- Key features and lessons for Policy Makers-

• Main Author: Key Features
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: Iceland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.570.8625; http://www.cato.org/sites/cato.org/files/articles/mitchell-iceland.pdf

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.1 The aggregate tax burden rose steadily, climbing from 26.2 percent of GDP in 1965 to about 40 percent today.2 A value-added tax was adopted without the concomitant elimination of other taxes.3 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.