Estonia: Tough campaign stop for Bernie Sanders

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.

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14 Comments

  1. billg

    August 1, 2016 @ 2:13 pm

    1

    > once you’ve got free trade agreements in place

    Trade agreements with countries full of people earning roughly the same amount as your own citizens? Or with countries 1/2 way around the globe where people earn $0.70/hr?

  2. Russil Wvong

    August 1, 2016 @ 3:03 pm

    2

    Estonia’s tax system looks like it was designed by economists! It looks very efficient. I’m particularly impressed by the 20% value-added tax (Singapore only has a 7% VAT) and the property tax based on the value of the land.

    In a small country, it’s easier to run a government in a sensible way. (Are you still reading The Efficient Society, or did it make you overdose on Canadian smugness? Heath makes the same arguments, in a more rigorous way, in Normative Economics, available online.) In one key area, though, small countries have a huge disadvantage: national defense.

  3. Cubano Boi

    August 1, 2016 @ 3:43 pm

    3

    Let’s “sort out” Cuba too. The ownership records there have been meticulously maintained.

  4. Scientist

    August 1, 2016 @ 4:38 pm

    4

    After the Soviet collapse, Mart Laar of Estonia used Milton Friedman’s book Free to Choose to run the country essentially. Estonia is actually an example of libertarianism at work. And because of this, every liberal and conservative in the U.S. tries really hard not to mention it, instead going for Chile as an example of failure (although it seems to be mostly a success story). Go figure.

  5. Aaron

    August 1, 2016 @ 6:12 pm

    5

    A simple 74% tax rate?

  6. jack crossfire

    August 2, 2016 @ 12:58 am

    6

    Their taxes might be lower than US, but still sound incredibly high, by absolute standards. US employees pay about 75% of their income in taxes. You probably pay another 50% for benefits, so it costs 125% of the annual salary for the employee.

  7. Federico

    August 2, 2016 @ 9:07 am

    7

    Did you ask about the ~ 25% of the population who is effectively alien citizens living within Estonia’s borders? Given the fact that these aliens are basically Russians and are a pretty good reason for Moscow to invade, how’s the feeling?

  8. philg

    August 2, 2016 @ 10:49 am

    8

    Our guide’s day job is teaching the Estonian language to Russian children. She said that essentially anyone who can learn basic communication skills in Estonian is welcome to citizenship. She did not express a fear of being invaded. That said, a guide in Latvia did express a concern about Donald Trump being elected to the U.S. Presidency. He saw Hillary Clinton as corrupt and probably bad for Americans, but was fearful that Trump would be friendly with Putin. “We don’t trust Putin,” he said.

    All of these Baltic countries have a low birthrate (1.2-1.5 births per woman, according to our guides). The guides expressed a fear that their boutique languages would die out. At the same time they are not enthusiastic about immigrants who don’t share their culture and language. Estonia has welcomed exactly 30 refugees, according to our guide. Lithuania has been assigned to take 1,000 by the EU. Our guide thought that maybe 10 had actually been approved.

  9. Vince

    August 2, 2016 @ 8:06 pm

    9

    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.

    The significant reliance on VAT probably means that taxes are regressive overall, unless you’re leaving out some important details. This is true of many American states, since sales taxes represent a large portion of their revenue.

    Also, the Heritage Foundation and the Tax Foundation push policies that favor big business and the wealthy. Thus their idea of freedom is anything that helps the rich get richer and keeps wages low for ordinary workers. That’s the pattern you see when freedom and liberty is mentioned in discussions regarding economics in America.

  10. jay c

    August 3, 2016 @ 1:20 pm

    10

    Sort of back on topic, was it in the 1996 election Vladmir Zhirinovsky started saying he wanted to clear-cut Estonia and Latvia and then dump Russia’s nuclear waste there, and then buy back Alaska from the US and put all the Ukranians there?

  11. philg

    August 4, 2016 @ 2:47 am

    11

    Vince: If an Estonian surgeon buys a $5000 carbon fiber bicycle she will pay roughly $1000 in VAT and then use the same bike paths (they have a lot of them around their capital and suburbs) as a retail clerk who purchased a $200 bike and paid $40 in VAT. The doctor paid 25X as much as the retail clerk and enjoys the same public facility. If Estonians were consumed with envy of the successful they presumably would vote (electronically?) for a different system. But at least for now it seems safe to assume that Estonians are happy with the 25:1 ratio. You call it “regressive” but they call it “fair”. If you think that they are stupid for being happy with this arrangement, you can go over there and campaign for Socialism and Bernie Sanders! If you learn Estonian they may even give you citizenship.

  12. ianf

    August 4, 2016 @ 5:40 am

    12

    REPOST WITH WORKING URL LAST, please remove the previous #12

    […] If Estonians were consumed with envy of the successful they presumably would vote for a different system. But at least for now it seems safe to assume that Estonians are happy with the 25:1 ratio. […]

    I keep reading this, again and again and again, and disbelieving my eyes… because, if that is how you imagine the Estonians at large to go about analyzing the state of their welfare, and choosing whom to vote for, then you really could profit from a prolonged stay at some Back-to-European-Reality reeducation camp. Maybe they also could inoculate you with a horse dose of suspicion against, essentially, socrealist depictions of capitalist success story Estonia tailored to blank-slate Americans.
              Reading your earlier #8 comment, I got the feeling that, while your guide’s day job might’ve been teaching Estonian to Russian-Estonians (i.e. immigrant children), and her summer job guiding cruise passengers around Tallinn, her real job was promotion of apple-cheeked Estonian Ways! to foreigners (so how come she’s working all the time). And not even obvious sticking out contradictions like the official (but theatrical) fear of their boutique languages becoming extinct (was she authorized to speak for all the Baltic countries?), while their collective TFR falls well below replenishment rates, made you question her wisdoms.

    Because, let’s face it, despite their hatred of Imperial Russia, and fears of other immigrants not sharing their culture or language (how?), to survive as an independent entity, they have no option but to start importing foreigners, and perhaps—the horror the horror—dropping the requirement of that boutique language as a prerequisite for citizenship… which ethnicity will then be the first in line? (hint: won’t be next door Latvians or Finns). Euro tech.nerds who spent time working there usually mention that they’d move there the instant they wouldn’t be 2nd class citizens on account of their “non-Estonianism.” BTW. that language requirement arose out of fear of Russians moving in en masse in the 90s to escape poverty and stifling embrace of their native Russian culture.
              As for Estonians’ xenophobia, it’s the same story all over Eastern Europe, including such in—perhaps no surprise—the once-heaven for economic migrants/ political refugees from martial-law Solidarity Poland (1981-1989) in the über-liberal West Berlin, depicted here by a fellow Polish journalist asking unpalatable questions.

  13. Vince

    August 4, 2016 @ 4:38 pm

    13

    philg: You’re making a big assumption there, which is that the Estonian government implements the wishes of the Estonian population well. Opinion polls in the US suggest that the American government does rather poorly in that regard. Americans would actually like to see much of Bernie Sanders’ program implemented. Unfortunately, it’s probably pretty difficult to find English translations of Estonian opinion poll results.

    Speaking of Senator Sanders, many Estonians would find his policy ideas to be pretty sensible and unremarkable. One thing that he suggested was expanding Medicare to cover every American. Using Google for a few minutes I was able to find that Estonia already has a program which is basically like Medicare that covers every Estonian. They also appear to have something similar to the program which is called child benefit in the UK and kindergeld in Germany – cash payments to every family with children, regardless of income. This is a government program that is beyond anything that Sanders has proposed.

    I didn’t have the time to see whether Estonia had free college education, another Sanders proposal. But it’s reasonable to assume that it’s either free, as it is in Germany, or so heavily subsidized by Estonian taxpayers that most Americans would consider it to be a phenomenal bargain.

  14. tekumse

    August 4, 2016 @ 5:50 pm

    14

    I agree with Vince that most of what Sanders is proposing is not at all up for debate in any other country.

    And to throw in something you love to complain about – the MA public school system. If they had inherited the incredible Soviet education why is Estonia behind Massachusetts in reading, math and science? Source of the data: http://www.forbes.com/sites/jamesmarshallcrotty/2014/09/29/if-massachusetts-were-a-country-its-students-would-rank-9th-in-the-world/#6ce2b63d21b1

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