Iceland Abandons the Flat Tax

In the wake of its financial and economic crisis, Iceland modified its personal income tax.

Effective January 1, 2010, Iceland replaced its 35.7% flat-rate personal income tax (combined national and municipal) with three national rates: 24.1% on income up to ISK (Iceland Krona) 2,400,000; 27% on income between ISK 2,400,001 and ISK 7,800,000; and 33% on income exceeding ISK 7,800,001 (US$1=ISK 126.2). The additional municipal tax on these brackets ranges between 11.24% and 13.28% , putting the top personal rate at 46.28%.

It should be noted that Iceland’s flat-tax rate was the highest in the list of flat tax countries, some 10.7 percentage points above the next highest rate of 25%.

The corporate tax rate remains a flat 18%.

Joseph, Pharaoh, and a 20 Percent Flat Tax in Egypt

Biblical scholars place the story of Joseph and the famine, recounted in Genesis 41 and 47, in the Second Intermediate Period (1674-1553 B.C.). Joseph, endowed with the ability to interpret dreams, advised Pharaoh that his two dreams of seven lean ears of corn devouring seven good ears and seven lean cows arising from the Nile eating the seven fat cows which preceded them meant that Egypt would enjoy seven good years of harvests followed by seven bad years.

To prevent this disaster and possible destruction of Egypt, Pharaoh appointed Joseph to supervise the collection of a fifth of the grain output in the seven plentiful years and store it for subsequent distribution and sale in the seven lean years. Sure enough, Pharaoh’s dream came true, but the storehouses of grain saved Egyptians and their neighbors from starvation.

From this episode, Joseph established as law the principle that a fifth of the produce grown in the land of Egypt belongs to Pharaoh. This principle was reestablished in July 2005 when a new code slashed the top personal rate from 32 to 20 percent (with two lower rates of 10 and 15 percent) and set the corporate rate at 20 percent.

Flat Tax Chronology

A chronology of countries that have adopted a flat tax, indicating the year of adoption, the personal income tax rate, and the corporate income tax rate appears below.

Flat Tax Jurisdictions
Jurisdiction	Year of Implementation	Personal Tax Rate Percent	Corporate Tax Rate Percent
Jersey	1940	20	20
Hong Kong	1947	16	17.5
Guernsey	1960	20	0
Jamaica	1986	25	33.3
Estonia	1994	21	0
Latvia	1995	25	15
Lithuania	1996	24	15
Russia	2001	13	24
Serbia	2003	14	10
Iraq	2004	15	15
Slovakia	2004	19	19
Ukraine	2004	15	25
Georgia	2005	12	20
Romania	2005	16	16
Turkmenistan	2005	10	20
Trinidad & Tobago	2006	25	25
Kyrgyzstan	2006	10	10
Albania	2007	10	20
Iceland	2007	35.7	18
Macedonia	2007	10	10
Mongolia	2007	10	10,25
Montenegro	2007	9	9
Kazakhstan	2007	10	15
Pridnestrovie	2007	10	0
Bulgaria	2008	10	10
Czech Republic	2008	15	15
Mauritius	2009	15	15
FBiH	2009	10	10
Belarus	2009	12	24
Belize	2009	25	25

A few comments on the table are in order. All but the first four entries were implemented after the collapse of the Soviet empire, most being former states within the Soviet Union. The spread of the flat tax was contagious, as one country after another enacted flat taxes to maintain competitiveness with neighboring countries to attract both foreign and domestic investment.

The more recent entries in the table have tended to enact very low flat rates, with the modal rate at 10 percent. Thirteen have unified their personal and corporate income rates, with the others maintaining different rates between personal and corporate tax rates.

The Flat Tax at Work in Moscow’s Real Estate Market

Those of you who have followed the flat tax revolution, beginning with the Baltic state of Estonia in 2004, know that Russia was the first large country to adopt the flat tax, effective January 1, 2001. This blog has posted results for Russia’s flat tax each year for the seven years 2001-07, documenting the rapid growth in revenue attributable to the flat tax.

The weekend edition (March 6-7, 2010) of the Financial Times carried a story on the Eastern Europe property market in the wake of the global financial crisis. The author noted that some Eastern European countries were faring better than many in Western Europe.

Prospects in Moscow were sufficiently attractive for British real estate firm Chesterton Humberts to open an office earlier this year. One of its agents, Greg Thain, who has lived in Moscow for 17 years, explained why:

"Working Russians have large disposable incomes because they pay just 13 percent [the flat rate] in tax and utilities are very low in real terms." Moscow’s population has grown rapidly because everyone in Russia who wants a good job moves to Moscow and the low flat-rate income tax enables many to afford a housing unit.

Libya Ponders the Flat Tax

The New York Times of February 28, 2010, carried a lengthy story on Seif al-Islam el-Qaddafi, the son of and possible successor to Libya’s ruler Colonel Muammar el-Qadaffi. The young Qaddafi is Western educated, with a Ph.D. from the London School of Economics.

Seif wants to reform Libya’s economy, opening it to Western investment and transform it into the Dubai of North Africa. His ideas include massive investment in infrastructure, a free-trade zone for foreign investment, a new business and commercial legal code, and a 15 percent flat tax.

Seif’s views on the flat tax are attributable to two factors. In 1996, while attending a meeting of the Mont Pelerin Society in Vienna, I taught a one-credit, day-long course on tax policy at IMADEC (International Management Development Consulting) University. I concluded with an exposition of the flat tax, which had then been adopted in the three Baltic countries of Estonia, Latvia, and Lithuania. Among the students was Seif al-Islam el-Qaddafi, who asked several interesting questions about the flat tax.

A second factor is its spread to another two dozen countries with positive results for fiscal policy and economic development.

The flat tax is only one, but very important, ingredient in the matrix of economic policies that fosters investment and growth. If and when Libya adopts a 15 percent flat tax, it will be a sign that the country has chosen, as Deng Xiaoping put it for China in 1982, to open up to the West.