“Estonia’s Tax Phenomenon”

In Which Results Trump "Theory"....

This is a little unfinished business from the week before last, induced by my tidying up my briefcase this morning as I prepare for my next “deployment.”

When I travel in and out of Tallinn, I normally don’t use Estonian Air (because it’s not really a Star Alliance carrier); however, when I was planning out the trip, there was no alternative viable way to get from Tallinn to Bucharest without starting out with EstAir to Copenhagen.

Sometimes when overseas, I’ll grab a copy of the carrier’s in-flight magazine – since some people I know are interested in them. When I pulled up the EstAir in-flight mag and saw that one of the stories contained therein was entitled “Estonia’s Tax Phenomenon,” I had to make sure to have it. I’ve been seeing the positive results of that enlightened tax system first-hand for some time.

I can’t find a copy of the article on-line, but I’ll share a couple of excerpts here.

On business taxes:

The perhaps most remarkable part of the Estonian tax system is the taxation of business income. This is because in 2000 a law was adopted in Estonia providing that no tax is imposed on the income earned by a company as long as it stays within the company. (Neither does a tax liability arise if owners leave earned income in a company in the form of money.) The tax liability arises only when the income is taken out of the company or when it is transferred to subsidiaries or natural persons, and this tax liability arises irrespective of whether the income is transferred in the form of money, assets, or services. What’s most important is that unlike in the majority of countries such income is taxed only once at the income tax rate, i.e., 21%. In most countries such income is initially taxed with corporate income tax and after that a dividend income tax is imposed on natural persons who receive such income. Also, the tax rate is decreasing by 1% every year until it reaches 18% in 2011.

This just works, and it’s been the prime driver of Estonia’s remarkable growth into a “normal” country in terms of the standard of living (see my final flourish below).

This is what the “competition” is doing, and it works. Where do you think investment dollars and new jobs are going in this kind of competitive environment?

The final paragraph of the article sums it all up:

The main characteristic of the Estonian tax system is its wide tax base and low tax rate, i.e., the number of subjects or persons that are exempted from tax is minimal. On the one hand, this makes the collection of taxes very economical, and on the other hand it places all economic transactors in an equal position, giving no advantages to anybody, irrespective of circumstances.

I’ve been going to Estonia regularly since 2001, and the scope and pace of changes for the better have been breathtaking. Back in 2001, there was still obvious crumbling communist detritus everywhere. Since then, I’ve noted that Estonia has been looking more and more like Finland (in the good ways). This month, I noted to myself that the transition is complete – in the good ways, Estonia is now indistinguishable from Finland.

But it’s a clean, orderly, high-tech Finland with low taxes that is present-day Estonia.

The practical, results-oriented lessons are out there if we’re willing to take them to heart….

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