Excerpts from the Ministry's Weekly Web Release August 8, 2002.

Excerpts from the Ministry of Finance's Weekly Web Release
August 8, 2002

Has the tax burden on individuals increased?
At this time of year, when the annual tax assessments on individuals are made public, the usual round of discussions of tax burdens is renewed. The media reported earlier this week that income tax, both central and local government, had more than doubled over the last ten years. The news included graphs that gave reason to believe that the tax burden of households had escalated. Such interpretation, however, is entirely inaccurate.

According to information from the Internal Revenue Directorate on the income tax of central and local government since 1990 relative to the taxable income of households, the central-government income tax has shrunk proportionally while the local tax has increased. This is largely due to changes in the division of labour between central and local government, especially the transfer of elementary schools in 1997 and the abolishment of the local government turnover tax on companies in 1993, both of which were met by increasing the local income tax ratio and lowering the central government income tax correspondingly. There have been two further influential changes. First the central government income tax was reduced by 4% in stages in 1997-1999. Secondly, the reduction in the central government income tax and an increase in the local tax in 2001/2002 is partly due to an agreement between the government and municipalities.

The main conclusion of this survey is that the ratio of general income tax payable to central government from taxable income has changed little between 1990 and 2001, or from 10.4% to 10.9%. Total income-tax payments to the Treasury increase more, or from 10.4% to 12.1% of income. This is, on one hand, attributable to the levying of a special income surtax on higher incomes since 1993 and, on the other, to the introduction of an integrated capital income tax in 1997. The levying of local-government income tax, however, has increased substantially over the same period.

In addition to the explanations above, it is important to keep in mind that the development of tax revenue, both of central and local government, is undeniably influenced by general economic developments, i.e. the tax burden follows the economic cycle. Furthermore, it should be remembered that during this period, there has been a general tendency towards an increase in the weight of income tax while the weight of turnover taxes has reduced. Therefore, the increase in income tax alone does not represent the development of taxes in general. Talk of a heavy tax burden in Iceland also seems strange when considering the fact that not only income taxes but also all taxes in Iceland are among the lowest in Europe. It should also be remembered that few countries give as much consideration to tax equity as Iceland does. This is partly due to the fact that the tax-exempt personal allowance is among the highest and the tax burden among the lowest amongst OECD-countries, as indicated in OECD-reports. (See Web Release 18 April 2002).

The condition of the labour market
The condition of the labour market has been changing considerably in recent months. During the peak of the upturn, there was a steady influx of foreign labour into the country, the increase of foreign citizens on the labour market equalling about one-fifth of new jobs created during the upturn. There was a considerable transfer of labour between jobs; foreign citizens took jobs in fish processing and services, whereas locals transferred to jobs they found more interesting. Even though there has been a reduction in the number of work permits issued and the influx of foreign citizens, there does not seem to be a corresponding increase in the number of people leaving the country. On the contrary, there is a steady increase in the renewal of work permits that non-EEA foreign citizens need after one year in Iceland. There has also been an increase in the issuance of green cards and the granting of citizenship that follows later on. Most work permits granted to non-EEA members are issued in the autumn and reached 300 people per month in 2000, even though the number of people entering the country did not reach that figure. In the autumn of 2001, the peak was one-half of that the year before and the number of new work permits has been declining steadily ever since. Reported unemployment has risen during this period so there is likely to be less need to import labour from abroad.

The Icelandic economy has benefited from the chance to get people to fill vacancies that otherwise would not have been tended. Traditional economic principles also indicate that bringing in labour from abroad has prevented even more expansion on the labour market than was the case. However, the people who came are here to stay and are adjusting to Icelandic society. Likewise, the Icelandic society is adjusting to the fact that it now includes a group of people with a different background and habits. It is, for example, to be expected that a part of the wages of those people be sent to the country of origin, at least temporarily. An economy that needs labour from abroad has to be prepared for the permanent changes that this is bound to bring to society.


For comments and/or suggestions, send e-mail to:
"bolli.thor.bollason@fjr.stjr.is"
or contact the Ministry of Finance,
Weekly Web Release, Arnarhvoll, 150 Reykjavik, Iceland