Flat tax champion who ignored the economists

Business Platform by John Blundell in The Business

“It is so fortunate that I am not an economist,” says Mart Laar, winner of the Washington DC-based Cato Institute’s Milton Friedman Prize. “I had only read one book on economics – Free to Choose. I was so ignorant at the time . . . it seemed common sense to me. I simply introduced [all the reforms] despite warnings from Estonian economists it could not be done.” Shades of Mrs Thatcher and the 364 economists there.

Laar had become Prime Minister of the Baltic nation of Estonia once it renounced its subordination to the USSR. He is a jovial, tubby, stubbly, blond gentleman who looks more like a postgraduate student than a retired prime minister with multiple triumphs under his belt. He thought his life’s destiny was to be a history teacher. Laar’s prize money – $500,000 (£280,000, E405,000) – from this influential think-tank will free him to write the book he has long wanted to research and publish on the anti-communist partisans who fought on deep in the Estonian woods against the Red Army until the late 1970s.

We hear little of Estonia. Success on a small scale is less newsworthy than bombs or droughts. Put it this way: Estonia outpaces China by every measure of growth and it has a free democracy, the rule of law and a highly critical free media. Estonia is the most northerly of the Baltic states whose experience of the 20th century was about as unhappy as possible. Overrun by Russia, then Germany and then Russia again (with matching brutality), men like Laar could only hope to live semi-fugitive lives at the lowest reaches of the educational ladder teaching obedient Soviet Leninist history.

With the ideals of communism crumbling, Laar’s career lifted off. By an extraordinary sequence of events he found himself prime minister with no experience and little relevant learning outside of his burning belief that socialism was an intellectual cul de sac.

On taking office at only 32, Laar found inflation at 1,000%, the economy frozen, with 95% state-owned and 92% of trade being eastwards to Russia. Now inflation is 2%, every state asset has been sold or is in the process of being liberated and trade with Russia is higher in volume but as a percentage of traffic it has shrunk to marginal significance. Goodbye USSR. Hello World.

The aspect of the Estonian economic miracle that thrills me most is its bold implementation of a simple flat tax. All Estonians pay a rate of 20% – no exemptions, no confusions, no ambiguities. Did the Treasury in Talinn find its revenues stall? No, they increased. People ceased trying to dodge taxes; 20% is so fair few feel it isn’t reasonable.

Laar wants to see UK taxes reduced comparably – and simplified. He thinks there is an unseen competition between nations now. The high-tax, high-welfare formula, in his view, is stale and tired. The vitality in any economy is in deregulation and privatising. “I have very few regrets. Talinn has traffic jams where we used to have no petrol and no vehicles. Things had a certain placid virtue under communism – but nothing happened without Moscow’s directions.”

Now tax professionals and thrusting young politicians fly into the capital to see if they can learn from the extraordinary turnaround of this tiny nation. Laar is disarmingly modest about what he has achieved but also joyful. “It really only seemed common sense but we were freer to act as everyone knew we had been constricted and restricted by Moscow. Now the Russians seem to be modelling themselves on the Estonian experience and are opting for a flat tax.”

Estonia is not a Slav population. Its greatest affinity is with Finland and then with Hungary. All three are linguistic islands, being, in the philological sense, more Asian than Scandinavian, German or Slav. Laar is emotional about his heroes, those who fought a sporadic guerrilla war against the Russian military up until 1978. Who in the West ever knew there were these little remnant bands deep in the primeval forests? Based on his proposed book, Laar fancies either a documentary or, better still, a Hollywood epic. His $500,000 prize might just help to seed such a project. I would happily volunteer as an extra.

If the flat-tax innovation has helped win him the Milton Friedman prize, Laar admits there have been reversals. “We had to re-bureaucratise parts of the economy to be admitted into the European Union (EU). Our grocery prices could be far lower, for example, but for the protectionist policies of the European Commission. To join the EU was of symbolic significance but it has embraced much that is wasteful,” he says.

With his friend Viktor Orban, the Prime Minister of Hungary, Laar wants to set up an international panel or commission to investigate and reveal the crimes committed in the name of communism as “these have not been denounced with the same energy as those of the Nazis”.

Laar is cordial with Russia but wary. He also argues the Russian minority still residents must be equal citizens providing they want to be loyal to Estonia.

Laar received his master’s degree in philosophy from the University of Tartu in 1983. “None of us could have envisaged the events of the past 20 years but I think we may find the next 20 just as exciting. Governments must learn to deliver. They should do far less but do it well.”

John Blundell is director general of the

Institute of Economic Affairs and served

as a judge for the Milton Friedman Prize

The above picture: Mart Laar, the Prime Minister of Estonia.

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