Iceland has only twice as many inhabitants as Canada’s smallest province, Prince Edward Island, yet the Nordic country is being held up as a model for a workable welfare state that the Canadian government would do well to learn from.
Like Canada, Iceland’s government used to extract a high amount of tax from the corporate sector, nearly 50 per cent. However, reforms to Iceland’s tax system saw that figure cut to 18 per cent and the country is now reaping the benefits through a fast expansion in business activity.
The increased corporate revenue has been invested back into public sector spending by the Icelandic government. The amount of GDP spent by the government has increased from 32 per cent to 40 per cent over the last 15 years.
That’s not the only change. In the 1980’s, the Icelandic economy was in turmoil with inflation reaching levels of 100 per cent. However, with changes in corporate tax rates, the country is now the fifth richest in the world (based on GDP per capita and adjusted purchasing power). Canada, on the other hand, is ranked tenth.
The secret to Iceland’s success has been the reduction of both personal and corporate tax rates. Changes in the tax rates have resulted in the government being able to collect twice the amount of revenue in taxes since the cuts were introduced in 1992.
Lower tax rates encourage fast economic growth, which in turn stimulates a larger tax base with increased revenues. Meanwhile, while personal income, or ‘productive activity’ remains relatively highly taxed, the state gains income from higher consumption activities such as a higher sales tax (in Iceland’s case 24 per cent).
Canada, a country with an appetite for expensive social services and a high corporate tax rate, might therefore benefit from closer examination of Iceland’s economic model.