Our guide in Estonia explained that Estonia was forced by the Soviets to adopt a Socialist economic system in 1944 (Wikipedia history article). Private houses and apartment buildings were confiscated by the state. Farmers were allowed to keep a farmhouse and one hectare of land (2.5 acres) but the rest of their land was turned into communal farms. Families that had previously owned a house were generally allowed to stay in the house but they then had to share with multiple additional families. All of this was then unrolled starting in 1991 when the country became independent once again. Old property records were dug up and real estate was restored to previous owners and/or their heirs, even if those owners had left the country 50 years earlier. People who lived in houses and apartments under the Socialist system were then forced to move out, but they didn’t have enough money to rent or buy a new place due in part to the fact that there weren’t really enough housing units. It took about ten years to sort this all out and get every family into its own place.
What about our guide herself? Her family had a 63-hectare”linen” (flax?) farm that was confiscated and restored. Now they use it as a summer escape to the forest; there are no longer any crops on what had been the fields. Her husband’s family had a 20-hectare farm less than a 30-minute drive from downtown Tallinn. It too was confiscated, but restored to the husband and now they live there with their three children and two dogs.
What kind of political system do people who went from Capitalism to Socialism to Capitalism adopt? “We’re quite conservative,” Siiri explained. She described a streamlined government in which all business could be conducted online. She described taxes as “simple” and explained that people pay a flat 21 percent income tax plus a flat 20 percent consumption tax (VAT, as in the rest of Europe). In addition, employers pay a tax of 33 percent on top of wages to fund pensions and health care. It seems that there is no support for a progressive income tax rate; Estonians are satisfied that a person who makes 5X the average will pay 5X in tax; they don’t dream of a world in which that person will pay 10X or 15X. She expressed pride that Estonia had a budget surplus, a distinction that only Germany shares within Europe. The Heritage Foundation rates Estonia as having more economic freedom than the U.S. and as spending about 38 percent of GDP on government. I think that this number can’t be compared to the U.S. number because the typically quoted U.S. numbers don’t include all of Obamacare and other health insurance spending. (See “Health insurance premiums should be counted as tax revenue?”.) The Tax Foundation says that Estonia has the most favorable tax system within the OECD and it doesn’t double-tax corporate profits (in the U.S. we tax the company first and then tax individuals on the dividend income). It appears that there is in fact no “corporate tax” as such. It is just that the company pays tax on dividends that it is distributing. So where a U.S. company may face a combined 40 percent federal and state corporate income tax rate, the comparable number in Estonia is 0. (Estonia will tax distributed profits, however, just as the U.S. taxes dividends, but at a somewhat lower rate.) This page suggests that capital gains are not adjusted for inflation and they are taxed at the same rate as ordinary income (therefore at a lower rate than most U.S. taxpayers pay if you consider both federal and state rates).
Given the lack of higher tax rates on richer Estonians and the smaller share of the economy devoted to government, is Estonia doing worse than the U.S. for its most vulnerable citizens? “Where are children getting the best education?” suggests the opposite: “For example, Estonia has one of the highest PISA scores in Europe, and only 3% of children are low performers in all three skills, leading the European league table.” (The U.S., by comparison, has 25 percent of its schoolchildren in the “low performing” category that will likely result in their exclusion from the workforce (see “unemployed = 21st century draft horse?”).)
[Separately, I asked our guide in the next port, Riga, Latvia, to tell me what was better about this country compared to Estonia (“aside from the language, culture, and people” I prompted). He surprised me by saying that basically the Estonians were better at everything. They’d set up a lower tax more efficient environment for business and were “some years ahead of us.” Corporate taxes in Latvia are 15 percent (compared to zero, as noted above). Income tax is 25 percent. As in Estonia, all taxes are flat-rate. Our Latvian guide specializes in antiques and historical restoration when he is not managing busloads of cruisers. He lives with his wife on a 75-hectare (185 acres!) farm that is roughly a 30-minute drive from the center of Riga. Latvia went through the same process of confiscation of private property then restoration. Juris said that it took about 10 years to sort out during this last swing.]
I’ll write more about this later, but I wonder if Estonia shows that, once you’ve got free trade agreements in place, there is no per-capita economic advantage to be gained in having a country with a large population. It is apparently not more efficient to run a government for 100 million or 300 million people than for 1 million.
- Estonia’s electronic ID card for citizens (used for voting as well; let’s hope that nobody cracks into this!)
- “Estonia has the Most Competitive Tax System in the OECD” (Tax Foundation) — given the smaller percentage of GDP that Singapore spends on government, can the tax rates truly be lower than Singapore’s?