Those were dark days in Estonia in the wake of the 2008 financial crisis. And they lasted much longer then the bleak winter days when the sun only makes a cameo appearance. When the economy crashed and a real estate bubble burst, unemployment shot up from 4 percent to nearly 16 percent in 2009.
But the hardy Baltic nation, liberated from the grips of the old Soviet Union in the early 1990s, absorbed the pain and stuck with some tax reforms such as a flat tax and adopted a number of others. The country is now close to reaching the standard of living enjoyed by its Finnish neighbors to the north or those on the other side of the Baltic Sea such as Sweden.
So successful has Estonia’s tax reforms been that Baltic neighbour Latvia followed suit. The tax reform commitment of both Baltic nations merited the countries the No. 1 and No. 2 ranking, respectively, in the 2018 International Tax Competitiveness Index (ITCI) compiled by U.S.-based Tax Foundation. In the case of Estonia it was the fifth year in a row at the top.
The ITCI is designed to measure the extent that a country’s tax system adheres to competitiveness and neutrality. It gauges five overall categories: corporate tax, personal income tax, consumption taxes and its international tax system.
“Overall the ITCI rankings were based on more than 40 different tax policy variables“, said Daniel Bunn, an author of the report. “The ITCI gives a comprehensive overview of how developed countries’ tax codes compare, explains why certain tax codes stand out as good or bad models for reform“.
While Estonia and Latvia topped the charts as countries with the most overall competitive tax policies among European Union and OECD member countries, France and Italy ranked worst.
The contrast between the Baltic nations and some of its fellow EU member states moved one economist to state: “All EU member states should cut and paste Estonia’s tax policies. That would be the most efficient way for EU member states to adapt tax policies that would help generate economic growth and make Europe more competitive in the global economy“.
Due to the U.S. corporate tax reform adopted in 2017, the United States ranked 24th overall – an improvement from 28th in 2017.
Another top performer thanks to recent tax reform was New Zealand, which ranked third. Since 2010 the southern hemisphere Kiwis cut their marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax and cuts the corporate tax rate to 28 percent from 30 percent. In addition the country has no inheritance tax, no capital gains tax and no payroll taxes.
Luxembourg ranked fourth overall on the index due to the second best consumption tax scheme. It also adopted a new patent box scheme with an 80 percent exemption on income from patents, software and other intellectual property, according to the index report.
The Netherlands and Switzerland ranked five and six, respectively.
“Switzerland has a low corporate tax rate (21.1 percent), a low, broad-based consumption tax and a relatively flat individual income tax rate of 22 percent, which is below the 23.9 percent OECD rates”, the report said.
Although it has one of the highest overall EU tax burdens, Sweden ranked No. 7 on the ICTI based on a 22 percent corporate income tax rate, no estate or wealth taxes and a “well structured VAT and individual income tax” the report said.
“Sweden’s results show how a socialist-based economy can have an efficient and competitive tax structure“, Bunn said.
Countries with notable changes in 2018 compared to previous years included Belgium, according to the study. A corporate tax rate reduction to 29 percent from 34 percent in 2017 helped Belgian improve from 25th to 19 in the ICTI. Chile lowered its top marginal tax rate from 40 percent to 35 percent and went from 33 to 31.
Israel reduced its corporate income tax rate from 25 percent to 23 percent but fell one place from 29th to 30th on the index due primarily to one of the rankings highest personal income tax rates.
The low ranking for France was result primarily of a corporate tax rate at 34.5 percent – ahead of only Portugal at 31.5 percent.
“Though the French government has committed to lower the statutory rate over the next several years many more changes are necessary for France to have a competitive tax code” the report said. France also had the highest property tax rank.
Italy‘s second-to-worst index ranking was due primarily to a poor corporate tax ranking with an overall rate of 27.8 percent and high rates of personal income tax and property taxes.
Portugal and Poland were just ahead of France and Italy at the bottom of the ITCI report.