Yesterday’s Wall Street Journal (Online Version) included a wonderful piece on Iceland’s economy entitled “Iceland’s Laffer Curve” (in “Review and Outlook”, March 8, 2007). There are about 300,000 citizens of Iceland, and one of them is my pal Einar. I sent the article to him to congratulate his countrymen for their progressive tax policies.
Beginning in 1991, Iceland gradually cut its corporate tax rate from 45 to 18 percent. During the ensuing decade, collections grew by 300 percent, then tripled again from 2001-06. This illustrates the Laffer curve, which so many on the Left laughed about during the Reagan years. Arthur Laffer explains his theory and its origins in an essay on the Heritage foundation website. (http://www.heritage.org/Research/Taxes/bg1765.cfm). As Dr. Laffer points out, it has deep historical origins. Moreover, it reflects the common-sense understanding of human behavior: we work harder when we get to keep more of the fruits of our labors, and we work less when we don’t. Thus, falling tax rates, especially in a competitive climate where people have choices in where to invest, draw more capital there, all other things being equal.
Instead of resting on its laurels, Iceland is going after more tax relief. According to the WSJ article, it is considering a move from 18 percent down to ten percent, in part to compete with its neighbor, Ireland, which has a 12.5 percent rate.
Given the mobility of capital in the modern world, and the possibility of sourcing financing operations in locations that provide the most favorable climates, Iceland is paying attention and acting accordingly. What about our own government? Recent attempts to deal with corporate tax rates include the targeted relief for domestic manufacturing and production activity through section 199, but this reflects only a partial solution. Alternatively, we might just learn a few things from our Nordic neighbors. And I intend to enjoy a beverage with my pal Einar and toast to his country's prosperity the next time I see him.