Mart Laar on the Flat Tax
The Review recently had the opportunity to interview Mart Laar, the pioneer of Europe’s flat tax revolution. As Prime Minister of Estonia, Mart Laar introduced a flat income tax of 26% in 1994. Since then, nine European countries have adopted the flat tax. This year, Mart Laar was awarded the Cato Institute’s biennial Milton Friedman Prize for Advancing Freedom. He is currently a candidate for Prime Minister.
SR: Mr. Laar, you have stated that your only exposure to economics prior to instituting a flat tax was from Milton Friedman’s books. Was this ignorance an advantage?
ML: Ignorance is in and of itself of no value, but in the course of making political decisions, the decision maker’s conviction that he is the smartest person in the world can turn out to be a far greater problem. Advisers with a specific competence are, after all, usually far smarter in their area of expertise than their prime ministers or presidents. Thus, in the early 90s I set as Estonia’s goal enacting a simple, transparent and comprehensible tax structure that would encourage business and could ensure the collection of taxes. As a solution, I proposed the flat tax I had found in Milton Friedman’s book, which my economic adviser Ardo Hansson deemed entirely reasonable. What he neglected to mention was that nobody in the world had yet successfully implemented it.
SR: The collapse of the U.S.S.R. was a rare event in whose aftermath Estonians had a willingness to undergo systematic reforms. Did instituting the flat tax necessitate particularly strong political will?
ML: The unusual circumstances following the collapse of communism may have helped along, but at any rate this policy required greater than average decisiveness.
SR: Has your reasoning changed in the last fifteen years?
ML: All I can conclude fifteen years later is that we made an extremely good decision, whose consequences have been extremely positive and have been emulated in many other countries. The Baltics, who were first to go over to a flat tax, have developed far more quickly than their Eastern and Central European brethren who have remained faithful to progressive taxation.
SR: Is there a specific benefit to having a flat tax over a similar level of progressive taxation?
ML: Eastern and Central European progressive tax countries may have rates just as low as ours, but having a greater number of income brackets has kept them from making their tax structure sufficiently simple and transparent to make low taxes effective or spur enterprise. Further, they have had lower taxation revenue, which in turn doesn’t allow them to support effective poverty reduction or education programs. As a result, flat tax countries haven’t had much difficulty rebutting the attacks of “Old Europe’s” politicians against our tax reforms, and the new member states have encountered no serious pressure to undo the reforms.
SR: Has Estonia’s small size contributed to its success? What are the prospects of a flat tax in Western Europe?
ML: When Estonia, followed by the other Baltics, went over to the flat tax, it was said that their small size allowed them to do so. After Russia too successfully adopted the flat tax, such tales ceased or at least diminished—Russia is in no way, shape, or form a small country. Currently, several countries of “Old Europe” are also considering instituting a flat tax. A recent forum at which the Finnish prime minister participated included the presentation of a book on adopting the flat tax in Finland. Several participants thereby noted that Finland has quietly been transitioning to a single rate—the only progressive element of Finnish taxes is the portion paid to the central government. The Flat tax also has supporters in Sweden and Denmark. This is hardly surprising, since a single rate of taxation is in many ways more socially equitable than ostensibly fair progressive taxation, which actually makes tax evasion through various loopholes easier for the rich.
In addition to everything else, I particularly don’t understand why the world should so assiduously follow Karl Marx’s teachings, whose first imperative—the confiscation of private property—paved the way for progressive taxation in the arena of history. Perhaps the time has come to leave behind this relic of communism.
Interview translated from Estonian by Luukas Ilves.