Redstate

If I were going to bet on the cause of recent economic growth, I'd put my money on their having been admitted to the EU in May 2004.  You'll probably grow pretty fast once you're inside the protectionist system rather than outside.  (Not that I'm any fan of protectionism, all things considered.)

Estonia has been a poster child for free market economics since almost immediately after independence.  Estonia is one of the most economically free countries in the world and much more so than most of Europe.

Estonia was the first flat tax country, leading the way in Eastern Europe.

The experiment started in a small way in 1994, when Estonia became the first country in Europe to introduce a "flat tax" on personal and corporate income. Income is taxed at a single uniform rate of 26%: no schedule of rates, no deductions. The economy has flourished. Others followed: first, Latvia and Lithuania, Estonia's Baltic neighbours; later Russia (with a rate of 13% on personal income), then Slovakia (19% on personal and corporate income). One of Poland's centre-right opposition parties is campaigning for a similar code (with a rate of 15%). So far eight countries have followed Estonia's example (see article). An old idea that for decades elicited the response, "Fine in theory, just not practical in the real world," seems to be working as well in practice as it does on the blackboard.

And as with many former Soviet satelites in Eastern Europe, their experience with Communism has made them much more resistant to Western European Socialism.  Thus taxes are low, regulations are slim, and privatization isn't a bad word.  I'm sure having rich countries near by helps them the same way Mexico benefits from its proximity to America.  But Estonia leads a few Eastern European countries that are paving a new path of pro-market, pro-America, anti-totalitarianism foreign policy that is almost gone in Western Europe.

Congratulations to Estonia on embracing freedom and seeing its results.  Hopefully some day France and Germany will learn that lesson again.

The CIA Factbook puts Etonia's 2004 growth at 6%, which ranks them at 48th place among national economies.

The ease of tax returns seems to be not due to the flat rate of 24% as such, but to the very few deductions allowed.

Flat taxes are more than just the rate equilization.  The idea is to have a flat rate with no (or very very few) deductions.  The concept is to simplify the system and take out the cost of the complications.  No need for "tax professionals" or the huge IRS.  No searching for loopholes.

Here is a great Economist editorial endorsing Flat Taxes and singing their benefits.

Here is a recent article on Estonia's success and the following it has in Eastern Europe.  Also included is a graph of Estonia's growth since the early 1990s.

Estonians, twitchy about Russia, have long envied Slovenia's wealth and security. But now the tables are turning. Slovenia wants Estonian-style growth. The current rate, a projected 3.9% this year, will not match west European levels fast enough. Worse, other post-communist countries are catching up. "We are losing our first place," says the prime minister, Janez Jansa. He blames the gradualist approach of past governments. Having just returned from the Baltic states, he speaks of Estonia as "a good example for us".

One thing he would like to copy is Estonia's flat tax of 24% on personal and corporate income. Filing an annual tax return online, as 80% of Estonians do, takes a few minutes. "Our tax system is so complicated that even experts can't understand it, let alone foreign investors. And it takes from March to October to have it processed. In Estonia it's five days," says an envious Slovene official.

And here is another endorsement of Estonia's free-market approach:

The second thing that struck Mr Jansa was Estonia's economic openness. That dates from 1991, when it had to start from scratch after the Soviet collapse. It privatised almost everything, shunning tariffs, subsidies, bail-outs and restrictions on foreign ownership. That brought huge foreign investment and a manufacturing boom, as well as thriving service industries and a large niche in the new economy. Skype, an internet telephony company, is based on software developed in Estonia; its development centre in Tallinn employs 100-plus geeks, and its Estonian shareholders are now multi-millionaires. There is talk of a $1 billion stockmarket launch for another company, Playtech, which designs internet-gambling software.

Adam, unfortunately the Economist article on Estonia's growth you linked to here seems to be accessible only to paid subscribers.

I agree that according to the Economist editorial, flat rate taxes embrace a no deduction approach. But those don't have to be linked - you could remove deductions with a variable rate, or have a flat rate with deductions. In fact, the Economist's recommendation is for a flat rate with a threshold, which as they say can actually be quite progressive.

Absolutely, I know of no advocate of flat taxes who wants to entirely end progressivity.  The Economist's recommendation is the mainstream view on how to implement a simplified tax system where you do the following.

(Total Income - Set Deduction)*20% = Taxes owed.

You could do it on a postcard.

Here is the graphic:

<img src="http://www.economist.com/images/20051015/CEU666.gif">

According to the graph, their growth has been between 6-10% since 2000.  And it's been over 5% every year since 1995 except for a dip in 1999 of 0%.

might I recommend TurboTax. Most taxes should take less than 5 minutes, complicated ones less than an hour even if you are completely ignorant. 5 days is a long time.

Most of my comments here so far have been from the liberal side, but let me state that the flat tax is a great idea and I'm glad Estonia is providing a demonstration for us.

Also, next time you are in Europe pay Estonia a visit.  Talin is a beauty of a city and I highly reccomend Saku lager and Viru Valge vodka.

I don't think it's a coincidence that these flat tax approaches are being implemented in countries that are "starting from scratch" after the collapse of a previous regime.

Our own CongressCritters are by now addicted to the campaign contributions that flow their way from corporations and industry trade groups seeking favorable treatment in the tax code. The Critters' ability to "complicate" things ("except that any cement plant located within 1 mile of the Takahootchie River in the State of Minnesota shall be exempt from the provisions of Section 7.1, as amended) is a power they will not readily give up. It's a gravy train for the Critters on both sides of the aisle. I don't know how we would ever get them to vote in something that would take that power away.

Thanks, the Economist graph does work if you paste the URL in directly.

The CIA GDP growth figures are a bit more subdued. I looked at a comparison with Ukraine, another former Soviet state where the tax is not flat, but seems to be a complete mess. The CIA data comes from this site.

Year   Estonia Ukraine

1999    -0.5   -0.4

2000    6.4    6.0

2001     ?     9.0     2001 Estonia data missing

2002    4.4    4.1

2003    4.8    8.2

2004    6.0   12.0

Re:  Why can't we be like Estonia?

It also helps to start from a low baseline, as countries like Estonia and, a few years earlier, Ireland, did. Yes, the right tax and fiscal policies are important too, and I'm not disputing that, but I also don't think you can get hyper-growth in a mature economy like ours, just as you don't find adults going through the sort of growth spurt experienced by adolescents.

Re: And as with many former Soviet satelites in Eastern Europe, their experience with Communism has made them much more resistant to Western European Socialism

That's partly true, in as much as they avoid turning their governments into an economic  dirigent over private enterprise. But they still insist on having a solid social safety net in place, with the usual European features, like universal health care and generous pensions.

on the virtues of a flat tax, but simiplicity is not assured. One of the reasons our taxes are so complex lies in determining what counts as income. Anyone who has self-employment income will still be filling out lots of paperwork no matter how flat the tax and how few the deductions.

Appears to be tasty.  Must try it out; thanks.

Moe

To understand the difference between Estonia and Ukraine, it is good look back a few more years. GDP growth from 1992 to 1998:

Year  Estonia Ukraine

1998  4.7     -1.9

1997  10.6    -3.0

1996  3.9     -10.0

1995  4.3     -12.2

1994  -2.0    -22.9

1993  -9.0    -14.2

1992  -14.2   -13

All post-Soviet countries experienced a big decline in early 1990s, but Estonia's decline was the least (even compared to its neighbours, Latvia and Lithuania) and Ukraine's was the biggest (even compared to Russia). Yes, Ukraine's GDP is now growing, but it is growing from very low levels.

Estonia was the first to turn their economy around, even before their Baltic neighbours. So, they must have done something right. I would guess a well-handled privatization (which might have been both the quickest and the least corrupt one in ex-USSR) and good tax policies were two big reasons.  

Estonia certainly has universal healthcare and pension system. But, even there, they are not entirely like Western Europe. Half of their social security taxes go to privately managed personal accounts and I was amazed how little controversy this has caused in Estonia.  

As a Democrat, one of my hopes is that when my party comes to power someday, it won't be beholden to the same special interests, and it'll undo the GOP special-interest tax code changes.  I'd even argue that Democrats are unlikely to complicate the tax code too far with their own changes, since we're  willing to use spending as a policy tool rather than tax incentives.  This probably won't please you very much, since you probably like spending increases even less than tax code complication.  

The only tax simplification in my lifetime was the Reagan tax reform of 1986.

I hope you can talk your fellow Ds into a simplification, it would be a positive agenda that probably could win over some voters.  But I do doubt the commitment.  Many (if not most) of the loopholes are attempts to help the poor or the environment or other groups that I can't see Ds finding it expedient to mess with.

Prove me wrong, please.  But I'm not holding my breath.

when my party comes to power someday, it won't be beholden to the same special interests

Why do you suppose Jack Abramoff and his Indian tribes gave Harry Reid tens of thousands of dollars in cash? It's not "news" in our media when a Democrat does it, but that doesn't mean they aren't on the same gravy train. They're all on it. It was the SEC under Clinton that gave Enron the loophole it needed to do what it did, after the GOP Congress had voted not to.

This probably won't please you very much, since you probably like spending increases even less

Nope. I'm pretty much off the reservation on that subject. Until we have reduced the Democratic Party to insignificance, cutting spending merely conserves borrowing capacity for use by Democrats. If we don't use it to pursue our goals, the Democrats will use it to pursue theirs. Well-meant "spending cuts" by conservatives just make sure that the tank is full when we hand over the keys to the Democrats. See, that's why the Prescription Drug Benefit is such a good deal. It's so expensive, you guys will never get HillaryCare now. There's simply no money for it. Or for any other schemes you might dream up. Bwaa ha ha.

As a Democrat, one of my hopes is that when my party comes to power someday, it won't be beholden to the same special interests

No, it will be beholden to different special interests :-D.  Trial lawyers instead of drug companies, etc.  Besides, the big contributors don't care which party, they just want their goodies.

The flat rate sounds good, but a flat rate without

deductions...NO!

The tax law structure may be complex,but it does

help if you can find the right information.

I belive it (tax law) motvates us to move into

our own business because we can make  and keep

more money.

A "W-2" employee buys a pick-up with post-tax

income and pays interest with post-tax dollars.

However...

A corporation buys the pick-up outright writes it

off as an expense with pre-tax income, and

pays less taxes on their income.

As a "W-2" employee pays Uncle Sam first,

then deducts.

but my point is that our special interests aren't the kind to want new complications to the tax code.  Rather, they want to beef up spending on entitlement programs.  

Did Abramoff and his tribes want changes in the tax code?  I thought they just wanted to be allowed to run casinos.  Republican contributors -- business interests, in particular -- want tax incentives more than Democratic contributors do.  Democrats are more likely to want spending programs.  That was the whole point of my post.  

Dems want tax breaks for universities, labor, environmental policies, and political groups masquerading as non-partisan (i.e. NAACP).  The problem is that when we open the door to adding loopholes, everybody has one they'd like.  And adding one more isn't that bad after 139,320 already exist.  The Economist article makes a strong (and underappreciated) point about Flat Taxes:

Once tax codes have degenerated to the extent they have in most rich countries, laden with so many breaks and exceptions that they retain nothing of their original shape, even the pretence of any interior logic can be dispensed with. No tax break is too narrow, too squalid, too funny, to be excluded on those grounds: everybody is at it, so why not join in? At the other extreme, the simpler the system, the more such manoeuvres offend, and the easier it is to retain the simplicity.

Let me explain this great economic growth to those with limited knowledge. YOu see, if you are WAY WAY down at the bottom of the barrel, and you suddenly get a free economy. The robust economic growth is very easy to obtain. I doubt if a VAY had any positive effect. In fact VAT is mostly a negative to economic growth.

  At any rate, I would oppose any VAT with the last vestiges of my life and energy UNLESS the sixteenth amendment is repealed. Having Income Tax and VAT?

 a recipe for disaster!!!!!!!!

I picked up a Saku mug when I was in Talin, can't wait to fill it with its namesake here in the states.