Osborne, this is how to do it better

Estonia capital 650

I have written before about how John James Cowperthwaite should be known by everyone as a great hero. He took one of the poorest nations on Earth, Hong Kong, and made it into one of the richest, despite having no natural resources and being embargoed by the local superpower, China. His brilliant economic and political ideas were copied by other nations in Asia, bringing billions out of poverty. And his work has benefited you; your smartphone and much else in your life would not be possible without him.

Look here:
Libertarianism, the cure for our financial problems
Hong Kong Vs Cuba. Capitalism Vs Socialism
The two greatest economists of the last century

Cowperthwaite’s amazing success had two main platforms. The first was leaving business alone to generate wealth. Harnessing the power of capitalism so that individuals could strive and succeed to build lives for themselves and their families. The second was to minimise government and especially to keep government out of business. He knew that individual businessmen knew far better how to provide goods and services for people than the politicians did.

Today in Hong Kong a married man with two children pays no income tax until he is earning more than HK$ 4,340,000. (There are 12 HK$ to the £). The initial income tax rate is 2%, rising gradually to a top rate of 17%. No wonder that Hong Kong generates so many millionaires. Imagine that here!

Despite Cowperthwaite being an Englishman his massively successful ideas have never caught on here, or in Europe. We prefer the large state, high tax route that stifles the economy and makes everyone poorer. The bankrupt dogmas of socialism and Keynsism, as touted by the likes of Paul Krugman and Joseph Stiglitz have impoverished us all. It seems that we don’t like individuals, and thus society as a whole, to strive and prosper. We prefer to pull everyone down to the same level of mediocrity.

But there is one small country in Europe that does apply the principles of Cowperthwaite to a great extent and, amazingly, that country is inside the EU. I am talking about Estonia. God, conveniently, arranged the three small Baltic countries in alphabetical order, Estonia at the top then Latvia then Lithuania. These countries are fascinating, with long and varied histories, they combine both Scandinavian and Slavic culture and they have a very long, Hanseatic, trading tradition.

Back in 2003 Estonia had half the GDP/capita of another European country, Croatia. Now it is $4,000 ahead! Despite Croatia doing quite well. Estonia has just done that much better. Let’s look at some of the policies that have created this economic miracle.

With income tax there are tax free personal allowances, as in the UK. These were just 3196 Euros in 2011. After that all income in Estonia is taxed at 20%, no matter how little or how much you earn. This is called a flat tax and in much fairer than our “progressive” tax regime that punishes success. In Estonia it is worth working hard and risking your capital.

There is no capital gains tax. If the capital is re-invested and not used there are no other taxes, but if is used then it is treated as income and attracts income tax at 20%.

There is no corporation tax on profits retained by a company. None. Zero. Ziltch. Instead it is levied when and if profits are paid out as dividends. And, guess what, this is at 20%. But there is no double taxation so this does not attract income tax. Which is utterly brilliant because Corporation Tax is evil, sucking the money used for investment and job creation out of the economy. In Estonia you can build a business and pay no tax at all on that growth.

Being in the EU there is also VAT. And, you must be expecting this by now, it is at 20%.

Benefits come from an unemployment insurance scheme, 2.8% of the employee’s salary and 1.4% paid by employers. Benefits are paid for a maximum of 270 days and only to people have worked at least 180 days within the previous 12 months when they start. Utterly brilliant.

So the Estonian government isn’t trying to “redistribute” wealth, they aren’t punishing successful people to vainly attempt to create “social justice”. Instead they are creating an environment conductive to enterprise and the accumulation of riches in their society. A place where individual people come first and not the state. And it is working fantastically well.

Estonia Enterprise 650

 

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6 Comments


  1. Very interesting! Definitely a country to follow over next few years. Hopefully they don’t succumb to Euro integration, demographic decline or Russian interference. If they stave off those threats as well as widely adopt English as a fluent second language I can see Estonia attracting a lot of international business and maybe even becoming a refuge for libertarian minded folk to escape from a world of big government and ‘social justice’! Plus Tallinn is a very beautiful and pleasant city.

    Reply

  2. “Despite Cowperthwaite being an Englishman his massively successful ideas have never caught on here, or in Europe.”

    He was Scottish.

    Reply

  3. Seems blindingly obvious, just wish a UK political party would have the courage to try it. Does the Latvian tax regime raise enough to provide good public services such as defence, infrastructure etc?

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    1. Andrew,
      Estonia spends a higher % of GDP on defence than we do.

      Reply

  4. The figures showing the penetration by EU nationals of the UK social housing sector came out recently:
    http://www.telegraph.co.uk/news/politics/11927700/Dramatic-rise-in-Eastern-European-social-housing.html

    The headline statistics for me were those for the Baltic near neighbours:
    Lithuania 12%
    Latvia 10%
    Estonia 1%

    Now you’d be a fool for deducing that correlation equals causation and this is a big endorsement for Estonia. In longer words you’d be foolish to immediately say that right-wing governments with simple and low taxes under the rule of law are great places to live and work, and the sort of places you want to come to work in rather than leave and seek your fortune in the UK.
    But I’d rather not take my chances with any other ideology, cheers.

    Reply

    1. Andrew,

      The Baltic states are different. The Soviet Union moved many ethnic Russians there. After independence there was lots of racism against these Russians, so they bailed out.
      This led to huge skill shortages in these countries. And to a disproportionate number of them coming to Britain.

      Reply

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