<html><body><P align=center><STRONG>Iceland's Economic Performance</STRONG></P> <P align=center>May 14, 2004</P> <P align=center>Unedited transcript prepared from a tape recording</P> <TABLE cellSpacing=1 cellPadding=1 width="100%" border=0> <TBODY> <TR> <TD> <DIV class=BodyText>4:15 p.m.</DIV></TD> <TD> <DIV class=BodyText>Registration</DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>4:30</DIV></TD> <TD> <DIV class=BodyText><EM>Introduction:</EM></DIV></TD> <TD> <DIV class=BodyText>Roger Bate, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Presenter:</EM></DIV></TD> <TD> <DIV class=BodyText>David Oddsson, prime minister of Iceland</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Comment:</EM></DIV></TD> <TD> <DIV class=BodyText>Veronique de Rugy, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>6:00</DIV></TD> <TD> <DIV class=BodyText>Adjournment</DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR></TBODY></TABLE> <P><STRONG>Proceedings:</STRONG><BR>MR. BATE:  Good afternoon, ladies and gentlemen.  Thank you very much for coming.  My name is Roger Bate.  I am a visiting fellow at the American Enterprise Institute.  It is my pleasant task to introduce our speaker this evening.<BR><BR>We will hear from the prime minister shortly, and then we'll have a brief comment from another European here at the American Enterprise Institute, Veronique de Rugy, who is also a visiting fellow.  Then we will take some questions from the floor.<BR><BR>Veronique and I met our speaker when we were in Iceland in November 2001.  It was a conference on tax competition, which was being hosted by numerous interested and interesting Icelandic economists and business people.  And it was undoubtedly one of the most informative trips I've ever taken part in.  We were royally looked after by the Icelandic people and especially one of Mr. Oddsson's advisors, Dr. Hannis Gittersson [ph], who, unfortunately, can't be with us this evening.  I, for one, learned an enormous amount about Icelandic public policy.<BR><BR>Iceland's excellent economic performance of the last 12, 13 years has been caused by some daring, interesting, and successful policy decisions.  I'll mention just one that's not in the mainstream.  Iceland, along with New Zealand--in fact, it's probably better than New Zealand's--has the most sophisticated fisheries system in the world.  Not surprisingly, it involves market mechanisms, where most other fishery policy around the world is based on command and control.  The Icelandic individual transferable quota system has led to sustainable catches and increases in revenue.  For anybody who knows anything about the fishery industry, that's a rarity.  It's something that the rest of Europe in particular, and much of the rest of the world, could learn from, and unfortunately, so far has not done so.<BR><BR>Iceland's leaders have also taken bold and important and, I would argue, correct decisions over whaling, biotechnology, and other areas of public policy.<BR><BR>Iceland, of course, is also a staunch ally in the war against terror.  Iceland is a key member of NATO.  Indeed, our speaker tonight was the mayor if Iceland's capital, Reykjavik, and a local organizer, although I'm not exactly sure how much--and hopefully, he will comment on that this evening--a local organizer of the famous Reykjavik disarmament summit involving Ronald Reagan and Mikhail Gorbachev back in 1986.  I hope he'll give his personal reflections on that summit and, of course, President Reagan.<BR><BR>The honorable David Oddsson is a lawyer, an author, and a playwright of note.  He is co-author of two theater dramas--"For My Country's Benefit" and "Icelandic Confabulations"; author of three television dramas--"Robert Eliasson Returns Home from Abroad," "Dust On the Collar," and "Everything's Fine".  He is author of the essay, "The Independence Movement" and translator of a book by Anders Kung, "Estonia: A Small Nation Under the Yoke of Foreign Power."  He is also the author of two best-selling collections of short stories--"A Couple of Days Without Gudny" and "Stolen From the Author of the Alphabet."<BR><BR>Besides his extensive writing, Mr. Oddsson's interests include bridge, forestry, and angling, when he has time to do them.<BR><BR>On a very personal note, when he was kind enough to host the tax experts and economists at his home in November 2001, we had a wonderful meal accompanied by his marvelous dinner speech, and even an amazing local opera singer to boot.<BR><BR>I always wondered how I would be able to invite him somewhere so that I could hear him speak again.  Thanks to the marvelous environment that I am able to take part in here as a visiting fellow at the American Enterprise Institute, and the largesse of Chris DeMuth's presidency here, I'm able to do that this evening, although unfortunately we don't have an opera singer--unless we have one in the audience that I don't know anything about.<BR><BR>Mr. Oddsson has been leader of his country since 1991, when he stepped down as mayor of Reykjavik.  He has presided over 13 years of excellent growth and is Europe's longest-serving leader, who I understand is set to step down in September.<BR><BR>Our speaker, ladies and gentlemen, the Honorable David Oddsson, the prime minister of Iceland.<BR>  [Applause.]<BR><BR>MR. ODDSSON:  Thank you so much for your kind words.  Ladies and gentlemen.  I would like to thank the American Enterprise Institute for this opportunity to address you here today.  It is a particular pleasure for me to be able to discuss Icelandic economic issues and their development with you.<BR><BR>This year in Iceland we are celebrating the centenary of Home Rule.  With Home Rule, political authority was returned to Iceland from Denmark, which had ruled the country for centuries.  This is a landmark in our political history, and also marked a breakthrough for our economy.  After being one of the poorest countries in Europe for centuries, Iceland managed to become fairly prosperous in an incredibly short time.  For most of the last century, fisheries were the mainstay of the economy, but in later decades other sectors grew, such as the aluminium production, biotechnology, tourism, and banking.  The point has now been reached where Iceland enjoys one of the highest general living standards in the world.<BR><BR>But although this broad picture is impressive, Iceland's economic history has often not been plain sailing.  We have repeatedly suffered severe external setbacks, but more often than not we have been our own worst enemies on the economic front.<BR><BR>The government of Iceland faced a wide range of tasks in the 1990s.  Inflation had run riot for decades.  Most of the time it ran in double digits and, at its worst point, the monthly figure was more than 100 percent inflation a year.  Runaway inflation ruined people's awareness of prices, made business planning more or less meaningless, ate up savings, and eroded purchasing power.  It did not help that the Icelandic state was actively and extensively involved in business activities at the time.  Nothing seemed beyond its scope.  Running a travel agency, fish meal processing plants, knitting workshops, printing companies, and all manner of other enterprises was taken for granted.<BR><BR>The crucial factor, however, was the iron grip that the Icelandic state had on all business activity through its ownership of the commercial banks.  Political power infused the entire financial system, which could hardly be distinguished from the political system.  Furthermore, the fiscal position at the start of the 1990s was far from acceptable.  The persistent treasury deficit and the mounting debt that accompanied it were, in my opinion, one of the greatest threats to the Icelandic economy in those years.  A recession in the early 1990s, which was caused, among other things, when the all-important cod quota had to be cut back by as much as one half, compounded the existing problem.<BR><BR>It is obvious from this account that the politicians in Iceland faced a sizeable challenge.  Equally clearly, there was no way to back down from solving it.  It would not have made the world headlines if an island nation in the far north had thrown away its economic independence.<BR><BR>In my view, two important factors were decisive for the successful restructuring of Iceland's economy.  The whole nation suffered because of economic instability, and the ordinary wage-earner was worst hit of all.  Thus, the public at large were prepared to bear temporary difficulties if stability could be established by doing so.  Most people realized that wage increases far beyond what companies could afford would only lead to inflation.<BR><BR>A second important factor was that the coalition government, which was formed in 1991, was based on very clear policies.  Having a clear ideology is the best way that a politician can equip himself when setting off on a long, hard journey.  It is both a driving force and a compass to point the way.  Politicians need to take a standpoint toward a great number of issues, large and small, almost every single day, and it is impossible for them to keep their bearings if their ideology is vague.  There are many sides to every challenge and every decision has consequences that must be taken into account.  Politicians who lack clear political vision tend to go astray when there are many complex questions to ponder.<BR><BR>When Milton Friedman visited Iceland in the 1980s, he was asked what solution he had to Iceland's economic problems.  Friedman gave a simple answer: "The solution is freedom."  The freedom of the individual and the freedom of the nation are the founding of all well-being, spiritual and material alike.  The motive behind attacking the treasury deficit was not only its bad economic consequences.  An equally important consideration was that a persistent deficit was a sure-fire recipe for higher taxes in the future, and higher taxes erode the freedom of the individual.<BR><BR>Necessary as taxes may be, we must not forget that by their very nature they restrict our freedom.  In 1995, treasury debt in Iceland was more than 50 percent of GDP.  Next year it is forecast to be down to 15 percent of the GDP.  The Icelandic treasury is in a solid position and Iceland's international credit ratings have never been better.  This success has been achieved not in spite of extensive tax cuts but, to a great degree, because of them.  In the early 1990s, corporate income tax was 50 percent.  The government cut it first to 30 percent and later to 18 percent, and the treasury revenues and economic growth actually increased as a result.  Personal income tax has already been lowered, and during the current government's term in office, it will be reduced by a further 4 percentage points.  An income tax surcharge on the highest incomes will also be removed, and inheritance tax has been reduced and harmonized at a level which will never exceed 5 percent.  So it is very pleasant to die over there.<BR> [Laughter.]<BR><BR>MR. ODDSSON:  In addition, it is planned to reduce value-added tax on food, which will benefit the lowest income groups in particular.<BR><BR>I am convinced that these tax cuts will greatly strengthen the Icelandic economy well into the future.  And not just the economy.  The whole society flourishes and becomes more diverse when each and every one of us keeps more of what we earn and can dispose of it as we please.<BR><BR>The political dialogue in the last century revolved around the dispute between those who believe in control and those who believe in freedom, between those who regard the state as the be-all and end-all of everything and those who are convinced that freedom of word and deed is a foundation for progress and prosperity.  The privatization debate touches on the essence of this conflict.  When the government launched its privatization Prince George's, it encountered heavy political opposition.  Left-wingers found fault with everything, and every time some state enterprise was supposed to be sold off, in their view precisely that enterprise happened to be the cornerstone of society.  It did not matter whether a wool factory, printing company, or fish meal factory was being privatized--the counter-argument was always that market forces were now taking over an important public service.<BR><BR>So it was necessary to proceed slowly.  There is little point in hoisting all the sails only to run aground on the nearest rock.  But gradually the public noticed that the doomsday prophecies did not come true--far from it.  Services improved and expanded after privatization.  And support has steadily been growing for the view that market forces need to have as much say as possible.  But a special case must be argued every time that the state undertakes to provide a certain service, such as health care or education.  This is the natural course of things, in my opinion.  The market is fundamentally about the wishes and needs of the public at large, and these are best fulfilled by allowing individuals and their businesses to compete with each other to provide the best service.  This is the way to achieve the most progress.<BR><BR>There would have been little hope of success if we had not carefully considered the order in which we went about privatizing state enterprises.  I am convinced, for example, that it would not have been appropriate to sell off the state-owned commercial banks at an early stage.  The nation needed to have reached a broad understanding that it was advisable for the state to release its grip on this important market.  The point has not been reached where the state has withdrawn completely from operation of financial companies, apart from housing loans, and the Icelandic financial market is much stronger as a result.  Banks are now more capable of backing Icelandic business and have been expanding overseas on a growing scale.  This is a very positive development which shows beyond all doubt that the enormous force unleashed when the state entrusts individuals with freedom of action.  In the near future, Iceland Telecom will be privatized.  This will be the single largest privatization project so far.  Parliament has already approved the sale, and I am convinced that the public accepts its privatization.<BR><BR>Ladies and gentlemen, privatization, strong fiscal management, and responsible leadership on the part of the labor unions and employees have played a major part in the successful restructuring of the Icelandic economy.  But many other factors have been important as well.  The Central Bank was granted full independence and the Icelandic currency was floated in the market.  Such a framework makes the economy more disciplined and solid.<BR><BR>Another important point is that Iceland has sharply stepped up its spending on education in recent years.  A large number of new educational establishments have appeared and it is particularly pleasing to note that many of them are privately run, especially at university level.  Although the state-run University of Iceland is still the leader in its field, there has been a massive increase in the number of courses offered and, what is most important, more people now find suitable courses of study than when the state had sole control of what was taught.  Iceland now ranks with the countries that allocate the highest share of their national income to education, which is a very positive development.  Our economy is built upon renewable natural resources, and higher levels of education will enable us to utilize them in a new and better way.<BR><BR>Economists are forecasting robust growth in Iceland as far ahead as the year 2010.  Continuous output growth has taken place since 1995, and last year it amounted to 4 percent.  The rate of growth will speed up considerably in the next few years, driven by large-scale investments in the energy sector and aluminium industry.  Real wages have also grown continuously since 1995, by more than 30 percent, which is the longest unbroken period of real wage growth in Icelandic history.  Booming real wages have played a part in winning over public support for the political parties that have fought for greater freedom.<BR><BR>Interventionist politicians think that the state can and should solve everyone's problems.  Like everyone else, they see the obvious challenges and it is often easy for them to demand action by the state.  Free-thinking politicians put their faith in the market and are less able to point out specific, limited solutions.  No one can tell in advance what solution the market will find to the problem in hand.  But it is certain that if the market is given the time and the freedom, the solution it provides will, as a rule, be better for the community than anything that the bureaucracy might invent.  All the public sector committees and commissions rolled into one can never compete with the market.  For each single idea from the public sector, the market has many; and what is more, ideas challenge each other in the marketplace and the best and most useful ones emerge as the victors.  This is the best guarantee for the well-being of the general public in the long term.<BR><BR>The problem facing politicians who champion freedom is that they are not always granted time enough to allow the market to do its job.  It has been my great fortune as a politician to have been given a mandate by the people of my country for long enough to see what fruits freedom can bring.<BR><BR>Over the coming years, Iceland's economic growth will depend upon how well we take advantage of the possibilities that prosperity has opened up for us in recent years.  Freedom is an opportunity, a magnificent opportunity, but is matched by the duty to take advantage of it, and take good advantage of it.  I believe that freedom has vast potential in Iceland.  International surveys show that we rank with the countries offering the most business freedom in the world, and it's also one of the easiest places to set up business.  This is crucial.  Low taxes, business freedom, and innovation are a combination that I know will bring benefits to Iceland.  Furthermore, our treasury is in a firm position, our pension fund system is solid.  Some 70 percent of our energy consumption is from renewable sources.  Unemployment is low, and the work ethic is strong.  Of course, Iceland is not the first country in the world to have no problems.  Far from it.  But we now have more opportunity than ever before to prove that my grandparents' generation was right in its belief that Iceland, despite its small population, could be a free and sovereign nation.<BR><BR>For centuries, Iceland was a very isolated country.  It was so isolated, in fact, that once, when we were a Danish colony, many months passed after the death of the king of Denmark before the news reached Iceland.  And we toasted daily to his good health.  That, I suppose is what you call being loyal beyond the grave.<BR><BR>Now, of course, times are different.  Transport to and from Iceland is excellent, and advances and innovation in IT and telecommunications have transformed Iceland's scope for international trade overnight.  Globalization presents a great opportunity for us.  Naturally it poses risks for a small nation, but in Iceland's case the potential far outweighs the problems.  Iceland is totally dependent on the freest possible international trade.  Our history is the story of how a poor nation managed to harvest its natural resources and export the products from them.  That is how we began to prosper.  If, at the beginning of the last century, we had not had access to foreign markets for our fish, the economic well-being we enjoy today would probably still be only a remote dream.<BR><BR>Market access is still one of the most important planks of Iceland's foreign policy.  In 1994, we became members of the European Economic Area, which granted us access to the single market of the European Union, by far our largest trading partner.  The EEA agreement removed the need for Iceland to join the European Union.  Membership of the European Union would carry too high a price tag.  The biggest factor here is the European Union's common fisheries policy, which is completely unacceptable for Iceland.  It is based on the principle that the fishing grounds of member countries are controlled from Brussels.  Another point is that Iceland's fisheries sector operates on the same principle as other business activity--it is run commercially, since we cannot afford to do it otherwise.  The European Union fisheries sector is generally in a bad state and relies heavily on government aid and centralized control.<BR><BR>There is another and perhaps equally strong reason that Iceland does not want to join the European Union.  A strong trend toward centralization and integration seems to prevail within the Union and it appears to be heading toward becoming some kind of a federal state.  In my opinion, the introduction of the euro has been the strongest stimulus in that direction.  The European Central Bank now formulates a common monetary policy for all the countries in the euro area.<BR><BR>For us in Iceland, it would be very difficult to live with that.  Iceland's economic cycles are often far out of pace with those on the continent.  Recent economic history leaves us in no doubt about that.  Fish catches, major investment projects, and price developments in foreign seafood markets--all these can transform the Icelandic economy radically, but have little or no impact in the bigger countries whose economies the European Central Bank must reflect with its monetary policy.<BR><BR>The euro also exerts pressure toward establishing a single fiscal policy.  We all know the fiscal conditions that the euro countries need to fulfil in order to avoid being penalized by Brussels.  Advocates of a single community tax policy are now making their voices heard.  Germany's Chancellor Schroeder recently stated that corporate income taxes should be harmonized within the European Union and that they should be brought toward Germany's current corporate income tax rate of 43 percent.  Iceland, with its 18 percent, does not want to follow such a course.  We know from experience that low taxes are a driving force behind the economy and that nothing dampens people's energy as much as watching most of the money they earn being taken away by the state.<BR><BR>I believe it is absolutely vital that nations should compete to offer the best environment for business to operate in.  Exactly the same arguments apply there as to competition by business in the marketplace.  Competition imposes discipline and inspires new ideas, which is particularly necessary in the case of the state and how it exercises its authority.  The fact of the matter is also that there is little point in countries shutting themselves away in a customs union with high corporation taxes and then trying to compete in a global market.  Business will simply relocate to another part of the world, thereby reducing the tax base available to the state.  Everyone can see where such a development would lead.<BR><BR>Ladies and gentlemen, although the theme of my address is the Icelandic economic issues, I do not want to forgo the opportunity at this critical time in international affairs, and while I am here in the capital city of Iceland's closest ally, to touch briefly upon international security questions from the Icelandic government's perspective.<BR><BR>Iceland became one of the founding members of NATO in 1949, with the aim of ensuring its security and freedom in the alliance with the Western democracies with whom we had shared interests and values and common destiny  Participation in NATO and the defense agreement made with the United States in 1951 remain cornerstones if Iceland's security policy.<BR> Iceland and the U.S. base at Keflavik, Iceland, were of vital military significance during the Cold War.  After the Cold War ended, U.S. forces in Iceland were quickly reduced to provide for minimum defenses.  The United States is now in the process of reviewing its global military posture, including its forces in Iceland.  Regrettably, ideas have been raised within the U.S. system for discontinuing Iceland's air defenses by removing the few fighter aircraft that remain at the Keflavik base.  This would render our bilateral defense agreement meaningless and put an end to more than 60 years of defense cooperation between identical and the United States.  I have faith that this matter will be successfully resolved in the good spirit that has prevailed between our two countries for such a long time.<BR><BR>After the Cold War, NATO continued to have a crucial role for stability in Europe.  And after the attacks on the United States on September 11, 2001, the alliance responded to terrorism and the proliferation of weapons of mass destruction.<BR><BR>Notwithstanding these new challenges, the alliance's cause remains unchanged, of course--namely, to ensure freedom, peace, and stability.  No international organization has the same potential as NATO has in this respect.  At the same time, everyone realizes that the disputes before the invasion of Iraq weakened the alliance.  A NATO summit will be held in Istanbul toward the end of this month.  Hopefully, the summit will demonstrate that the alliance is united on how to tackle the main threats and dangers in the world today.<BR><BR>Iceland aligned itself with the nations in the Coalition of the Willing under U.S. leadership before the Iraq war.  We are all aware of the problems and difficulties that have arisen after invasion and which have led to even more claims than before that it was a mistake made on false assumptions.<BR><BR>But the invasion of Iraq was justified.  The Iraqi regime was a threat to peace and stability.  Under Saddam Hussein, Iraq had attacked its neighbors, and not only produced weapons of mass destruction, but used them as well.  Should the risk have been taken that Iraq could possess weapons of mass destruction or begin to develop them again?  Everything suggested that the regime could not be trusted, including the information and suspicions of the United Nations weapons inspectors.  For more than a decade, Saddam Hussein had flouted the U.N. resolutions and demands for disarmament.  This was impossible to accept any longer.  The credibility of the international community and the U.N. Security Council was at stake.<BR><BR>Now Iraq needs to be put back on its feet after many years of suffering under a criminal regime.  Notwithstanding disputes over the legitimacy of the invasion, everyone will surely agree that it removed a threat to peace in the region and that the Iraqi people are better off now than they were under Saddam Hussein and his henchmen.  And everyone who favors peace in the area must realize the importance of successfully establishing democracy and stability in Iraq.  The alternative is that instability and chaos will gain the upper hand, with awful consequences for the Middle East and for the war on terrorism.<BR><BR>The NATO summit in Istanbul at the end of this month is expected to discuss how the alliance may contribute to furthering freedom and democracy in the Middle East.  Disregard for democracy and human rights is a prominent factor behind the troubles in that region and behind the threat posed by terrorism and weapons of mass destruction.  NATO certainly has a contribution to make interest his respect, as shown by the alliance's recent experience of assisting Central and Eastern European countries in the Partnership for Peace.<BR><BR>The war on international term is a complex and far-reaching task.  There is a genuine risk that terrorists may acquire weapons of mass destruction.  NATO, the great transatlantic alliance of democratic nations, must remain alert to the grave danger of a combination of extremism, dictatorship, and weapons of mass destruction, and find effective means to counter such a horrifying threat.<BR><BR>Iceland has deployed civilian experts of various kinds for peacekeeping and reconstruction work in Bosnia, Kosovo, and Iraq.  Recently we began to participate in the NATO peacekeeping mission in Afghanistan by providing personnel for the administrative control of Kabul airport and other tasks there.  Iceland has also leased cargo jets for the airlifting of aid and peacekeeping forces to Afghanistan.<BR><BR>Ladies and gentlemen, again I would like to thank the American Enterprise Institute for this opportunity to address you here today.  Politics are founded on ideology, and this institute performs an important role, not only here in the United States but much farther afield, in nurturing and developing ideas that can be used in the battle of freedom against control.  Above all,  politicians stand for ideas and ideologies.  Their work is compared with the ideas they have presented to the voters.  Good politicians are those who succeed in winning support for their convictions and are consistent and manage to implement their ideals.<BR><BR>Politicians who have fought for freedom can look back proudly, for everywhere there are clear examples of the supremacy of freedom over control.  In this context I would like to conclude by remembering a politician who has benefited the cause of freedom more than most others.  Ronald Reagan was a politician who, by virtue of the strength of his ideals and his integrity, defeated communism, one of the most horrific forces of destruction in the history of mankind.  In Iceland we remember him especially in connection with the important summit meeting with Mikhail Gorbachev at Hofdi House in Reykjavik, 1986.  But history will remember Ronald Reagan above all else as a man who supremely benefited the cause of freedom.  For his work we are all grateful.<BR><BR>Thank you very much.<BR> [Applause.]<BR><BR>MR. BATE:  Veronique de Rugy will now make some brief comments and then we will have questions for the prime minister.<BR> Veronique.<BR><BR>MS. de RUGY:  It's a pleasure to be here.  I took part of this trip in Iceland with Dan Mitchell and Solveig Singleton at CEI, and it was a fabulous trip.  A little cold for me, but the food is outstanding.  I think that's where I got my nickname "the food camel," because I ate more than I could actually contain and I had those big humps growing out of me.<BR><BR>But anyway, it was a fabulous trip and--oh, and we also went to visit the Parliament, and it was fabulous inside.  The kind of government I like--less than 70 MPs.  This is my type of government.  I wish we could see that one day here.<BR><BR>According to Iceland's sagas and chronicle, Iceland was the first tax haven in the world.  When King Harald Fairhair unified Norway, his first ruling as a king was to implement new taxes.  The Vikings, who were pretty rebellious already, decided that they wouldn't have any of that and they took off.  And they decided to set sail to Iceland because, according to the sagas, the men there are free from assault from kings and criminals.  So that's how they chose Iceland.  So there's a long tradition.<BR><BR>Prime Minister Oddsson, I believe, is a direct descendant of those Vikings.  Even better, he's a very wise ruler.  He has learned what the King Harald did not learn, and this lesson is:  Overtax your people and they will fly away.  On the other hand, by contrast, implement low tax rates and you will bring prosperity and your country will become very rich.<BR><BR>After many years of economic stagnation, unemployment, inflation, deficit, Prime Minister Oddsson turned Iceland around.  In the 1990s, he decided that he would, in a very Reaganesque manner, cut all taxes, income tax, move it toward a flatter and simpler system, and also cut drastically the corporate income tax rate from 48 percent to 30 percent.  The consequences were huge.<BR><BR>However, after a few years, Prime Minister Oddsson and his team decided that that was not enough.  He needed to take Iceland in an even more radical direction.  He needed to be much more aggressive, and not only to work on improving domestic output but also to start attracting foreign capital.  And that's what he did.  And he cut the corporate income tax rate from 30 percent to 18 percent.<BR><BR>Today, Iceland has the third-lowest income tax rate of all the OECD countries--after Ireland, which has 12.5 percent, and Hungary, which is 16 percent--and not too long ago, they had 18 percent.  And I heard, if the Icelandic sagas are right, I heard that Prime Minister Oddsson is also thinking of cutting the rate again.  But I would like to talk to you about that.<BR><BR>But the beauty, of course, of the model, as we've heard, is not only a tax-reform model, even though it's very dear to my heart.  It's also one that privatized a lot of public companies, got the government out of the banking industry--which, again, we would like to see that in our country.<BR><BR>But let us go back to tax reform.  The ideas underlying most of the tax reform in Iceland were that cutting taxes does not only stimulate the economy, but also is meant to attract foreign investment.  And that's tax competition at its best.  Iceland is a very small country; it's isolated.  There's no way Iceland, like the Cayman Islands and other very small countries, can compete with the U.S. or a bigger country with infrastructures and things like that.  The only thing they can do, really, is to compete in the financial sector.  And as such, cutting the tax rate and deregulating the financial sector is a great idea.<BR><BR>And that's what they did.  And this idea of trying to grab, you know, foreign investment and take money from other countries where the environment is less friendly and bring it home where it could be invested and produce more money is called tax competition.  And of course, today, it's increasingly easy for investment funds to cross borders.  Thanks to the mobility of capital, taxpayers have the choice where to invest their money, but better, where to pay their taxes.<BR><BR>When tax competition exists, politicians must exercise a certain degree of budget and fiscal discipline in order to attract jobs, capital, and entrepreneurs, instead of losing them to other countries.<BR><BR>As might be expected, of course, politicians in higher-tax countries hate tax competition.  And for the last 10 years we've seen these high-tax-country politicians, like France and Germany, trying to destroy tax competition.  They've used means like international organizations, like the OECD.  Or the European Union, of course, joyfully joined the ranks of the anti-tax competition movement.  They've been bullying low-tax restrictions and trying to increase their rates.  They've been also trying to get them to join a global tax cartel.  They have not stopped--I mean, nothing has stopped them.  They've tried to convince the U.S., and they won't stop.<BR><BR>Fortunately, they haven't been very successful, and that's a good thing. Unfortunately, they don't take no for an answer.  So each time they're defeated, they just postpone their deadline and their threat to lower tax restrictions and tell them, well, you know, okay, you have one more year to join the tax cartel.  Ultimately, what they want is to stop cross-border investment.  And I think it's very, very wise for Iceland not to be joining the EU, because one of the open goals of the EU is to harmonize as much things as possible.<BR><BR>What are the things that the United States could learn from Iceland?  The first thing is, certainly, that low tax rates are a good thing.  If Iceland has very low rates on corporate income, certainly the United States doesn't.  The U.S. has the second-highest corporate rate of all the OECD countries after--is it Japan, or--yeah, it's Japan.  It's higher than France and it's higher than Sweden and Germany.  So when you have higher rates than Germany and France, you know that you're doing something wrong.  So certainly, you know, that's something the U.S. should learn.<BR><BR>The second thing is that cutting drastically the marginal tax rate doesn't mean massive loss in tax revenue.  The example of Iceland, like the one of Ireland more or less at the same time, maybe 10 years earlier, shows that actually it's not the case.  They've cut tax rates drastically and they moved their situation, where they had a very high corporate tax rate bringing very little tax revenue, to one where they have low tax rates bringing, actually, a large amount of income.  From the numbers I've looked at this afternoon, Iceland has doubled the amount of tax revenue rates from corporate income, while the rates went from 48 percent to 18 percent, and hopefully much lower.<BR><BR>I personally believe we should abolish the corporate income tax.  Eric Engen and Kevin Hassett here at AEI have an excellent paper showing that in fact there's very little future for the corporate income tax and that's a good thing.<BR><BR>Finally, really, I think, the final lesson that the U.S. should learn from Iceland is that tax competition is a very powerful thing.  Iceland understood that it was its only weapon toward prosperity.  And also, we know that we live in a world where tax rates are not as high as they could be because there is this threat that capital and entrepreneurs could fly away.  And I hope that the U.S. will embrace tax competition at least as strongly as Iceland has.<BR> Thank you.<BR> [Applause.]<BR><BR>MR. BATE:  Thank you very much, Veronique.<BR> Prime Minister, if you could answer some questions, that would be great.  The first question, I think, was actually asked by Veronique, which is what is happening with corporate tax rate?<BR><BR>MR. ODDSSON:  This is correct, that we very much would like to go further down with that tax rate.  We have been talking about 15 percent in the next round.  But at the same time, it is very important that we not forget the personal income tax.  We are now in decisions to lower taxation on private income to 4 percent in three years' term.  And I think that is important for us.<BR><BR>We have had taxation, too--property tax.  We've had property taxes with both companies and people.  Now we are eliminating that taxation, too, completely, because we think that's unfair taxation because [inaudible].  So that will be completely taken away.  And we already have halved it, and now it will be taken completely away.<BR><BR>It was mentioned here that there were runners from high taxes from Norway in 874.  Then we established our parliament in 930.  We are an old nation that way.  But if that's a long way, we almost took over the United States, as you know, because Iceland was the first to discover America in the year 1000.  Oscar Wilde said that Iceland discovered America but had the decency to leave it again.<BR> [Laughter.]<BR><BR>MR. ODDSSON:  They went back.  It was Leif the Lucky who found America, the first Viking.<BR><BR>QUESTION:  [inaudible] the Cato Institute.  I want to ask you a question regarding Iceland's relationship with the European Union.  You mentioned that joining the EU would be too costly.  Now, when the European Union enlarged recently, there was an implicit agreement whereby the Eastern European countries would gain access to European markets and in exchange they would adopt a lot of job-destroying regulation.<BR><BR>What incentive, do you think, does the European Union have to carry on its free trade relationship with Iceland?  And do you think that in the future Europeans may use it as a foreign policy tool in order to force you to accept some of the regulations that are present in Europe?<BR><BR>MR. ODDSSON:  It is now, today, because we are members of the European Economic Area, as I described before.  We take up some part of the European Union regulations.  We take up, like the Norwegians have done, about 18 percent of the regulations that the European Union states take up into their law system.  And that is a lot.  It's a lot of regulations.  And such things have come from Brussels.  But we only take up 18 percent of that.<BR><BR>With the enlargement, all the enlargement states, at least from Eastern Bloc states, they became partners with Europe in the economic area, too, so they've become our partners.  And I think that is very good for us.  The market becomes larger for us.<BR><BR>I suppose that if [inaudible] countries, the European Union could maybe find out it was difficult to allow a country, like Iceland, free-wheeling outside the system and maybe in a way showing that you can do things by yourself without all the self-regulations that they are producing--not day-by-day but minute-by-minute in Brussels now.  So maybe that--I think we can be pretty sure of keeping our position outside the union, because we are not a threat to anybody as a small nation.<BR><BR>For us, it is very [inaudible].  Because for us to come into the European Union would mean that the freedom of ruling ourselves would go down sharply and we would not gain anything.  We are already members for the internal markets, and we would not gain anything from it.  It would be a dangerous moment for us.<BR><BR>Talking about harmonization with the taxes, like the German chancellor has been talking about, why should harmonization always be like that, that you harmonize taxes up?  We could say to them, okay, we will harmonize taxes if you would come down to our level.  That is not the case.  Harmonization shall come up to the German level.  We would not like that.  That would be hell for us.<BR><BR>QUESTION:  Dan Mitchell, Heritage Foundation.Veronique mentioned in her comments that<BR>even though tax rates on corporations have come down dramatically, that the tax revenues have gone up.  And I'm wondering whether you have some of those figures, or whether somebody maybe at the embassy could provide them?  Because I've seen some very good data on Irish taxes as a percent of GDP from corporate income going up dramatically as their rate went from 50 to 12.5 percent, I'm wondering--I'd love to get similar figures regarding Iceland.<BR><BR>MR. ODDSSON:  I don't have it in my head now, but I can just tell you that when we were discussing in the first parliament getting the first taxation down from 50 percent, roughly, to 30 percent, the opposition just took the revenues that we got from 50 percent and took 10 percent out of it, almost a half of it, and said where are you going to get the money because you are giving that back to the companies?  This didn't happen.  When the companies got more room to play and more for themselves, the revenues came up.  We had extra money, not less money.  And the same happened when we went down to 18 percent.<BR><BR>So I don't have the numbers in my head, but that way they tripled the [inaudible].  But it will go only like that.  Because you can't take only the first year or two years, three years, because it takes time for the companies to benefit from such a lowering of taxes.  This has proved to be very [inaudible].  At the same time as we have lowered these taxes, we have always had a fairly balanced budget [inaudible].  The opposition always was counting that you will go to an unbalanced budget, have a great deficit if you do that and cut taxes.  Quite the opposite of that happened.  We have more money to pay for all the good things that politicians like to do for their people.<BR><BR>QUESTION:  John Rickman.  I'm with Tax Notes International.You stated the importance of workers being able to keep more of what they earn.  The OECD recently released excerpts from its annual report on wage taxes for the years 2002 and 2003.  And it placed Iceland in the same camp as Slovakia and Turkey as a country whose wage taxes have increased over those years.  I was wondering, does your vision for tax cuts and privatization include wage tax cuts and perhaps other worker benefits?<BR> MR. ODDSSON:  Well, as I say, we have plans now to lower these taxes about 4 percent in the years to come, the next three years to come.  I don't recognize these figures that you [inaudible], but actually that they might be correct would surprise me a little.  But as I say, we are going down this slope in the future.  I think that's good for the economy.<BR><BR>QUESTION:  I'm Jeff Race [ph] with the Joint Economic Committee of Congress. Often with state-run banking systems, you have a situation where, because capital is allocated by politics rather than efficiency-hungry markets, you have a lot of non-performing loans.  Was that the case with your country?  And is it the case now that the banking system is fully private and well capitalized?<BR><BR>MR. ODDSSON:  I'm sorry to admit that this was the case in our situation.  It is a great temptation for politicians, even honorable politicians as most are, it's a great temptation, if you have your [inaudible] the banking system, to use it, of course, for the good [inaudible] as others have done.  But it didn't [inaudible] when you look back.  It was in a way misused.  It was used to keep out companies that couldn't keep themselves up.  Of course, it was done to help them through some situations and so on, without making any demands on the company.  And that didn't help in the long term.  It could help you for a short term, but not the long term.  It was very unhealthy.<BR><BR>Now this has completely changed, and the companies have to live through the criteria that the banking system has provided for them.  And that is a healthy thing.  That has meant that the companies have got better directors.  Because you could survive a long time as a director of a company if you had access to the [inaudible] and the banks.  Nowadays you have to show that you can run a company.  You can't go to big mother or brother, the state, to help you out of a problem.  These days are over.<BR><BR>QUESTION:  Nicola Bolya [ph] from United Press International. Mr. Bate mentioned before that you would step down in September.  I was wondering how confident you were that these policies of tax cuts and privatization would be continued with successive leaders for Iceland.<BR><BR>MR. ODDSSON:  Well, I'm very confident, because my party will be the largest party in the government still.  Even if I go out of my current job, I think that you can be pretty secure that this way will go on this way.  And this has been proved successful.  I think it will take time for politicians to go and make a U-turn to another direction, so I'm pretty confident that it will--the government will follow this path that has been taken.  I think that's very important.<BR> As I say, I've been prime minister for 13 years.  It can be good to have competition there too.  A new prime minister can show what we can do.<BR><BR>QUESTION:  I'm Bob Hershey.  I'm a consultant. How have your low-tax policies affected other countries investing in Iceland?<BR><BR>MR. ODDSSON:  Investment in Iceland has grown very much.  Some of that growth is not only because of taxation, but, as I pointed out, we have these very fine energy resources.  Seventy percent of our energy resources are renewable resources, from geothermal [inaudible] and geothermal power and hydro power.  Therefore, we have had now in the last two years, we've had a lot of investment from Alcoa in the United States.  It is [inaudible] a huge investment.<BR><BR>But at the same time, I think it helped us to make an agreement [inaudible] having such a [inaudible] investment was that regulations and tax systems and credit rate of Iceland was so fine as it is.  Such a small nation to have the same credit rate as the United States and Germany is not to be expected.  But we have the same credit rate as the United States and Germany.  For a small nation, that's very good.  That's helped.<BR><BR>QUESTION:  Jonathan [inaudible], Plexus Consulting. With the United Kingdom possibly being removed from the EU, will this affect any fishery policies between Iceland and the EU or the U.K. itself?<BR><BR>MR. ODDSSON:  I don't think that the U.K. will slip away from the EU very soon.  In U.K. there is lots of opposition, though, and Euro-skeptics are growing in the U.K. in recent years.  And part of that skepticism is the common fishery policy.  Because the seamen and the people that are counting on fisheries for their living, they were deceived when the United Kingdom went into the European Union.  The full [inaudible] wasn't told at the time, what would happen to them, and they have had a very bad time since then.<BR><BR>I think it would be a fine thing for the U.K. to have the same position as Iceland has.  As I said before, I think the European Union would not allow such a large country to play completely free-wheeling from the Union.  They are pressing them with the euro, and they would have [inaudible] on the euro in one or two years.  I forecast--I'm not an expert--that they would say no then.  They are still driving on the left side of the road, so why should they say yes?  And they're clever people, too.  They know that this is not right for them.<BR><BR>MR. BATE:  If there are no more questions, then thank you very much indeed.<BR> [Applause.]</P></body></html>