001, when the competitive tax regime further led to higher tax revenue, the amount of revenue reached 33 billion kronas, estimated for the last year. The economy's transformation was characterized by a 10-year averaged 4 percent economic growth.
In the peripheral parts of Europe, the tax competiton is flourishing. Now there is a healthy tax competition between Eastern Europe (Estonia, Latvia, Slovakia), Iceland and Switzerland where cantons are allowed to set the corporate tax rates independently from the federal government. There's a huge opposition to tax competition in the EU. Policymakers in high tax jurisdictions such as France and Germany, have reverently attacked Switzerland, saying that cantonal tax cuts are a kind of illegal subsidy (???). But it seems that the wheel is turning since Germany announced a corporate tax cut from current 38 percent to 30 percent next year.
Iceland is an isolated example where economic policymakers are ambitious after having implemented pro-growth reforms. The committee of the Iceland's biggest bank (Kaupthing) leaded by the chairman Mr. Sigurdur Einarsson, recommended that corporate tax rate be reduced from current 18 percent to 10 percent, in order to make Iceland (Reykjavik) an international financial hub. If this particular tax cut is implemented, it will be the lowest one in Western Europe, overcoming Ireland's 12,5 percent rate.
If some political circles see the proposed rate as controversional, they should learn from the tax-cut history of Iceland that made the Arctic island, both rich and prosperous. If Reykjavik truly wants to become an international financial hub then it should immediately offer investors the foremost advantageous financial and investment environment that will led investors to choose Iceland as their operation destination.