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Europe > Iceland

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Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper on Iceland analyzes housing market risks and housing affordability. House prices in Iceland have increased markedly since the onset of the coronavirus disease-pandemic, with signs that the valuations have exceeded macro fundamentals and long-term trends. Overvaluation has important implications for macroeconomic and financial stability, and housing affordability. House price cycles seem to be closely linked with the business cycle, indicating an amplification risk in the event of price correction. Thus, well calibrated and coordinated policies are crucial to navigate the house price cycle, minimize adverse feedbacks, and reduce affordability risk. IMF’s quantitative analysis examines the interplay between house prices and related factors. The ongoing monetary policy tightening cycle should help address Iceland’s house price pressures. Further macroprudential tightening through binding and effective borrower-based measures could help contain systemic risks and create further buffers in the financial sector. In the medium term, focusing on structural measures that reduce construction costs and increase supply by eliminating red-tape and reducing the period for obtaining building permits is likely to have the highest pay-off.
Keywords:
housing affordability; D. containing housing market; C. informing housing market policy; Energy exchange transition; I. carbon absorption; Housing prices; Greenhouse gas emissions; Carbon tax; Housing; Global
Cover IMF Staff Country Reports
Iceland: Technical Assistance Report-Optimal Reform and Distributional Analysis of the Personal Income Tax
International Monetary Fund. Fiscal Affairs Dept.
This paper discusses key findings and recommendations of the Technical Assistance Report on Optimal Reform and Distributional Analysis of the Personal Income Tax (PIT). With regard to reforming the PIT schedule, it recommends that the basic credit be increased and made fully refundable to all taxpayers age 18 and older. To avoid paying this benefit to young singles, such as students, who generally have other means of support, it could be conditioned on a certain level of labor earnings. This credit should be rapidly phased out as labor income rises, and the initial PIT rate should be significantly reduced. The current top PIT rate does not need reform, although the threshold for that rate should ideally be raised.
Keywords:
ISCR; CR; per capita income; taxable income; gross income; guaranteed annual income; household income; phase-out rate; reform proposal; tax burden; income tax; central government; government reform; Personal income; Personal income tax; Marginal effective tax rate; Income tax systems; Income distribution
Cover IMF Staff Country Reports
Iceland: Selected Issues Paper
International Monetary Fund. European Dept.
This Selected Issues paper examines implications of capital account liberalization in Iceland. Capital controls were critical in 2008 to avoid a more severe collapse of the Icelandic economy. Six years later, capital inflows have been liberalized, but most outflows remain restricted. Iceland has used the breathing room to reduce flow and stock vulnerabilities, strengthen institutions, and prepare for the lifting of capital controls. Simulations using the central bank’s Quarterly Macroeconomic Model (QMM) suggest that, compared with the 2008 crisis episode, the economy can better withstand the impact of an abrupt removal of capital controls. However, the outcome would be dependent on a number of factors, including resident depositor behavior.
Keywords:
ISCR; CR; Iceland; financial crisis; saving; investment; statistics Iceland; current account balance; FCI component; credit condition; saving rate; Housing prices; Personal income tax; Private savings; Global; East Asia; Europe
Cover IMF Working Papers
Allocating Business Income between Capital and Labor under a Dual Income Tax: The Case of Iceland
Ms. Thornton Matheson
and
Mr. Pall Kollbeins
In contrast to most Scandinavian countries, Iceland allocates the income of closely held businesses (CHBs) between capital and labor based on administratively set minimum wages rather than an imputed return to book assets.  This paper  contrasts the relative tax burdens of the current minimum wage system with asset-based allocation methods, and finds that switching to an asset-based method could increase tax revenues from CHBs in a generally progressive manner.  Predictably, the shift would also raise the tax burden of skilled labor-intensive industries more than it would that of capital-intensive industries.
Keywords:
WP; wage; minimum wage; CHB owner; Dual income tax; small business taxation; wage income; capital income; CHB income; business owner; Income; Capital income; Personal income tax; Minimum wages
Cover IMF Staff Country Reports
Iceland: Advancing Tax Reform and the Taxation of Natural Resources
International Monetary Fund
This study focused on environmental tax measures, and on allocation, pricing, and taxation of Iceland’s major hydropower and geothermal resources. Measures to secure the tax base for the corporate income tax (CIT) are proposed. Taxation of the financial sector can be improved by a number of measures. The measures that increase fiscal levies on energy-intensive industries should be avoided. The proposals in this paper aim at efficiency and equity in the tax system rather than revenue growth.
Keywords:
ISCR; CR; income tax; property tax; tax rate; withholding tax; excise tax; wealth tax; carbon tax; cash flow; natural resources; value-added tax; Income; Income and capital gains taxes; Value-added tax; Income tax systems; Capital income tax; Europe
Cover IMF Staff Country Reports
Iceland: Improving the Equity and Revenue Productivity of the Icelandic Tax System
International Monetary Fund
The Icelandic government has launched a review of the tax system, with a view to improving its income redistribution, growth orientation, and efficiency features, as well as increasing its revenue mobilization potential. It aims at minimizing detrimental effects on employment and growth, and at removing inconsistencies with international practices. The tax measures will boost the revenue potential in line with the government’s objectives while substantially increasing income redistribution. The Icelandic Corporate Index Tax would benefit from adopting financial accounting as the basis to determine taxable income.
Keywords:
ISCR; CR; excise duty; withholding tax; return on assets; tax system; wealth tax; double taxation; rate of return; Personal income; Capital income tax; Personal income tax; Income tax systems; Capital income; Europe
Cover IMF Working Papers
Tax Revenue Response to the Business Cycle
Ms. Cemile Sancak
,
Jing Xing
, and
Ricardo Velloso
This paper examines tax revenue during the business cycle by estimating the relationship between tax revenue efficiency and the output gap. We find a positive and significant relationship between these variables; results are consistent for quarterly and annual data, and across advanced and developing economies. We also find that a worsening (improvement) in the VAT C-efficiency is driven by shifts in consumption patterns and changes in tax evasion during contractions (expansions). A key implication is that, particularly during major economic booms and downturns, policy makers should look beyond simple, long-run revenue elasticities and incorporate into their analysis the effects of the economic cycle on tax revenue efficiency.
Keywords:
WP; tax revenue; output gap coefficient; tax revenue forecasting; business cycle; tax revenue efficiency; C-efficiency; VAT elasticity; VAT C-efficiency; estimation result; output gap variable; Value-added tax; Output gap; Tax efficiency; Consumption; Baltics
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund
This Selected Issues paper reports on the technical aspects of the model-based inflation forecasts of the Central Bank of Iceland (CBI) and the monetary transmission mechanism in Iceland. The paper summarizes the structure and results of time series models employed by the CBI to forecast inflation and quantify lags in the transmission of monetary policy changes. The paper also briefly discusses recent inflation trends, including the IMF staff’s estimate of the exchange rate pass-through. The paper presents some remarks on potential distortions in the financial market pass-through of monetary policy changes.
Keywords:
ISCR; CR; tax rate; Iceland; price; wealth tax; income tax; inflation development; B. inflation forecast; I. inflation forecasting; transmission mechanism; wealth surtax; Corporate income tax; Inflation; Exchange rate pass-through; Corporate taxes; Personal income; Europe; liquidity provision; publication policy; financial market pass-through; Exchange rate adjustments
Cover IMF Staff Country Reports
Iceland: Selected Issues
International Monetary Fund
This Selected Issues paper focuses on the European Monetary Union and the monetary policy framework in Iceland. It concludes that in terms of an exchange rate regime, the two most realistic options for Iceland are to continue with the existing arrangement or adopt a unilateral peg to the euro. However, it is argued that both options entail the need for enhancing the independence of the central bank, which will require reforming the Central Bank of Iceland Act. The paper also discusses a Scandinavian forecasting model for inflation in Iceland.
Keywords:
ISCR; CR; central bank; inflation equation; wage inflation; equation residual; world inflation; D. forecasting inflation; Inflation; Commercial banks; Personal income tax; Securities; Exchange rates; Western Europe; Europe
Cover IMF Staff Country Reports
Iceland: Recent Economic Developments
International Monetary Fund
This paper reviews economic developments in Iceland during 1990–96. It analyzes the origins of the current economic expansion associated with a swing in the current account and in emerging inflation pressure. Three driving forces are emphasized: the positive supply shock affecting the fisheries; the expansion of the power intensive industry; and brisk increases in real wages over the past two years (1995–96). The paper highlights that the main sources of upside risks comprise the likely construction of a new aluminum smelter.
Keywords:
ISCR; CR; demand; market; investment goods; consumer price inflation; HP filter; current account sustainability; asset price development; saving rate; tax system; saving-investment imbalance; Current account; Output gap; Personal income tax; Current account imbalances; Europe; Global