## _cr15315 ## Source details **Canonical URL:** [_cr15315](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15315.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15315.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15315.pdf.json) --- ### Preface, mission, and executive summary - Mission and timing: - Technical assistance (TA) request by the Icelandic authorities at the 2014 IMF Annual Meetings. - Headquarters-based TA mission during March – July 2015. - Mission team and local assistance: - FAD headquarters: Ms. Thornton Matheson (head), Ms. Dora Benedek, Mr. David Wentworth, Mr. Philippe Wingender. - Visiting expert: Ms. Marianna Jonasdottir. - Department of Taxation, Ministry of Finance and Economic Affairs: Ms. Fjola Agnarsdottir, Ms. Elin Gudjonsdottir. - Rikisskattstjori (Tax Administration): Mr. Pall Kollbeins. - IMF HQ assistance: Ms. Edda Ros Karlsdottir, Mr. Johan Bjorgvinsson. - Reform objectives and analytical approach: - Improve work incentives by lowering marginal tax rates. - Simplify the PIT and refundable credits (child benefit and interest rebate). - Focus credits on needier households. - Provide a standard distributional analysis framework by income decile and household type. - Applied Mirrlees-Saez optimal income tax model implying a U-shaped marginal tax rate schedule across income. - Diagnosis of the current system: - Basic credit shelters very low-income taxpayers, producing near-zero rates until credit exhaustion when PIT jumps to almost 40 percent. - Refundable credits (child benefit and interest rebate) phase out slowly and extend into the top income decile. - Current top PIT rate is close to the revenue-maximizing top marginal income tax rate for Iceland given its income distribution and standard elasticity estimates. - Headline reform recommendations: - Basic credit: increase and make fully refundable to all taxpayers age 18 and older; rapid phase-out as labor income rises; significantly reduce the initial PIT rate; consider conditioning on labor earnings to exclude young students. - Child benefit (CB): single fixed benefit per child under 18, regardless of age or family structure, up to a maximum of three children; unify and sharply increase phase-out rate; unify and lower phase-out threshold. - Interest rebate (IR): gradually phase out the mortgage interest deduction/rebate; immediate simplification to single mortgage interest cap, single interest rebate amount, single net wealth phase-out range; lower wealth phase-out range and at least double the minimum income percentage spent on interest. - Fiscal federalism: review revenue sharing with local governments; central government currently finances the cost of the basic credit; consider PIT revenue sharing as part of overall allocation. - Microsimulation and distributional findings: - Microsimulation model using detailed taxpayer-level data; households grouped by decile and demographic characteristics. - Current PIT system (including CB and IR) is progressive; single parents taxed much more lightly than other household types. - Government reform proposal reduces revenues by roughly ISK 10 billion, benefits all deciles (particularly the seventh to ninth), and benefits singles more than couples. ### IMF illustrative reform scenario (modeled package) - Main parameters: - Replace the non-refundable credit with an ISK 1.2 million refundable credit granted to taxpayers over 17 with at least ISK 600,000 of labor income. - Phase-out of the refundable credit at a 35 percent rate against total income. - Cut the initial central government PIT rate to 12.5 percent. - Set the top PIT rate to 30.5 percent with a threshold of ISK 12 million. - Child credit of ISK 400,000 phased out at a 12 percent rate beginning at ISK 1.8 million in income (regardless of family structure). - Eliminate the interest rebate. - Fiscal and distributional outcomes: - Modeled reform roughly revenue-neutral to the government’s proposed PIT reform for 2016. - Maintains the same overall progressivity as the current system and the government reform proposal as measured by the Gini coefficient. - Relative to the government reform: - Benefits the first quintile (due to the refundable credit) and the top quintile (due to tax rate reductions and higher top-rate threshold). - Leaves the three middle-income deciles somewhat worse off because of reductions in the child benefit and elimination of the interest rebate. - Significantly reduces single parents’ net income by leveling treatment of singles and couples; other household types unchanged or marginally better off. ### Revenue-raising measures and fiscal context (2008–2014 and mid-2013–2015) - Major tax changes after the crisis: - VAT: top rate raised from 24.5 percent to 25.5 percent (later reduced to 24 percent under 2014 reform); bottom rate raised to 11 percent in 2015. - Excises increased; new green taxes on carbon fuels, electricity and geothermal water. - Direct taxes: added higher PIT brackets; local government income tax rates raised; capital income tax raised from 10 percent to 20 percent (with exemptions); CIT raised from 15 to 20 percent; inheritance and net wealth taxes reintroduced/raised. - Social security charges raised from 5.85 percent to 8.65 percent (later adjustments to 7.49 percent by 2015). - New bank levy and financial activities tax (FAT). - Fiscal outcomes: - MOFEA estimates tax measures implemented 2008 to mid-2013 raised about 6 percent of GDP. - General government tax revenue recovered from 29.2 percent of GDP in 2009 to 32.2 percent in 2013. - Aggregate impact of measures mid-2013 to 2015: supposed increase in CG tax revenues by ISK 26.8 billion; bank tax reform expected increase ISK 37.6 billion; other reforms reduce revenues by ISK 10.9 billion; net increase around ISK 12 billion when adding effects from abolishing net wealth tax and electricity tax. - Trade-offs and complexity: - Higher revenues accompanied by increased complexity and demand for exemptions. - Net wealth tax administration particularly complex due to annual valuation needs. ### Personal Income Tax (PIT) structure, recent changes, and assumptions - Pre-reform profile and parameters: - High initial tax rate of 37.3 percent (average LG rate 14.44 percent and CG rate 22.86 percent). - Non-refundable basic tax credit of ISK 610,824 sheltering about ISK 1.6 million of income. - Two additional tax rates of 39.7 percent and 46.2 percent applying above ISK 3.7 million and ISK 10 million respectively. - Basic unit of assessment is the individual; couples may share unused portions of basic credit and up to one half of unused portion of second-rate bracket. - Government actions: - 2014: slight reductions in first and second rates and raised threshold between them; increased child benefit phase-out rates by one percentage point. - During the mission: second rate lowered by 0.36 percent and second rate eliminated, leaving top rate unchanged at 31.8 percent. - Report baseline: - Assumes the government’s current PIT reform proposals will pass and incorporates them into the baseline, including elimination of bracket sharing. ### Distributional implications of means-tested benefits (CB and IR) - CB and IR are highly complex; parameters depend on income, number of children, marital status, children’s ages, mortgage interest, and net wealth. - High phase-out thresholds and low withdrawal rates extend benefits up the income scale, raising costs and interacting with PIT to increase marginal tax rates for middle-income families. - Dependence on marital status can create perverse incentives for household formation/dissolution. - Policy direction: radical simplification and refocusing of CB and IR on low-income households recommended. ### Optimal income tax framework and Mirrlees-Saez implications - Modeling approach: - Mirrlees-Saez optimal income tax framework calibrated to Iceland’s income distribution. - Theoretical implications: - Optimal marginal tax schedules typically U-shaped: rapid withdrawal of a lump-sum grant at low incomes; low marginal rates for middle incomes; rising rates at the top. - Relevance for Iceland: - Current PIT departs from optimal pattern: generous basic credit lowers bottom MTRs; PIT jumps when credit exhausted; refundable credits phase out gradually into middle incomes. - Optimal reform emphasizes refundability of basic credit and lower middle-income marginal rates. ### Baseline MTRs, microsimulation, and top-income distribution - Microsimulation: - Model constructed using 2013 RSK data inflated to 2015 levels using MOFEA parameters. - MTR method: give each taxpayer an additional króna and recalculate tax liability; MTR = increment in tax liability / increment in income. - Weighted-average MTR schedule findings: - Wide dispersion of MTRs at each income level due to multiple low phase-out rates of CB and IR. - General shape: very low rates (10 percent or less) for individuals with less than ISK 3 million in income; jumps quickly to about 40 percent above that level; increases slightly to about 47 percent at incomes above ISK 10 million. - Caveat: actual bottom MTRs likely higher if other means-tested benefits (rental benefits or “Pillar 1” pensions) not captured by microsimulation were included. - Top-income distribution and Pareto: - Top income distribution well approximated by a Pareto with coefficient 2.7. - Pareto coefficient of 2.7 implies a relatively thin top tail. - Revenue-maximizing top marginal tax rate: - Using taxable income elasticity 휀 = 0.3, calculated revenue-maximizing top marginal tax rate for Iceland = 55 percent. - The current top effective marginal tax rate in 2015 equals 55 percent, implying current top rate is at the top of Iceland’s Laffer curve. - Sensitivity: 휀 = 0.15 → revenue-maximizing = 71 percent; 휀 = 0.45 → revenue-maximizing = 45 percent. - Components included in top effective marginal tax rate: - Central government top statutory PIT rate = 31.8 percent. - Local government top statutory PIT rate = 14.44 percent. - Flat capital income rate = 36 percent (20*(1 – 0.2) + 20 = 36). - Social security tax = 7.49 percent. - Effective consumption tax rate = 15.4 percent (ratio of taxes on goods and services to GDP in 2013). ### Optimal MTR schedule, guaranteed lump sum, and sensitivity - Optimal MTR characteristics (휀 = 0.3; social welfare weight CRRA = 1): - High initial marginal rate of almost 70 percent that falls sharply to below 30 percent by around ISK 7 million, then rises gradually toward current top MTR. - Optimal marginal rates lower than actual beginning at around ISK 5 million and remain lower at higher incomes. - Guaranteed annual income (intercept of optimal after-tax income): - ISK 1.4 million for 휀 = 0.3. - ISK 1.25 million for 휀 = 0.45. - Under optimal refundable-credit design, taxpayers with no gross labor income receive net ISK 1.4 million; taxpayers pay positive net taxes above roughly ISK 2.5 million gross labor income. - Sensitivity to elasticity: - Higher elasticity produces lower MTRs at all income levels and a lower guaranteed lump sum. ### Mirrlees limitations and extensive margin considerations - Mirrlees model does not capture the extensive margin (labor force participation/dropout). - If workers can drop out, optimal design may require lower—and possibly negative—MTRs at the bottom. - Possible policy response: condition refundable grants on work hours or earnings (e.g., US earned income tax credit phase-in). ### Key numerical findings and explicit recommendations - Pareto coefficient: 2.7. - Revenue-maximizing top marginal rates (Iceland): - Effective Top Marginal Rate (2) = 0.55. - Revenue-Maximizing Top Rate 휀=0.15 (3) = 0.71. - Revenue-Maximizing Top Rate 휀=0.30 (4) = 0.55. - Revenue-Maximizing Top Rate 휀=0.45 (5) = 0.45. - Optimal guaranteed lump sum: ISK 1.4 million (휀 = 0.3); ISK 1.25 million (휀 = 0.45). - Key income thresholds and MTR observations: - Low MTR region: less than ISK 3 million. - Jump to ~40 percent: above ISK 3 million. - ~47 percent at incomes above ISK 10 million. - α(z) peak around ISK 13 million (95th percentile). - Top PIT rate threshold under reform plan: ISK 8.4 million. - Positive net taxes above roughly ISK 2.5 million gross labor income under optimal refundable credit design. - Recommendation: reduce marginal tax rates on middle incomes from ~40 percent to about 25 percent; introduce a refundable credit conditional on work; use a high phase-out rate for the refundable credit; maintain the top rate but consider raising the top rate threshold to at least ISK 12 million. ### Child benefit (CB) design, parameters, analysis, and recommendations - Structure and parameters (from Table 2): - CB is fully refundable, household-based, for children under 18. - Thresholds for phase-out: Single Parents ISK 2,400,000; Couples ISK 4,800,000. - Basic Phase-Out Rates: - One Child: 4% - Two Children: 6% - Three or More Children: 8% - Supplemental Phase-Out Rate (all children): 4% - Minimum Child Benefit – Per Parent: 5,000 - Table 2 exact benefit amounts: - Child Benefit Amount – First Child Only: Single Parents 323,253; Couples 194,081. - Child Benefit Amount – Other Children: Single Parents 331,593; Couples 231,019. - Supplemental Benefit - Children under age 7: Single Parents 115,825; Couples 115,825. - Analysis: - CB is complex and poorly focused; modest phase-out rates distribute CB into the middle class. - Higher benefit for subsequent children than first child runs counter to standard analysis; supplemental benefit for children under seven may be redundant. - CB contributes to reduced average tax rates at low incomes only for taxpayers with children. - Recommendations: - Simplify CB to a single fixed benefit per child, regardless of age or parental marital status. - Phase out at a single rate regardless of number or age of children. - Focus on low-income families by lowering phase-out thresholds, increasing phase-out rate, and limiting to three children per household. ### Individuals versus households, basic credit, and bracket sharing - Basic tax credit: - ISK 610,824 per taxpayer for 2015; non-refundable but shareable between taxpayers filing as a couple. - Bracket sharing: - Transfer rule: one-half of the unused second bracket amount can be transferred to the high-income partner up to ISK 3,163,584. - Bracket sharing not available to singles. - Distributional and behavioral effects: - Hybrid individual/household features create marriage penalties and credits: - CB creates marriage penalty for couples with children because it provides greater assistance to single parents. - Examples show marriage penalty of ISK 728,000 in a four-child scenario; marriage credit examples also exist for asymmetric incomes. - Bracket sharing benefits only high-income couples and yields small savings as a share of tax paid. - Administrative challenge: treating un-married cohabitating couples as “married” complicates correct filing. - Recommendations: - Preserve individual taxation. - Eliminate bracket sharing for couples. - If basic credit becomes refundable, credit sharing becomes unnecessary. - Reform CB and IR parameters to reduce marital penalties. ### Housing-related policies: location-specific supplements, mortgage interest rebate (IR), and rent benefits - Location-specific housing subsidies: - Preferred instrument: local income supplements targeted to local cost-of-living differences rather than rent subsidies. - Supply-side and rental income tax treatment: - Rental income already benefits from 30 percent imputed cost deduction. - Cutting tax rate on rental income risks recharacterization of income and undermines dual income tax uniformity. - Any fiscal space should be used to lower capital income tax on all investment income. - Property tax can encourage intensive urban land use; zoning and non-tax constraints matter. - Mortgage interest rebate (IR): - Due to high household indebtedness, abrupt termination inadvisable; recommend gradual phase-out over several years. - Immediate simplification: merge treatment of households into single parameters; reduce maximum rebate and wealth phase-out range; sharply increase income phase-out rate. - Suggested income test level (preserved hedged wording): "Most households in developed countries expect to spend much more than 8.5 percent of their income on housing, so a more reasonable level for the income test would be 20-25 percent." - Simplification would help marginal home buyers and enable banks to account for the benefit in mortgage decisions. - Opportunity: central government PIT reform and Ministry of Welfare plans to take over rental benefits present a reform window; current IR parameters lapse end-2015 unless extended. - Rental benefits: - Local government responsibility; Reykjavik examples: - Maximum ISK 50,000 per month or 50 percent of rent; average Reykjavik rental benefit around 47 percent of total rent. - Means-testing formulas include income and net wealth tests; around 15,400 households receive rental benefits yearly. - Recommendation: reform rent benefit into enhanced income support for low-income households in high-cost areas. - Recommendations (explicit): - Phase out IR over next several years in favor of general income support (e.g., refundable tax credit). - As first step, simplify parameters and focus benefit on marginal households that could not afford to buy without it. - Reform rent benefit into enhanced income support for low-income households in high-cost areas. ### Fiscal federalism, PIT revenue sharing, and local government finance - PIT significance: - PIT constitutes 17 percent of central government revenue and 61 percent of local government revenue. - Current revenue sharing mechanics: - Central government (CG) bears entire cost of basic credit; local governments (LGs) receive constituents’ PIT share from first dollar earned even if basic credit shields constituent from PIT. - CG financing of basic credit constitutes about 7 percent of LG PIT revenue. - CG share of PIT revenue was 42.5 percent in 2014; under IMF proposed reform CG share would fall by roughly 2 percentage points. - Local government fiscal scale (2014): - 76 municipalities account for more than a quarter of total government revenue and expenditure. - LG revenues = 12.9 percent of GDP or 28.5 percent of total government revenue. - LG expenditures = 13.2 percent of GDP or 29 percent of total government spending. - LG revenue composition (2014): PIT 61 percent; Property Tax 12 percent; Grants 11 percent; Fees and charges 10 percent; Capital income 4 percent; Indirect Taxes 1 percent; Other 1 percent. - Local revenue autonomy and constraints: - LG PIT rates band: 12.44 and 14.52 percent; average 14.4 percent. - CG caps real estate tax rates (commercial/government 1.32; residences 0.5 percent). - LGs cannot introduce new taxes; autonomy in fees/charges only. - Grants and Equalization Fund rules summarized. - Revenue volatility and responsibility: - Allocation of revenues should match magnitude and volatility of expenditures. - Example calculation: if LGs financed their own share of basic credit (charge PIT only once income exceeded ISK 633,965 = ISK 610,824/0.373*0.144/0.373), net PIT revenue would fall by roughly 15 percent and become more volatile. - Recommendations (explicit): - Conduct a review of central and local government revenue sharing to align division with expenditure responsibilities and LG fiscal accountability. - Consider increasing the cap on real estate taxes, particularly for residential properties. ### Distributional microsimulation methodology and results - Methodology: - Microsimulation using 2013 RSK individual tax return data inflated to 2015 levels. - Static calculations (no behavioral responses). - Households ranked into deciles using household per capita pre-tax income. - Current regime findings: - System progressive with a negative tax rate on poorest households. - Average per capita household net income more than 10 times higher in top decile than lowest decile. - Top 10 percent contributes about 33 percent of total PIT; top 20 percent contributes about half. - Child benefit distribution (total household income basis): greatest share to third decile; last 30 percent of households get about 35 percent of total child benefit envelope; middle 4 deciles receive almost half; top 30 percent receive almost a fifth. - Per capita basis: child benefit largest in bottom decile (~17 percent); more than 65 percent of child benefit to bottom 20 percent; 95 percent of total budget envelope to bottom half (per capita basis). - Interest rebate skewed to top half: 35 percent (per capita categorization) and 55 percent (total household income categorization). - On average tax burden around 25 percent of gross income for all family types; child benefit share rises with number of children. - Single parents have lowest per capita net income and lowest tax burden; child benefit provides more than 10 percent of average net income for single parents. - Government reform proposal findings: - Overall distributional impact very small. - Reduces tax burden on middle income families slightly. - Largest gain to ninth decile: household net income +1.5 percent on average. - Reform somewhat favors single adult families; single households without children and single parents gain slightly below 1 percent. - IMF reform scenario findings: - Benefits bottom fifth most and to some extent top 20 percent. - Bottom decile net income increases by more than 30 percent due to conditional refundable credit. - Second decile increases by about 10 percent. - Middle deciles (4th–6th) drop by around 5–7 percent. - Single parents average loss ~4 percent compared to baseline; couples with children average gain >1 percent. - IMF reform preserves or slightly increases progressivity (Gini post-tax = 0.32). - Key tables and inequality measures (as presented): - Table 7: Average After-Tax Household per Capita Income by Decile (numbers preserved in source format). - Table 8: Inequality Measures - Pre-tax Income | Post-tax Income - Current System Gini 0.37 | Post-tax 0.32 - Government Reform Post-tax Gini 0.32 - IMF Reform Post-tax Gini 0.32 - P90/P10: Pre-tax 6.30 | Current post-tax 4.37 | Government Reform post-tax 4.43 | IMF Reform post-tax 3.75 - P75/P25: Pre-tax 2.37 | Current post-tax 2.01 | Government Reform post-tax 2.01 | IMF Reform post-tax 1.93 ### Appendix highlights — tax policy changes since 2008 and 2013–2015 measures - Personal income tax adjustments, capital income tax changes, corporate tax increases, net wealth and inheritance tax changes, social security tax adjustments, VAT and commodity tax changes, energy taxes and bank/financial sector levies summarized as in source. - Specifics preserved: - 0.2 percent introduced on retail price of geothermal water. - 2011 carbon tax raised by 50 percent and again in 2012 by 33 percent; carbon tax and geothermal charge made permanent from 2013. - Bank tax initial rate 0.041 percent; surcharge 0.0875 percent added for 2012–2013; broadened to 0.376 per cent as of 2014 with debt threshold ISK 50 billion. - Financial activity tax payroll portion adjusted from 5.45 percent to 6.75 percent then lowered to 5.5 percent. - VAT standard lowered to 24 percent and lower rate raised to 11 percent from January 1, 2015; commodity tax repealed from January 1, 2015. - Estimated net revenue loss from VAT and commodity tax reform: around ISK 4 billion, or 0.2 percent of GDP. - Aggregate mid-2013–2015 impacts summarized above. *Italic: IMF staff analysis and calculations from _cr15315 (2013 RSK data inflated to 2015 levels using MOFEA parameters) contained in the provided content.* ### Preface ................................................................................................................ ### _cr15315 - Preface ### Preface: Mission, team, and assistance - Request and timing: - Technical assistance (TA) request by the Icelandic authorities at the 2014 IMF Annual Meetings. - Headquarters-based TA mission during March – July 2015. - Mission team: - FAD headquarters: Ms. Thornton Matheson (head), Ms. Dora Benedek, Mr. David Wentworth, Mr. Philippe Wingender. - Visiting expert: Ms. Marianna Jonasdottir (Director General, Department of Tax Policy, Ministry of Finance and Economic Affairs, Reykjavik). - Local and departmental assistance: - Department of Taxation, Ministry of Finance and Economic Affairs: Ms. Fjola Agnarsdottir, Ms. Elin Gudjonsdottir. - Rikisskattstjori (Tax Administration): Mr. Pall Kollbeins. - IMF HQ assistance: Ms. Edda Ros Karlsdottir (Monetary and Capital Markets Department), Mr. Johan Bjorgvinsson (Statistics Department). ### Executive Summary: Objectives, analytical approach, and headline recommendations - Reform goals: - Improve work incentives by lowering marginal tax rates. - Simplify the PIT and refundable credits (child benefit and interest rebate). - Focus credits on needier households. - Provide a standard distributional analysis framework for proposed tax policy changes by income decile and household type. - Analytical framework: - Applied Mirrlees-Saez optimal income tax model balancing work incentives, revenue needs, and redistributional preferences. - Model implies a U-shaped marginal tax rate schedule across income: rapid withdrawal of a universal grant at low incomes; low marginal rates for the middle; rising rates at the top. - Diagnosis of Iceland’s current PIT: - Very low-income taxpayers sheltered by the basic credit face rates at or near zero; once the credit is exhausted PIT jumps immediately to almost 40 percent. - Refundable credits (child benefit and interest rebate) phase out slowly and extend into the top income decile. - Current top PIT rate is close to the revenue-maximizing top marginal income tax rate for Iceland based on its income distribution and standard elasticity estimates. - Optimizing the PIT therefore chiefly requires reform of: the basic credit, the initial PIT rate, the child benefit, and the interest rebate. - Key reform recommendations: - Basic credit: - Increase the basic credit and make it fully refundable to all taxpayers age 18 and older. - Option to condition on a certain level of labor earnings to avoid paying to young singles (e.g., students). - Rapid phase-out as labor income rises. - Significantly reduce the initial PIT rate. - Current top PIT rate need not change, though its threshold should ideally be raised. - Child benefit (CB): - Replace complex, conditional structure with a single fixed benefit amount per child under 18, regardless of age or family structure, up to a maximum of three children per household. - Unify and sharply increase the phase-out rate; unify and lower the phase-out threshold. - Interest rebate (IR): - Recommendation to gradually phase out the mortgage interest deduction/rebate. - Immediate step: radically simplify parameters — single mortgage interest cap, single interest rebate amount, and single net wealth phase-out range. - Lower the net wealth phase-out range and at least double the minimum income percentage spent on interest to better match typical housing expenditure shares. - Consider incorporating IR reform into a broader review of housing-related benefits, especially if central government may take over rental benefits from local governments. - Fiscal federalism and revenue sharing: - Review revenue sharing arrangements with local governments; central government currently finances the cost of the basic credit. - PIT revenue sharing should be considered as part of overall allocation of revenues and expenditures between levels of government. - Distributional analysis and microsimulation: - Developed a rubric and microsimulation model using detailed taxpayer-level data. - Households ranked into income deciles and grouped by demographic characteristics (singles, couples, with and without children). - Findings: - Current PIT system (including CB and IR) is progressive and taxes single parents much more lightly than other household types. - Government reform proposal reduces revenues by roughly ISK 10 billion, benefits all income deciles (particularly the seventh to ninth deciles), and benefits singles more than couples. ### IMF reform scenario (illustrative modeled package) - Main parameters of the hypothetical IMF reform: - Replace the non-refundable credit with an ISK 1.2 million refundable credit granted to taxpayers over 17 with at least ISK 600,000 of labor income. - Phase-out of the refundable credit at a 35 percent rate against total income. - Cut the initial central government PIT rate to 12.5 percent. - Set the top PIT rate to 30.5 percent with a threshold of ISK 12 million. - Child credit of ISK 400,000 phased out at a 12 percent rate beginning at ISK 1.8 million in income (regardless of family structure). - Eliminate the interest rebate. - Fiscal and distributional outcomes: - The modeled reform would be roughly revenue-neutral to the government’s proposed PIT reform for 2016. - Maintains the same overall progressivity as the current system and the government reform proposal as measured by the Gini coefficient. - Relative to the government reform, the IMF scenario: - Benefits the first quintile (due to the refundable credit) and the top quintile (due to tax rate reductions and higher top-rate threshold). - Leaves the three middle-income deciles somewhat worse off (despite the sharp decline in the initial PIT rate) because of reductions in the child benefit and elimination of the interest rebate. - Significantly reduces single parents’ net income by leveling treatment of singles and couples; other household types unchanged or marginally better off. ### Introduction and overview: context and motivation - Motivation: - Reform requested by Minister of Finance and Economic Affairs Bjarni Benediktsson. - Main goals in the mission terms of reference: simplify tax rate structure and means-tested benefits (CB and IR); improve incentives for work; reduce incentives for tax evasion; avoid substantially increasing progressivity. - Historical context: - The 2008 financial crisis caused general government tax revenues to fall by more than 8 percent of GDP from its 2006 peak to its 2009 trough. - Post-crisis policy responses included a comprehensive review of the tax system to restore revenue, improve progressivity, and promote efficiency; June 2009 fiscal consolidation plan with the IMF. - Prior IMF tax policy TA reports: general diagnostic of Icelandic tax system in 2010 and follow-up diagnostic on natural resource and energy taxation in 2011. *Source: _cr15315 - Preface (IMF Fiscal Affairs Department technical assistance report).* ### 3. The tax reforms that emerged from the 2009-2011 review increased revenues from ### _cr15315 - 3. The tax reforms that emerged from the 2009-2011 review increased revenues from ### Revenue-raising measures and fiscal impact - Indirect tax changes: - Top VAT rate raised from 24.5 percent to 25.5 percent (later reduced to 24 percent under 2014 reform). - Excises were increased. - New green taxes introduced on carbon fuels, electricity and geothermal water. - Direct tax changes: - Two higher tax brackets introduced into the initially flat-rate PIT. - Local government (LG) income tax rates were raised. - Capital income tax rate raised from 10 percent to 20 percent (with an exemption for up to ISK 100,000 in interest income and 30 percent of rental income). - Corporate income tax (CIT) rate raised from 15 to 20 percent. - Inheritance tax rates increased and a net wealth tax reintroduced. - Other measures: - Social security charges raised from 5.85 percent to 8.65 percent. - New taxes on the banking sector (bank levy, financial activities tax). - Fee system on fishing quotas was reformed. - Fiscal outcome: - MOFEA estimates the tax measures implemented in the period 2008 to mid-2013 raised about 6 percent of GDP. - General government tax revenue recovered from a low of 29.2 percent of GDP in 2009 to 32.2 percent in 2013. - Trade-offs: - Higher revenues were accompanied by increased complexity and demand for special exemptions. - Administration and enforcement of the net wealth tax were viewed as particularly complex because of required annual valuation of private business equity. - Behavioral responses to higher capital and corporate taxation were partly contained by capital constraints imposed during the crisis. ### Political mandate and reform objectives (post-2013 election) - Government platform objectives included: - Simplifying the tax system. - Broadening tax bases. - Reducing income-linkage and tax evasion. - Reducing social security charges during the electoral term. - Abolishing minimum municipal taxes. - Reviewing the income tax system. - Leveling and simplifying consumption taxes and reviewing commodity taxes. - Strategic goal: - Rebalance the tax mix from direct to indirect taxes to reduce distortions while maintaining progressivity via better-targeted expenditure on lower-income households. ### 2014 VAT reform and immediate compensations - IMF technical assistance recommended: - Narrow the gap between standard (25.5 percent) and reduced (7 percent) VAT rates and ultimately move toward a single rate. - Eliminate generous exemptions for tourism, transport, and recreation. - Largely abolish the commodity tax. - Enacted reform in 2014: - Reduced the top rate to 24 percent and raised the bottom rate to 11 percent. - Abolished the commodity tax. - To compensate for higher tax rates on staples, means-tested child benefits were increased. - Lowering the top VAT rate and repealing the commodity tax also created downward pressure on inflation (relevant for households with indexed mortgages). ### Personal Income Tax (PIT) structure, changes, and assumptions used in the report - Pre-reform PIT profile: - Current PIT structure characterized by a high initial tax rate of 37.3 percent (comprising the average local government rate of 14.44 percent and the central government rate of 22.86 percent). - A non-refundable basic tax credit of ISK 610,824, which shelters income of about ISK 1.6 million (about US$12,000) per year. - Two additional tax rates of 39.7 percent and 46.2 percent, applying to income above ISK 3.7 million and ISK 10 million, respectively. - Basic unit of assessment is the individual; registered couples may share unused portions of the basic credit and up to one half of any unused portion of their second-rate tax bracket; a fraction of any remaining credit may be offset against capital income. - Government actions in 2014 and during mission: - In 2014, reduced the first and second rates slightly (by 0.04 percent and 0.5 percent, respectively) and increased the threshold between them; increased the child benefit phase-out rates by one percentage point. - Second wave of reform (introduced during the mission) lowers the first rate another 0.36 percent and eliminates the second rate altogether, leaving the top rate unchanged at 31.8 percent. - Report assumptions: - The report assumes the government’s current PIT reform proposals will pass into law and incorporates them into the baseline policy regime. - The report assumes that eliminating the second tax rate will also eliminate bracket sharing. ### Distributional implications and means-tested benefits - Comparison with Nordic countries: - Iceland’s PIT exhibits moderate progressivity; the basic credit is more generous than any other Nordic country except Norway. - The initial tax rate is the highest in the region; overall PIT schedule is relatively flat with rates increasing less than 10 percentage points over the entire income spectrum. - Most progressivity derives from the basic credit. - Means-tested benefits complexity: - Two major programs—child benefit (CB) and the interest rebate (IR)—are highly complex. - CB benefit levels and withdrawal rates depend on income, number of children, marital status, and children’s ages. - IR depends on mortgage interest, income, marital and parental status, and net wealth. - Relatively high phase-out thresholds and low withdrawal rates extend both benefits well up the income scale, raising costs and undermining progressivity. - These features raise marginal tax rates for middle-income families through interaction with high PIT rates. - Dependence of benefit levels on marital/couple status can create perverse incentives for household formation or dissolution. - Policy direction: - The report indicates radical simplification and refocusing of these schemes on low-income households will be recommended (Chapters III and IV). ### Optimal income tax framework and implications for PIT design - Modeling approach: - The report applies the Mirrlees-Saez optimal income tax framework calibrated to Iceland’s income distribution. - Key theoretical insights summarized: - Optimal taxes trade off equity (redistribution) and efficiency (behavioral responses). - Lump-sum grants are most efficient but are politically impractical; optimal designs approximate redistributive transfers while limiting distortion. - Marginal income tax rates in optimal schedules typically follow a U-shaped pattern: - An unconditional lump-sum grant withdrawn at high rates to target the needy. - High marginal tax rates at the bottom to limit benefit capture by non-needy. - Low marginal tax rates for middle-income earners to minimize distortions where the taxpaying population is concentrated. - Rising marginal tax rates at the top to ensure progressivity and revenue. - Relevance to Iceland: - Iceland’s current PIT departs from the optimal pattern: generous basic credit yields low marginal tax rates at the bottom, but tax rates jump in the middle where basic credit is exhausted and high initial/second PIT rates apply; gradual withdrawal of refundable credits compounds high middle-income marginal rates. - To improve work incentives, the Mirrlees model will be calibrated to derive an optimal marginal tax rate (MTR) schedule for Iceland (Chapter II). - Limitations noted: - Optimal tax models typically do not account for family structure, number of dependents, disability status, lifecycle behavior, savings, or intertemporal choices—factors relevant for capital income taxation. - The current dual income tax system in Iceland, with a flat rate on capital income, is consistent with recommendations derived from the modeling exercise. ### Institutional and analytical recommendations - Revenue-sharing considerations: - Optimal PIT reform is likely to alter allocation of revenues between central and local governments; the current revenue-sharing formula should be reviewed as part of reform. - Under the current structure the central government absorbs the entire cost of the basic credit even though taxpayers use the credit against both central and local PIT; implications should be evaluated in the context of Iceland’s overall federal revenue and expenditure sharing regime (Chapter V contains basic considerations). - Distributional analysis: - The government wishes to establish a regular framework for distributional analysis of proposed tax policy measures. - Lack of such analysis complicated the recent VAT reform; Chapter VI will present distributional analysis evaluating impacts by income level and demographic characteristics. *Source: _cr15315 - 3. The tax reforms that emerged from the 2009-2011 review increased revenues from (IMF PDF content provided).* ### 21. The first step in projecting an optimal tax reform for Iceland was to calculate the ### The first step in projecting an optimal tax reform for Iceland was to calculate the ### Baseline marginal tax rates (MTRs) and microsimulation - A microsimulation model was constructed using detailed 2013 taxpayer data from the Rikisskattstjori (RSK) to reflect baseline tax rates, thresholds, and benefit parameters for the PIT, the child benefit (CB) and the interest rebate (IR). - Income amounts were inflated to 2015 levels using parameters provided by the MOFEA. - MTR calculation method: - Each taxpayer was given an additional króna of income and tax liability recalculated. - MTR = increment in tax liability divided by increment in income. - Weighted-average MTR schedule (Figure 5) findings: - Great dispersion of MTRs at each income level driven by multiple low phase-out rates of the CB and IR which extend across most of the income distribution. - General shape: very low rates (10 percent or less) for individuals with less than ISK 3 million in income; jumps quickly to about 40 percent above that level; increases slightly to about 47 percent at income levels above ISK 10 million. - Caveat: - Actual MTRs at the bottom are likely higher to the extent means-tested benefits (e.g., rental benefits or “Pillar 1” pensions) not captured by the microsimulation exist; mission lacked sufficient information to include these. ### Distribution of top incomes and revenue-maximizing top rate - Top-income distribution: - Well approximated by a Pareto distribution with a Pareto coefficient of 2.7. - Income definition: sum of labor and capital income. - Panels in Figure 6 show close match between theoretical Pareto with coefficient 2.7 and actual top 10 percent densities and incomes. - Interpretation: - Iceland’s Pareto coefficient of 2.7 indicates a relatively thin top tail (fewer very high-income people) compared to comparator countries. - Optimal top income tax rate depends negatively on thinness of the top tail; thinner tail lowers revenue gain from higher top rates. - Revenue-maximizing top marginal tax rate calculations (Table 1): - Using a standard elasticity of taxable income (휀) of 0.3, calculated revenue-maximizing top marginal tax rate for Iceland = 55 percent (Table 1, column 4). - The current top effective marginal tax rate in 2015 equals 55 percent (Table 1, column 2), implying current top rate is at the top of Iceland’s Laffer curve. - Components included in top effective marginal tax rate: - Weighted average of top statutory PIT rates: 31.8 percent for the central government and 14.44 percent for the local government. - Flat 36 percent rate on capital income (compounded capital income tax and CIT: 20*(1 – 0.2) + 20 = 36). - Mandatory pension contribution rates for employers and employees. - Social security tax of 7.49 percent. - Effective consumption tax rate of 15.4 percent (ratio of taxes on goods and services to GDP in 2013). - Policy implication: - Any further increase in the top PIT rate might lead to lower revenues from taxpayers in the top 10 percentile. - Sensitivity: - Lower elasticity (휀 = 0.15) → revenue-maximizing rate = 71 percent (Table 1, column 3). - Higher elasticity (휀 = 0.45) → revenue-maximizing rate = 45 percent (Table 1, column 5), implying current top effective marginal rate would be on the wrong side of the Laffer curve if elasticity exceeds 0.3. ### Mirrlees model, α(z) term, and optimal marginal tax schedule - Mirrlees framework: - Define α(z) = z * f(z) / (1 − F(z)), reflecting product of income level z and ratio of density f(z) over one minus cumulative F(z), evaluated at z. - α(z) reflects ratio of total income of those affected by marginal tax at z relative to total income of taxpayers at higher income levels. - Mirrlees implication: higher α(z) → lower optimal marginal tax rate, all else equal. - Empirical α(z) for Iceland: - α(z) highest at around ISK 13 million (around the 95th percentile of the gross labor income distribution). - Figure 7 shows stability of Pareto coefficient once sufficiently high income threshold reached. - Optimal MTR schedule derivation: - Used Pareto estimates from Figure 7 and taxable income elasticity 휀 = 0.3. - Standard social welfare function with constant inequality aversion factor of 1 (constant relative risk aversion form W(ui) = ln(ui)) to derive social marginal welfare weights. - Example interpretation: government values an additional kroná given to an individual earning ISK 10 million ten times less than an additional kroná given to an individual earning ISK 1 million. ### Optimal vs actual MTR schedule and guaranteed lump-sum - Optimal MTR schedule (Figure 8) characteristics: - Markedly different from actual MTR schedule. - Optimal displays a high initial marginal rate of almost 70 percent that falls sharply to bottom out at less than 30 percent by around ISK 7 million and then rises gradually toward the current top MTR. - U-shaped structure consistent with previous Mirrlees-Saez models. - Marginal rates are lower under the optimal schedule beginning at around ISK 5 million and remain lower at higher incomes. - Actual MTR jumps up at ISK 8.4 million (top PIT rate threshold under government reform plan) while optimal MTR is close to its minimum at this point. - Guaranteed annual income: - Optimal model prescribes a guaranteed annual income level of around ISK 1.4 million (intercept of optimal after-tax income line, Figure 9). - This could take the form of a refundable tax credit to ensure low-income individuals receive net transfers. - For individuals with no gross labor income, refundable credit provides after-tax net income of ISK 1.4 million; taxed away as income rises so taxpayers with more than roughly ISK 2.5 million gross labor income would pay positive net taxes. - Optimal regime implies slightly higher average tax rates for taxpayers earning ISK 3-6 million; at income levels above ISK 6 million, lower marginal tax rates of optimal regime lead to lower average tax rates. - Sensitivity to elasticity: - Comparing 휀 = 0.3 and 휀 = 0.45 (Figure 10): - Higher elasticity produces lower marginal tax rates at all income levels and schedules diverge slightly as incomes increase. - Higher elasticity model generates lower guaranteed lump sum amount of ISK 1.25 million. ### Limitations and extensive margin considerations - Mirrlees model limitation: - Does not incorporate an extensive margin—assumes all taxpayers participate in the labor market and can only adjust work intensity (hours), not drop out. - Important to ensure tax system does not discourage labor force participation. - Extensions incorporating extensive margin imply: - Where workers can drop out, there should be lower—and possibly negative—MTRs at the bottom of the income scale. - Ways to introduce initially low MTR include conditioning lump-sum grant on work hours or earnings (e.g., US earned income tax credit with phase-in rates). - Fundamental adjustment: channel redistribution to the working poor rather than individuals who do not work. ### Key numerical findings and table values (as presented) - Pareto coefficient for Iceland: 2.7. - Revenue-maximizing top marginal tax rates (Table 1): - Columns reflect 휀 = 0.15, 휀 = 0.30, 휀 = 0.45. - Iceland: Effective Top Marginal Rate (2) = 0.55; Revenue-Maximizing Top Rate 휀=0.15 (3) = 0.71; 휀=0.30 (4) = 0.55; 휀=0.45 (5) = 0.45. - Other country examples included in Table 1 (Pareto; Effective Top Marginal Rate; Revenue-Maximizing rates for 휀=0.15, 0.30, 0.45) preserved as in source. - Components included in top effective tax rate calculation: - Central government top statutory PIT rate = 31.8 percent. - Local government top statutory PIT rate = 14.44 percent. - Flat capital income rate = 36 percent. - Social security tax = 7.49 percent. - Effective consumption tax rate = 15.4 percent. - Optimal guaranteed lump sum: ISK 1.4 million (휀 = 0.3) and ISK 1.25 million (휀 = 0.45). - Key income thresholds cited: - Low MTR region: less than ISK 3 million. - Jump to ~40 percent: above ISK 3 million. - ~47 percent at incomes above ISK 10 million. - α(z) peak around ISK 13 million (95th percentile). - Top PIT rate threshold under reform plan: ISK 8.4 million. - Taxpayers pay positive net taxes above roughly ISK 2.5 million gross labor income under optimal refundable credit design. - Suggested top rate threshold consideration: at least ISK 12 million (see Recommendations). ### Recommendations (from source) - Reduce marginal tax rates on middle income earners from an average of 40 percent to about 25 percent. - Introduce a refundable credit, with the possibility of making it conditional on work subject to some minimum hours or earnings test. - Have a high phase-out rate of the refundable credit to ensure that only low-income individuals benefit from the transfer. - Maintain the top rate at its current level, but consider raising the top rate threshold to at least ISK 12 million. ### Child benefit (CB) design, analysis, and recommendations - Structure and parameters (Table 2): - CB is a fully refundable credit calculated at household level for children under age 18. - Benefit amounts vary by filing status and number of children; supplemental benefit (SB) for each child under age 7 is fixed. - Means-tested on total household income (labor and capital). - Thresholds for phase-out: ISK 2,400,000 for single parents; ISK 4,800,000 for couples. - Basic phase-out rates: - One child: 4% - Two children: 6% - Three or more children: 8% - Supplemental phase-out rate (all children): 4% - Minimum child benefit per parent: ISK 5,000 (below which no benefit is paid). - Table 2 exact amounts: - Child Benefit Amount – First Child Only: Single Parents 323,253; Couples 194,081. - Child Benefit Amount – Other Children: Single Parents 331,593; Couples 231,019. - Supplemental Benefit - Children under age 7: Single Parents 115,825; Couples 115,825. - Threshold for Phase-Out (based on total income): Single Parents 2,400,000; Couples 4,800,000. - Basic Phase-Out Rate – One Child: 4% (both Single Parents and Couples). - Basic Phase-Out Rate – Two Children: 6% (both). - Basic Phase-Out Rate – Three or More Children: 8% (both). - Supplemental Phase-Out Rate (all children): 4% (both). - Minimum Child Benefit – Per Parent: 5,000 (both). - Analysis: - CB described as complex and poorly focused; ambiguous objectives between promoting fertility and preventing childhood poverty. - Current modest phase-out rates distribute CB well into middle class rather than concentrate on low-income families. - Higher benefit for subsequent children than first child runs counter to standard economic analysis that cost of rearing two children is less than twice cost of one; if differing benefits, amount should decrease with each subsequent child. - Supplemental benefit for children under seven may be redundant given extensive child care subsidies. - Lack of benefit cap means subsidy may extend to quite large families. - CB provides much of reduced average tax rates at low incomes but only for taxpayers with children; correct distribution should be achieved through basic tax credit and rate schedules. - Recommendations for CB: - Simplify the child benefit: - Give a single fixed benefit per child, regardless of age or parental marital status. - Phase out the benefit at a single rate regardless of number or age of children. - Focus the benefit on low-income families: - Lower the phase-out thresholds. - Increase the phase-out rate. - Limit the benefit to three children per household. ### Individuals vs. households - Under current law and MOFEA PIT reform proposal, PIT is imposed separately on each individual, but key components (CB and IR) are based on household calculations. - Result: Iceland’s Personal Income Tax effectively functions as a hybrid individual/household tax system. - Section examines how household structure affects income tax calculations, particularly for the CB. *Italic source attribution: IMF staff analysis and calculations from _cr15315 (2013 RSK data inflated to 2015 levels using MOFEA parameters) contained in the provided content.* ### 39. Two features of the PIT, the basic tax credit and bracket sharing, are indirectly ### _cr15315 - 39. Two features of the PIT, the basic tax credit and bracket sharing, are indirectly ### Household structure, basic tax credit, and bracket sharing - The basic tax credit is ISK 610,824 and is received by each taxpayer regardless of filing status; it is not refundable but can be shared between two taxpayers who file as a couple. - Sharing of the basic credit: if one partner cannot fully absorb his or her credit while the other can, the unused portion of the former’s credit can be used by the latter, effectively increasing total credit used for the couple. - Bracket sharing (current law): if one partner has income in the highest tax bracket (over ISK 10,036,848) and the other’s income falls below the top bracket, one-half of the latter’s unused second bracket amount can be transferred to the high-income partner, up to a limit equal to half the second bracket (ISK 3,163,584). The transferred amount is taxed at a rate lower than the top tax rate. - Bracket sharing is not available to single taxpayers. ### Analysis — individual versus household taxation; marriage penalties and credits - Key trade-off: individual-based taxation ensures two individuals earning the same wage face the same tax rates; household-based taxation ensures two households with the same combined income face the same taxes. - Household-based progressive taxation can discourage labor force re-entry (e.g., a parent re-entering faces spouse’s marginal rate on first earnings). - In Iceland: - The tax table and the basic credit are applied to individuals, not households, so they do not create the common marriage penalty seen elsewhere. - The Child Benefit (CB) creates a significant marriage penalty for couples with children because CB provides greater assistance to single parents than married parents (offset somewhat by higher phase-out threshold for couples). - Example (Table 3): two adults with four children (two under age seven) - As singles combined net tax: ISK 932,000. - As a couple combined net tax: higher; CB falls from ISK 1,505,000 to ISK 777,000 when moving from filing as singles to filing as a couple. - Marriage penalty: ISK 728,000 (Penalty % 78%). - Marriage credit from basic credit (Table 4) occurs when one partner has higher income and the other has little/no income; example shows marriage credit of ISK 163,000 (Credit %-22%). - Marriage credit from bracket sharing (Table 5): - Allows shifting income taxed at 46.24 percent to be taxed at 39.74 percent. - Under the 2015 PIT regime, maximum shiftable income is ISK 3,163,584, for a reduction of roughly ISK 250,000 in tax. - Savings are small as a share of tax paid (example: only four percent). - Policy critique: - Bracket sharing benefits only high-income couples (top tax bracket roughly coincides with top income decile) and only when one partner is high income and the other lower income. - Iceland’s hybrid of individual and household taxation plus refundable credits creates perverse incentives: encourages single childless individuals to become couples for tax benefits and encourages couples with children to become single for CB; observed influence on behavior particularly among lower-income households with children is noted by Icelandic policy experts. - Administrative challenge: Iceland treats un-married cohabitating couples as “married” for tax purposes, creating difficulty ensuring correct filing status absent bright-line legal test. ### Recommendations on household taxation features - Preserve the current PIT practice of taxing individuals. - Eliminate bracket sharing for taxpayers filing as couples. - Rationale and additional points: - If the basic tax credit is made refundable (per recommendations in the report), there will be no need for sharing the basic credit because the credit will be fully monetized. - Reform parameters of the child benefit and interest rebate to eliminate or greatly reduce marital penalties and credits. - The baseline policy scenario assumes the government’s proposed PIT reform will repeal the second income tax rate, thereby eliminating bracket sharing. *Source: _cr15315 - 39. Two features of the PIT, the basic tax credit and bracket sharing, are indirectly* ### 61. One common motive for location-specific housing subsidies is geographical ### _cr15315 - 61. One common motive for location-specific housing subsidies is geographical ### Location-specific housing subsidies and income supplements - Rationale: Geographical differences in housing costs raise the cost of living and thus the effective poverty threshold; urban centers (example: Reykjavik) are typically more costly than less populated areas. - Preferred instrument: - Local income supplements targeted to local cost-of-living differences are more efficient than rent subsidies because they do not distort relative prices and allow consumers to make efficient trade-offs (e.g., urban housing cost vs. higher transport costs in outlying areas). - Location-specific income supplements can address situations where housing is cheap but other costs (utility and transport) are elevated, including remote areas or locations with harsh climate. - Policy implication: Design benefit systems to recognize variation in local living costs through supplements rather than price-distorting rent subsidies. ### Supply-side housing policies and tax treatment of rental income - Government consideration: Reduced capital income tax rate on rental income as a means to stimulate housing supply. - Analysis and risks: - Rental income already benefits from an imputed cost deduction of 30 percent. - Cutting the tax rate on rental income would undermine the dual income tax’s flat, uniform capital income tax rate and create incentives for financial arbitrage to recharacterize interest and dividends as rents without necessarily stimulating housing investment. - Preferred fiscal use: - Any available fiscal space should be used to lower the capital income tax rate on all types of investment income (not just rental income). - Property tax role: - The property tax can be developed to encourage more intensive use of high-value urban land. - Non-tax constraints: - For tax measures to be effective, non-tax policies (e.g., zoning laws) must be conducive to increased residential development. ### Mortgage interest rebate (IR): phasing out and simplification - Constraint: High level of household indebtedness from the financial crisis makes abrupt termination of the IR inadvisable. - Phasing approach: - IR should be phased-out gradually over a number of years. - Initial steps: greatly simplify the program by merging treatment of all types of households into a single set of parameters. - Specific parameter adjustments proposed: - Reduce the maximum rebate and the wealth phase-out range toward that of the single homeowner. - Sharply increase the income phase-out rate. - Suggested income test level: "Most households in developed countries expect to spend much more than 8.5 percent of their income on housing, so a more reasonable level for the income test would be 20-25 percent." (preserve hedged wording) - Simplification benefits: - Radical simplification would facilitate the IR’s policy purpose of helping marginal home buyers enter the market. - Current complexity makes the benefit uncertain; banks reportedly do not take the IR into account in assessing mortgage applications. A simpler formula would allow applicants to use it to secure financing. - Political timing: - Two developments offer an opportunity to reform IR: central government PIT reform initiative and Ministry of Welfare legislation to take over and reform the rental benefit system run by local governments. - Current IR parameters will lapse at the end of 2015 unless extended; after lapse the system reverts to pre-2011 parameters (much lower benefit levels but much higher wealth phase-out levels). This impending lapse creates an incentive for rationalization. ### Recommendations on housing-related benefits (explicit bullets from the source) - Phase out the interest rebate over the next several years in favor of general income support for low-income households (e.g., a refundable tax credit). - As a first step, simplify the parameters and focus the benefit on marginal households that could not afford to buy a home without it. - Similarly, reform the rent benefit into enhanced income support for low-income households in high-cost areas. ### Fiscal federalism — PIT revenue sharing and local government finance - Context and importance: - Reform of the PIT, which constitutes 17 percent of central government (CG) revenue and 61 percent of local government (LG) revenue, may necessitate rebalancing revenues between central and local governments. - Current PIT revenue sharing mechanics and effects: - Under current rules, the CG bears the entire cost of the basic credit. LGs receive their share of constituents’ income from the first dollar earned, even if the basic credit shields a constituent from paying any PIT. - When a taxpayer starts to pay PIT, all of their payments are allocated to the LG until that liability is fully paid off before the CG begins to recoup net revenue. - This CG financing of the basic credit constitutes about 7 percent of LG PIT revenue. - The CG’s share of PIT revenue is lower and more volatile than that of LGs: CG share was 42.5 percent in 2014; under the IMF’s proposed reform, the CG share would fall further by roughly 2 percentage points. - Over 2000-2014, the coefficient of variation (standard deviation/ mean) of CG PIT revenue as a share of GDP was 7 percent vs. 6 percent for LGs. - Local government scale and fiscal statistics (2014): - Iceland’s 76 municipalities account for more than a quarter of total government revenue and expenditure. - LG revenues amounted to 12.9 percent of GDP, or 28.5 percent of total government revenue. - LG expenditures were 13.2 percent of GDP or 29 percent of total government spending. - Composition of LG revenues (2014): - PIT: 61 percent - Property Tax: 12 percent - Grants: 11 percent - Fees and charges: 10 percent - Capital income: 4 percent - Indirect Taxes: 1 percent - Other: 1 percent - Local revenue autonomy and constraints: - Economic theory: LG revenue autonomy should correspond to LG spending autonomy. - Under the Local Government Act (LGA), the real estate tax and LG share of PIT are considered LG own revenues, but the CG determines bases and allowable rates. - Current constraints and parameters: - LGs may set their PIT rates within a narrow band of 12.44 and 14.52 percent; the average rate is 14.4 percent, indicating most LGs choose the maximum allowable rate. - CG caps the real estate tax rate at 1.32 for commercial and government properties and 0.5 percent on residences. - Local governments cannot introduce new taxes but have autonomy in setting local fees and charges. - Grants and Equalization Fund: - CG contribution rules call for the CG to contribute 2.12 percent of its total tax revenues and 0.264 percent of the previous year’s PIT base. - LGs contribute 0.77 of their PIT base, earmarked for elementary school expenditure, and 0.95 percent of the PIT base, earmarked for disabled expenditure; Fund revenues are shared among municipalities based on a complex needs- and resources-based formula. - Revenue volatility and responsibility: - Allocation of revenues between central and local governments must match expenditure responsibilities in magnitude and volatility; anti-cyclical spending responsibilities should be matched with less procyclical or smoothed revenues. - Specific fiscal example and calculation: - If LGs were to finance their own share of the basic PIT credit—that is, to only charge PIT on a constituent’s income once it exceeded ISK 633,965 = ISK 610,824/0.373*0.144/0.373—its net PIT revenue would fall by roughly 15 percent and also become more volatile. - The current PIT sharing formula insulates LGs from the wage negotiation process because CG finances the basic credit; rebalancing could give LGs an incentive to participate in wage formation. If necessary, revenue cost could be balanced by higher general revenue sharing. - Property tax as ideal local tax: - Real estate least suffers from base mobility and is therefore ideal for LG taxation. - Property tax rates are highly visible, promoting LG responsiveness to constituents. - 2011 IMF tax policy mission recommended further development of the property tax: raise the 0.625 cap on the residential property tax rate and perhaps introduce a positive floor for rates. - Heavier recurrent taxation of real estate allocated for residential use—particularly the tax on land (as opposed to structures)—would encourage more intensive development of those sites and could help address undersupply in the Reykjavik area. ### Recommendations on fiscal federalism (explicit bullets from the source) - Conduct a review of central and local government revenue sharing to ensure that its division is reasonable, given the division of expenditures, and that LGs are fiscally responsible to their constituents for their discretionary spending. - Consider increasing the cap on real estate taxes, particularly for residential properties. _Italic: IMF staff summary of sections on housing subsidies, IR reform, and fiscal federalism from the referenced content unit._ ### 80. The government aims to develop standardized methods for measuring the ### The government aims to develop standardized methods for measuring the ### Methodology - Microsimulation analysis using the population database of individual tax return data from 2013 provided by the RSK. - Microsimulation model simulates tax payment and resulting net income of households under: - the current 2015 rules, - the tax reform package of the government (the “baseline regime”), - the tax reform proposal developed by the IMF mission team. - Microsimulation calculations are static and do not take into account behavioral responses (for example, changes in labor supply). - Distributional analysis is assessed at the household level. Households are ranked into deciles using household per capita pre-tax income (total household income divided by the total number of household members), at the authorities’ request. - For perspective, results sometimes also show households’ total income unadjusted for household size. ### A. The Current Regime — Findings - The current tax system is progressive with a negative tax rate on the poorest households. - The average effective tax burden (ratio of income taxes to pre-tax income) increases very sharply for the bottom 4 deciles, and then rises more gradually. - Income disparity: - The average per capita household net income is more than 10 times higher in the top decile than in the lowest 10 percent of households. - PIT contribution: - The top 10 percent of households contributes about 33 percent of total PIT. - The top 20 percent of households contribute about half of the total PIT tax payment. - Child benefit distribution (based on total household income): - Greatest share goes to the third decile, followed by the second, sixth and seventh deciles. - The last 30 percent of households gets about 35 percent of the total budget envelope of child benefit. - The middle 4 deciles (4-7th) receive almost half of the total. - The top 30 percent receive almost fifth of all spending on child benefits. - Child benefit contribution to net income: - Contribution is greatest in the bottom of the distribution and decreases with income. - Based on per capita income, child benefit is largest in the bottom decile, about 17 percent. - More than 65 percent of the child benefit is provided to the bottom 20 percent of households (per capita basis). - 95 percent of the total budget envelope is received by the bottom half of the distribution (per capita basis). - Interest rebate distribution: - Top half of the income distribution receives a large share: 35 percent based on per capita categorization and 55 percent based on total household income categorization. - The share of the interest rebate in net income is much lower than that of child benefit for the bottom third of the distribution. - Tax burden by number of children: - On average around 25 percent of gross income for all family types. - Contribution of child benefit to net income rises with number of children: from 2 percent for families with 1 child to close to 5 percent for families with 3 or more children. - Family-type findings: - Single parent families have the lowest per capita net income, followed by single households with no children. - These families face the lowest tax burden on gross income. - Child benefit provides more than 10 percent of average net income for single parents. - Couples with children have substantially higher household net income (total and per capita) and child benefit constitutes a much smaller proportion of their net income. ### B. The Government Reform Proposal — Findings - Overall distributional impact of the government’s multi-year PIT reform proposal is very small. - The reform reduces the tax burden on middle income families slightly. - Largest gain accrues to the ninth decile: - Household net income increases on average by 1.5 percent. - This occurs despite the reduced threshold for the top rate, because elimination of the second tax rate benefits these households. - Family-type impacts: - Reform somewhat favors single adult families. - Gain in percent of net income for single households without children and single parents are slightly below 1 percent. - Couples with or without children gain a bit less. - Effect is mainly due to the (assumed) elimination of bracket sharing that currently favors couples with a high and a low income earner. ### C. The IMF Reform Scenario — Findings and Impacts - Distributional pattern: - Proposed IMF reform benefits the bottom fifth of households most, and to some extent the top 20 percent as well. - Bottom decile: very large increase in net income of more than 30 percent due to the conditional refundable credit. - Second decile: increase of about 10 percent. - Middle of the distribution (4th to 6th deciles): drop in net income of around 5-7 percent. - For most deciles, changes in household net income are somewhat smaller when compared to the current regime than when compared to the government proposal. - Family-type impacts: - Single parents: proposed system benefits this group the least; average loss in net income around 4 percent compared to the baseline regime. - Beneficiaries: couples with children (average gain of more than 1 percent of net income). - Families without children would also gain somewhat relative to the current system. - Progressivity and inequality: - IMF reform would at least preserve the progressivity of the current tax system, and by some measures increase it. - Improvement in equality largely due to large welfare increase at the bottom, which outweighs more moderate increases at the top. ### Key Tables and Measures (as presented) - Table 7. Average After-Tax Household per Capita Income by Decile (as presented in source) - 2015Government ReformIMF Reform - 1528580580768 - 21,4161,3921,3951,542 - 32,0451,8321,8421,820 - 42,6242,2022,2162,122 - 53,0662,5172,5322,364 - 63,5042,7872,8052,605 - 74,0973,1563,1823,029 - 84,9613,6993,7413,655 - 96,2714,5154,5814,606 - 1010,8007,3397,3937,766 - Note: Deciles based on pre-tax household per capita income - Pre-tax Household Average Per Capita Annual Income in ISK thousands - Source: RSK data and IMF staff calculations - Table 8. Inequality Measures Under the Current System and the Two Proposals - Pre-tax Income | Post-tax Income - Current System | Government Reform | IMF Reform - Gini coefficient 0.37 | 0.32 | 0.32 | 0.32 - P90/P10 6.30 | 4.37 | 4.43 | 3.75 - P75/P25 2.37 | 2.01 | 2.01 | 1.93 - Note: P90/P10 and P75/P25 are ratios of percentiles of the income distribution. Income concept is per capita household income. ### Appendix A — Selected Tax Policy Changes Since the 2008 Crisis (2009–2013) - Personal income tax: - At beginning of 2009 CG PIT was a single-rate tax; LG PIT averaged 13.12 percent. - CG PIT rate raised from 22.75 percent to 24.1 percent; temporary 8 percent surcharge on taxable income above ISK 2.4 million per year. - Beginning 2010: second PIT rate reduced to 27 percent and a third CG rate of 33 percent added on income above ISK 7.8 million; average LG PIT rate increased from 13.12 percent to 14.41 percent. - Early withdrawal of private pension savings allowed from 2010 until end 2014; withdrawals amounted to over ISK 100 billion and increased PIT revenues. - In 2012 private pension contribution deductibility from the PIT base was lowered from 4 percent to 2 percent (supposed to be in force until January 1, 2015). - Capital income tax: - 5 percent surcharge added to the 10 percent capital income tax rate from mid-year 2009. - Beginning 2010 tax rate raised to 18 percent; 2011 rate raised from 18 percent to 20 percent. - Yearly interest income below ISK 100 thousand per individual made tax exempt. - 30 percent imputed deduction given against rental income, reducing its effective tax rate to 14 percent. - Specific rule for owners of closely held companies: if dividend paid exceeded a threshold, half of excess taxed as wages and half as capital income. - Corporate income tax: - Beginning 2010 CIT raised from 15 percent to 18 percent; in 2011 raised from 18 percent to 20 percent. - R&D relief introduced as a refundable tax credit. - Net wealth tax: - Temporary 1.25 percent implemented in 2010 with tax-exempt threshold ISK 90 million per individual and ISK 120 million per couple. - Rate raised to 1.5 percent at beginning of 2011; thresholds lowered to ISK 75/100 million. - Beginning 2012, second tier of 2.25 percent introduced on net wealth above ISK 150 million per individual and ISK 200 million per couple. - Inheritance tax: - Rate raised from 5 percent to 10 percent at beginning of 2011. - Tax-exempt threshold of ISK 1.5 million of the deceased estate’s net assets introduced. - Social security tax (SST): - Mid-2009 SST raised from 5.34 percent to 7 percent; beginning 2010 from 7 percent to 8.65 percent. - Starting 2012 SST lowered from 8.65 percent to 7.79 percent, 7.69 percent in 2013, 7.59 percent in 2014 and 7.49 percent in 2015. - Value added tax: - General VAT rate raised from 24.5 percent to 25.5 percent at beginning of 2010. - 2012 parliamentary proposal to raise VAT on hotel accommodation from 7 percent to 14 percent was accepted but abolished before coming into force. - Energy taxes: - Three temporary energy taxes introduced in 2010: - A carbon tax on fossil fuels based on the ETS prices differentiated by type of fuel. - A fixed charge on electricity based on purchase of kW hours. - A third charge (text truncated in source). *Source: Icelandic authorities and IMF staff calculations (extracted from the provided PDF chapter).* ### 0.2 percent was introduced on the retail price of geothermal water. In 2011, the carbon tax was ### _cr15315 - 0.2 percent was introduced on the retail price of geothermal water. In 2011, the carbon tax was ### Tax measures and reforms (2010–2013) - Carbon and energy charges: - 0.2 percent was introduced on the retail price of geothermal water. - In 2011, the carbon tax was raised by 50 percent and again in 2012 by 33 percent, then becoming close to the average ETS price in each category of fossil fuels. - The carbon tax and the charge on geothermal water were made permanent from the year 2013. - The electricity charge was extended only to the end of the year 2015. - Bank tax (initial design): - At the beginning of 2011, a specific tax of 0.041 percent was introduced on the total liabilities of banks and other regulated lending institutions. - A surcharge of 0.0875 percent was added to the bank tax rate for the years 2012 and 2013 to finance government payments of specific interest rebates to households. - Old banks and other financial entities under winding-up procedures were exempt from the bank tax. - Rationale: mainly revenue raising and to curb excessive bank risk-taking. - Financial activity tax (FAT): - Introduced in 2012 as a twofold FAT: - A payroll tax of 5.45 percent on total salaries (same basis as social security charges). - A tax on profits above ISK 1 billion per year. - Rationale: financial entities exempt from VAT should be liable to pay FAT; VAT exemption was the main argument. - Payroll tax rate raised in 2013 from 5.45 percent to 6.75 percent. - Excises and commodity taxes: - Excises on fuel, alcohol and tobacco and road taxes were increased considerably in excess of the general consumer price index, especially excises on tobacco. - Commodity tax on sugary products was doubled in mid-2009 together with a considerable increase of commodity taxes in general. - In 2013, a new commodity tax was introduced on sugary products for health and revenue raising reasons. - Fisheries resource fees: - System based on individual transferable quotas (ITQs) with a fixed fee per kilo of TAC in place since early 1990s. - Reformed in 2012 to ensure public benefits from resource exploitation: new fee structure with a standard fee per kilo of TAC plus a special fee to capture natural resource rent. - Fisheries fee revenue almost tripled from ISK 3.7 billion in 2011 to ISK 9.7 billion in 2012. - Government overhauling fisheries legislation with plans to implement a new system no later than 2016/2017. - The 2015 budget figure for fisheries fees revenues is ISK 7.3 billion. ### Tax policy measures 2013–2015 (Progressive/Independent government) - VAT and commodity tax reforms: - Standard VAT rate lowered from 25.5 percent to 24 percent from January 1, 2015. - Lower VAT rate raised from 7 percent to 11 percent from January 1, 2015. - VAT base broadened for tourism industry (passenger transport, except publicly run transport, spas and tourist agencies) from January 1, 2016. - Commodity tax (including the sugar tax) repealed from January 1, 2015. - Estimated net revenue loss from VAT and commodity tax reform: around ISK 4 billion, or 0.2 percent of GDP. - Personal income tax (PIT) reforms: - First phase (beginning of 2014) was threefold: - Slight transfer of PIT rates between the CG and LG, bringing the CG lowest PIT rate from 22.9 percent to 22.86 percent. - Middle CG PIT rate lowered from 25.8 percent to 25.3 percent; top PIT rate unchanged at 31.8 percent. - Income threshold between first and second CG PIT bracket raised from ISK 241.5 thousand to ISK 290 thousand per month. - Private pension contributions (4 percent from employee and 2 percent from employer) made tax exempt if used as a down payment of a mortgage giving right to an interest rebate over the next three year, up to ISK 1.5 million per individual and ISK 2.25 million per couple (came into force from mid-2014; first-time home buyers could also apply). - Second phase of PIT reform announced for implementation in 2016 and 2017 (see Appendix B). - Bank tax reform and debt relief financing: - Comprehensive debt relief program initiated in 2014, in full force in 2015. - Financing via base broadening of the bank tax to include financial entities in winding-up process and a large increase of the tax rate from 0.041 percent to 0.376 per cent as of 2014. - Introduction of a debt threshold of ISK 50 billion for bank tax liability, exempting small financial entities. - In 2014, bank tax revenues amounted to 6.1 percent of the total tax revenues of the CG. - Financial activity tax adjustments: - In connection with increased bank tax, the payroll part of the FAT was lowered from 6.75 percent to 5.5 percent. - Stamp duties: - New simple system of stamp duties implemented at the beginning of 2014, replacing the old complex system. - Net wealth tax and electricity charge: - Legislated expiries: net wealth tax from the year 2015 and electricity charge from the year 2016, with a loss of around 2 percent of the total CG tax revenues. ### Revenue impact of measures (mid-2013 to 2015) - Aggregate impact of tax measures introduced from mid-2013 to 2015: - Supposed to increase CG tax revenues by ISK 26.8 billion. - Bank tax reform expected to lead to an increase of ISK 37.6 billion. - Other reforms (PIT, VAT, commodity tax, stamp duty reform and other minor ones) will reduce revenues by ISK 10.9 billion. - If revenue effects from abolition of the net wealth tax and electricity tax are added, the net increase is around ISK 12 billion. ### Appendix B — Overview of Iceland’s PIT and major means-tested benefits H3: A. PIT Structure and rules - Taxable income: - Individuals residing in Iceland are subject to both CG and LG income taxes on total earnings. - Taxable income includes all kinds of income from employment, business or profession, and capital; all income types and benefits are subject to tax unless directly exempted. - Dual income tax system: - Category A: wages and salaries, presumptive employment income of the self-employed, employment-related benefits, old-age pensions, social security payments, grants, payments to copyright holders, royalties, etc. - Category B: income from an independent economic activity (self-employed individuals), i.e. business income. - Category C: capital income such as dividends, interest income, rental income and capital gains. - Taxation mechanics: - Only deductions expressly provided for by law may be deducted from income of Categories A and C. - Operating losses may be deducted from Category B for self-employed individuals. - Category C (capital income) taxed separately at a flat rate of 20 percent (capital income tax); A and B taxed progressively. - Self-employed taxed under progressive PIT rather than 20 percent corporate rate or 36 percent partnership rate. - Self-employed obliged to declare a minimum presumptive income prescribed by regulation for different occupations (basis for social security tax and mandatory pension contribution). - Allowances, deductions and credits: - Employee contributions to pension funds (mandatory 4 percent and voluntary up to 4 percent) are deductible from taxable income. - No significant other deductions allowed. - For business income (Category B), expenses incurred for obtaining, securing and maintaining taxable income generally deductible. - For capital income, deduction allowed for capital losses only within the same tax year; interest cost is never deductible from capital income for individual taxpayers. - Personal tax credit: All individual taxpayers entitled to a non-refundable personal tax credit against CG PIT and LG PIT on Categories A and B. - Tax credit amount: ISK 610,824 for the income year 2015 (assessment year 2016). - For married or jointly taxed cohabiting individuals, unused credit may be transferred to spouse. - If paying capital income tax, taxpayer can use 20/37 percent of remaining personal tax credit against that tax. - PIT rates (income year 2015; assessment year 2016): - Of taxable income up to ISK 3,709,680 – 22.86 percent - Of the next ISK 6,327,168 – 25.3 percent - Of taxable income exceeding ISK 10,036,848 – 31.8 percent - Couple/cohabiting transfer rule: - Transfer of income from bracket 3 to bracket 2 by higher-income spouse if other spouse doesn’t reach bracket 3. - Transferable amount: half of the difference between the income level of that spouse in bracket 2 and ISK 6,327,168 per year; maximum transferable amount ISK 3,163,584. - Local government (LG) PIT: - Levied on same income base as CG PIT. - Average withholding tax rate is 14.44% in 2015, with a legalized minimum of 12.44 percent and a maximum of 14.48 when finally assessed in the year succeeding the income year. - 2016–2017 PIT reform proposal (government announced May 2015): - Number of rates to be reduced from three to two in two phases. - Total revenue loss for full reform estimated at ISK 9 - 11 billion. - Table 9 (Government 2015 PIT Reform Proposal) — monthly figures and rates: - 2015 / 2016 / 2017 - CG rate 1: 22.86% / 22.68% / 22.50% - CG rate 2: 2.44% / 1.22% / 0% - CG rate 3: 6.50% / 7.90% / 9.30% - LG average rate: 14.44% / 14.44% / 14.44% - Total rate 1: 37.30% / 37.12% / 36.94% - Total rate 2: 39.74% / 38.34% / -- - Total rate 3: 46.24% / 46.24% / 46.24% - Income thresholds* (monthly figures) - Rate 2: 309,140 / 309,140 / -- - Rate 3: 836,404 / 770,000 / 700,000 - Capital income (Category C) and compliance: - Capital income derived by individuals not engaged in business taxed separately at 20 percent. - Dividends and interest: tax withheld at source as preliminary payment and credited against final assessment the year after. - Capital gains and rental income: tax levied by assessment with one year lag. - Yearly tax-free limit for interest income: ISK 125,000 per individual. - 30 percent of individual’s rental income is tax exempt. H3: B. Child Benefit - Basic rules: - Paid for every child under 18 years of age. - Assessed/evaluated yearly at same time as final income tax assessment. - Amount varies depending on whether custodial parent is single or not. - Means-tested to total income of the household where the child has legal residency. - Child benefits are refundable and tax exempt. - Expenditures on child benefits estimated to be ISK 11 billion in the year 2015. - Supposed to be paid to around 54 thousand households in 2015. H3: C. Housing Benefits - Two main systems: - Interest rebate system (central government responsibility). - Rental benefit systems (local government responsibility; rules vary between municipalities). - Interest rebates: - Refundable interest rebate for individuals who build, renovate or purchase a residence for personal use and bear interest expenses. - Amount based on interest paid on mortgage loans obtained for refinancing, renovating, or purchase of owner-occupied residence. - Means-tested to income and net wealth; limits on interest paid and interest compensation. - In 2014 total expenditure of interest rebates amounted to ISK 9.5 billion and was paid to 53,525 households. - Legislative changes at end-2010 tightened rules to reduce expenditure growth; changes intended to be temporary for 2011-2012 but still in force for 2015 (based on 2014 figures). If not extended, old rules revert in 2016. - Rental benefits: - Largest municipality Reykjavik basic rules: - Basis: monthly rent paid by applicant. - Maximum amount per family: ISK 50,000 per month or 50 percent of rent amount, whichever is lower. - Many large municipalities add a special rental benefit making subsidy as high as 75 percent of total rent in some cases. - Reykjavik average rental benefit around 47 percent of total rent. - Basic amount per apartment: ISK 17,500 per month. - If renter has children, rent benefits increased by ISK 14,000 per child one, ISK 8,500 per child two and ISK 5,500 per child three. - Family can get 15 percent of the rent amount between ISK 20,000-50,000; overall maximum rent benefit ISK 50,000 per month. - Means-testing: - Income means test: 0.67 percent of yearly income above ISK 2.55 million is deducted from rent benefits each month. - Net wealth means test: 25 percent of net wealth at end of previous year above ISK 6,927,000 is added to yearly income and then income means test recalculated. - Statistics and expenditures: - Rough estimate: around 15,400 Icelandic households receive rental benefits every year. - Majority are singles, with or without children. - In comparison, 41,933 households got interest rebates in 2014, total amount paid being ISK 8 billion. - Total rental benefits paid out in 2015 estimated at ISK 6.4 billion, whereof the financing share of the central government will be ISK 4.5 billion, or 70 percent of the total. *Source: _cr15315 - 0.2 percent was introduced on the retail price of geothermal water. In 2011, the carbon tax was (IMF PDF content excerpt).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15315.pdf_