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Estonia: From Poor Nation To Innovation Powerhouse, But How Did They Do It?

Estonia, impuestos, burocracia 0

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VisualPolitik’s videos are illustrative and simple. Their topics — economic revolutions, tax policies and regimes — are often ignored by the mainstream media. And so it happens with the case of Estonia, the small European country that was ranked first by the Tax Foundation as the country with the most competitive taxes in the world for 7 years, despite not having the lowest taxes globally.

This VisualPolitik video presents the story of how Estonia, a nation that was under the yoke of the Soviet Union, went from being a country immersed in a severe crisis to present great numbers at the economic level from the privatization of national companies and the bet on technological development and the Internet.

In fact, until now, Estonia’s economy has been relied heavily on its electronic and telecommunication sectors, coupled with strong regional trade ties.

All this was enough to get out of a financial crisis in the 1990s. Estonia left behind those failed, statist economic policies, and embraced economic development and freedom.

Estonia took a major financial hit with the 2009 financial crisis, one that, for any other country, could have meant a point of no return. To put it in context, Estonia’s GDP fell by more than 14.4 %, and this, which was a disgrace at the time, ended up being an opportunity, forcing the Estonian government to implement what some consider a “secret” formula for success: simple taxes and 0 bureaucracy.

Estonia, the value of the sense of compensation

It is often said that tax havens attract companies because they are places where the rich and powerful does not have to give their money to government coffers. Well, that is not entirely true.

There are tax havens, much criticized by many, which usually offer greater legal certainty than countries with inflexible tax regimes. But Estonia is far from being a tax haven, instead it is a country with a 20% tax rate on all its taxes, a high figure to some libertarians.

This is how simple taxes are in Estonia: 20% VAT, 20% income tax (with important exceptions for lower incomes) and 20% corporate taxes; that’s how simple taxes are in Estonia. According to VisualPolitik’s analysis, these are tax burdens that do not punish or benefit any type of practice in the market, that is to say, it is a neutral tax; very contrary to what European countries like Spain do.

Another advantage that the Estonian tax system has is that, in the corporate tax, the company has the option to take the money out of the company and declare profits or, failing that, to reinvest and not pay a single cent of euro in corporate taxes and, in addition, there is no tax on dividends. Basically, there is no risk of paying duplicity.

After the 14.4 % drop in GDP following the 2009 financial crisis, the Estonian government applied a formula of tax cuts – to relieve the private sector and its citizens – and a giant austerity policy. For instance, the country reduced public spending to historic levels and reduced public employees by approximately 40%, pushing a majority of them to the private sector.

Did that work? Yes. Estonia’s GDP per capita has already surpassed countries like Greece, Portugal, and now is going after Spain. These three nations are larger than Estonia.

This was achieved in 30 years, with two key points, the fall of the USSR, which led the country to price liberalization and privatization of potentially bankrupt companies, resulting in its economic boom.

A key point in all this history is that Estonia is a country where the welfare state can materialize due to its small population.

Education in Estonia, to give one of the examples, is relatively free. Similarly, public transportation is free too. In terms of health, Estonia has been increasing its public spending to strengthen its public health system.

But the Estonians do not have an exorbitant debt either, in fact, the country’s national debt stands at 8.1% of its total GDP, which is a manageable figure that provides overall financial security for the nation.

Because of all these situations, the real strength of Estonia lies in the sense of compensation, i.e., companies and citizens know that the taxes they pay are invested in education, public health, good transportation and the development of the nation with public works such as roads.

According to The Heritage Foundation’s Index of Economic Freedom, “Estonia’s economic freedom score is 77.7, making its economy the 10th freest in the 2020 Index. Its overall score has increased by 1.1 points, led by a higher score for government integrity. Estonia is ranked 5th among 45 countries in the Europe region, and its overall score is well above the regional and world averages.”

“The economy of Estonia has been fluctuating in the upper reaches of the mostly free category for nearly two decades. Solid GDP growth has followed accordingly with increases in both private consumption and investment,” the report reads.

Estonia, the challenge of bureaucracy 0 and how can it improve

According to VisualPolitk, Estonia passed the Public Services Act in 2013, which brought forward several innovations for the recruitment of new civil servants for its public sector.

What innovations? For example, the decentralization of recruitment. That is, a small administration, linked to the state, can decide which personnel it needs and which it does not. A role that many countries leave to their central governments.

In this way, Estonia seeks the absolute efficiency of its state. Spend what is necessary, nothing more and nothing less. Estonia’s long-term goal is to keep the number of public employees to no more than 12% of the working population. Estonia has less than 1.5 million citizens.

To reduce bureaucracy, the Estonian government worked with civil servants and private companies alike to come up with suggestions on how to cut red tape. Through studies and surveys, the Estonian government realized that it was overspending on many duplications that could be served, equally or better, with less administration. In this way, the state became more efficient by optimizing resources.

A clear example is how in Estonia it is very simple to declare your taxes or create a new company. Everything is done digitally, preventing fraud and making the state less bureaucratic.

Even so, Estonia must continue to improve its public spending, which is why its bureaucracy 0 program must continue to be carried out in order to continue to make the work of the state more effective with less expenditure. An increasing national debt is not good for any country.

The Heritage Foundation noted that “what holds Estonia back from reaching the topmost ranks of the economically free are high levels of government spending and lingering rigidities in labor regulations that impede growth in productivity. Forecasts suggest modest but increasing budget deficits in the near future.”

In other words, it is not imperative, but necessary for Estonia to re-examine its public policies and labor laws if it wants to continue to grow and develop.

Despite this, the unemployment rate in Estonia is only 6%. Better than many countries and, it is worth remembering, in the midst of the global economic crisis caused by the coronavirus pandemic.

An example for Latin America

Countries such as Estonia and Poland, which suffered from the statist policies of the Soviet regime, had to face a series of liberal economic reforms to survive. Embracing economic freedom led them to become prosperous nations today. But of course, this path is very difficult to follow, and in Latin America this is still not understood.

For example, every time a government tried to implement strong austerity and de-bureaucratization measures to combat the present excess of the state, the government called it “paquetazos”, which triggered major social conflicts. In Venezuela, it was with the “caracazo.” Something similar happened not long ago in Ecuador There are former presidents like Macri in Argentina who promised drastic measures to save the economy and ended up applying “gradual” measures that did not change the country’s destiny at all.

Another case is that taxes in Latin America, many times, instead of going to investments in health, education or development, simply go to the juicy salaries of politicians and its often large public employees.

In the United States, the Trump Administration’s de-bureaucratization was an important achievement that President Trump must be proud of. Many large businesses finally saw that there were financial benefits in investing in the United States, including significant legal certainty and major tax relief.

From there, the Trump economy was one of the most successful of the last 5 decades until the arrival of COVID-19 forced industries and businesses to close.

In other words, you do not need to have the lowest taxes to attract investment. It is simply necessary to maintain a pleasant fiscal climate, to have legal certainty, to apply the sense of consideration and to de-bureaucratize processes to improve economic freedom and quality of life for citizens.

In Latin America and even in several states of the U.S., Estonia can be a good example to follow. Economic freedom is the key, of course, but so is decentralization.

Emmanuel Alejandro Rondón is a journalist at El American specializing in the areas of American politics and media analysis // Emmanuel Alejandro Rondón es periodista de El American especializado en las áreas de política americana y análisis de medios de comunicación.

Contacto: emmanuel.rondon@elamerican.com

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