Tuesday, August 30, 2005

All Right, Everyone, Out of the Boat: Start Walking

 
They must be holier than we.

The Brussels Journal calls the tax revolution that began in Estonia “walking on water,” but it’s really just doing what your Grandma told you as she thwacked your noggin: “use your common sense, child.”

Here’s what happened: The Estonian Prime Minister in 1992 (who governed for three years and then came back in 1999 until 2002) was Mart Laar. Mr. Laar was not a poliltician. His area of study was Europe’s 19th century national movements. Not being an economist, and figuring he’d better learn something quick, he sat down and read Free to Choose by Milton Friedman. Seeing all these ideas about the benefits of privitization, the abolition of tariffs, the economic advantages of a flat tax was a real eye-opener for Mr. Laar. He also thought that these were reforms already in place in the West.
     It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done. They said it was as impossible as walking on water. We did it: we just walked on the water because we did not know that it was impossible.”
So in 1994, Estonia introduced the flat tax with a rate of 26%. What did they have to lose, after all? When Laar took over, Estonia’s inflation rate was over a thousand per cent. The economic growth rate was neagative thirty per cent, and the employment rate was thirty per cent and rising. The government owned just about everything, and virtually all Estonian trade was with Russia.

So how do things look now? We should be so lucky:
     Today, inflation is 2.5%, economic growth is between 6 and 7%, unemployment is low, the government budget is balanced and there is a high level of investment. Moreover, Estonia is leading the world in the field of e-government.
And Estonia is not the only country with a flat tax and a thriving economy. The Brussels Journal lists Lithuania and Latvia, Russia, Serbia, Ukraine, Slovakia, Georgia and Romania as having implemented versions of the flat tax. They say Iraq is consdering such a move.

Meanwhile, Mart Laar has returned to writing history, this time about the anti-communist partisan fighters in the forests of Estonia. “They saved the soul of my country.” That may well be true, but Mr. Laar saved its bacon. And all it took was common sense.

Okay, everybody — out of the boat, start walking.

16 comments:

Bill said...

But then I wouldn't have my privileges such as special exemptions. Or be able to make the people better than me pay more. Or......

Horrors! We might have true equality under law!

Evan said...

In some brief Googling I have found that the federal tax code is about 50,000 pages, with perhaps 10,000 of that having been added since the GOP took Congress in 1994. The tax yoke is now simply a way to contribute to the permament re-election machine in the legislature that is the most prominent yet under-appreciated feature of the American government in these times. Taking from thee and giving to me, and then taking from me and giving to thee is just the ticket to send everyone back for two more years, a sort of political perpetual-motion machine.

Hanba'al said...
This comment has been removed by a blog administrator.
Hanba'al said...

Just to let you know Dymphna, Wanniski just passed away yesterday.

http://tooconservative.blogspot.com/2005/08/supply-side-economics-loses-parent-who.html

linearthinker said...

I met an amiable CPA at a local watering hole awhile back. After getting acquainted, I asked him what he thought about tax reform and how it would impact him. He thought reform was a good idea, and said it was not a worry...it wouldn't happen in his lifetime. He's younger than me, so I'm not holding my breath.

linearthinker said...

My hunch is that the reform we'll see will be limited to piecemeal revisions of the existing body of tax codes, e.g. there's now hope of reducing the rates of confiscation imposed by the inheritance tax, but not at present abolishing it completely.

Dymphna said...

lan nguyen--

Thanks for letting me know about Wanniski. I know he went off the deep end some years ago, but in economics he was my first love, and so his death is sad.

He also had interesting things to say about music. We both liked Gershwin, and he agreed with me that Ger. had an essentially urban undertone that was distinctive. It was sooo American/optimistic, even the sad songs.

Since I'm media impaired (no TV, we hardly listen to the radio, and certainly no newspaper crosses this threshhold) it would've been awhile till I heard.

I liked his stories of his father, whom he admired very much...

...as I said in our earlier discussion, it's too bad he went wonky and I still wish they made his HTWW required high school reading.

It was thoughtful of you to let me know. I feel sad, but that's okay...

Dymphna said...

Who do you think is responsible for the very strange font in the word verification?? Sometimes I struggle to type those suckers out correctly. ADD and astigmatism. Thank you, God.

TAXES: I think the revolution is coming. Don't know when the tipping point will be reached, but it will. The American electorate is getting more uppity by the day...fun to watch.

And I forgot to mention the Celtic Tiger -- Ireland went supply side and did beautifully but I don't know if it backed down later or not.

Hey, maybe this verfication stuff is Klingon! Wow.

unaha-closp said...

Estonia has also recieved just a touch of funding subsidy from the EU that does increase economic performance.

Hanba'al said...

The longer I live in this country the more I understand that it doesn't take very much to challenge America's economy. The main burden to the producers is tax and it is the stranglehold to choke the producers and increase the barrier of entry. Tax is in essence the cost to do business and with that in mind, we do have a lot of cost: regulation, subsidy, generous welfare , Social Security spending, money printing without standard, and irresponsible debt. I used to say that America economy like a man being chased by a buch of vicious dogs. He just can' stop but the problem that he might out run the dogs when he was young but he will not do that forever. Your guess is as good as mine about the age of this American but that's not the point. The point is: the real cause of this fundamental problem is whether your money belonged to the tribe or your money is belonged to you?

Hanba'al said...

I forgot to add in the post above that any country having a population base of said 50 millions, is even worse than America. But that doesn't mean to say a 200 pounds overweight is in any shape of form are better than those of 250 pounds and above. Sooner or later, he will got a heart attack.

Dymphna said...

Lan Nguyen--

You sound like my son. He thinks the banking system installed in the late 19th century, early 20th, the Federal Reserve, the lack of a gold standard, and the hideous personal and governmental debt is going to do us in.

I say, get rid of the current tax system, beginning with the very sneaky withholding laws, and we're on our way out of the labyrinth.

Dymphna said...

unaha closp -- whatever the EU did for Estonia, the EU should try for itself. Estonia has a much better track record and much lower unemployment.

Maybe the EU should read Friedman and try walking on water. Or a little common sense, whichever comes first.

Wish we could do both around here.

Hanba'al said...

I think this article about Wanniski echoes many former friends, students, acolytes' sentiment, your included Dymphna


But as time went on, Wanniski's views became more rococo, and, falling victim to his desire for attention, he strained so hard to be provocative that he alienated many of his original acolytes (including me; I wrote him numerous times asking to be taken off his e-mail list, his opinions had become so sadly loopy) and poisoned good relations with important figures in government.

The epitome of this nonsense was his political romance with Louis Farrakhan, the leader of the Nation of Islam and anathema to most conservatives. Wanniski became a severe critic of Israel and a fierce opponent of both the original Persian Gulf war and the current war in Iraq.
...
He was truly an American original -- with not a successor in sight.


I found his defense of Farrakhan and his anti-Jew attitude are just totally intelectual dishonesty. That erases all of my benefits of the doubt given to him in the early years. Regardless, with respect to the free market principle, I still have some respects for the old man.

http://www.techcentralstation.com/083105D.html

unaha-closp said...

Maybe the EU should read Friedman and try walking on water. Or a little common sense, whichever comes first.

If they ever do read this then they will stop giving subsidies to places like Estonia, Ireland and before that Portugal; and we will see for certain if it is the flat tax rate that fosters the growth in Estonia.

Is it the EU spending and direct investment encouraged by EU membership or the flat tax rate that encouraged the growth?

Same argument as in America was it the tax cuts or the increase in deficit spending that led to the current growth?

Muddy waters, muddy waters

Dymphna said...

I don't think it matters if the waters are muddy as long as your stride is long.

If Estonia's growth and financial well-being are the result of EU assistance, pray tell from where comes the sickly pall o'er the face of the EU?

They've got long underwear and bras from China piled up on the borders because they insist on playing their deadly tariff games. Shop keepers are going bust whilst the EU bureaucrats want everything to be fair. Communism isn't dead at all; it's merely in ICU in Brussels.

Give me the flat tax to the flat line on the brainwaves of the EU any day.

And the transparency of the flat tax, should Iraq adopt it, will go a long, long way to eliminating some of the corruption. Some.