Hannes Hólmsteinn Gissurarson is a Professor Emeritus of politics at the University of Iceland.

Nineteenth-century Icelandic poet Grímur Thomsen said Iceland was like the two-faced Roman god Janus, with one face turned towards Europe and the other towards America. Indeed, Iceland acted on this when she rejected resuming talks on EU accession in a referendum on 29 August 2026, with 53 per cent against 47.

She is, with Norway and Liechtenstein, in the European Economic Area (EEA), which Switzerland has similar access to through bilateral agreements. This gives her access to the internal market in exchange for compliance with most EU regulations governing that market, while she retains control of fisheries, agriculture, foreign trade and monetary affairs. One reason Iceland felt it unnecessary to join the EU was that she has a defence treaty with the United States under which the US undertakes to defend Iceland (which has no military): from 1951 to 2006 the US kept a military base in Iceland.

The Atlantic alternative

I have long argued that Iceland belongs much less to a continental project like the EU than to a possible Atlantic area of cooperation with Norway, the United Kingdom, the Faroe Islands, Greenland, Canada and the US. Icelandic foreign policy should focus on strengthening ties with those countries in both economic and military affairs. The US has shown little interest in a free-trade treaty with Iceland, but perhaps Iceland could use her increased strategic importance in the North Atlantic to encourage at least more trade with the US through bilateral agreements.

Learning from her 2008 bank collapse, when she found herself unable to obtain liquidity from any major central bank, including the American Federal Reserve System, which nevertheless extended swap lines to Sweden and Switzerland, neither of them US allies, she should also use her increased leverage to secure access to dollars in a possible credit crunch.

Tax cuts on corporations

Domestic policy should also be revised, although this is unlikely under the present government, an uneasy alliance of social democrats, social liberals and populists under three female leaders. One popular step, though special interests would strongly resist it, would be to reduce taxes.

During the Davíð Oddsson era of extensive economic liberalisation, from 1991 to 2004, tax cuts largely paid for themselves. For example, corporate income tax revenue increased in proportion to GDP as the rate gradually fell from 50 to 15 per cent, because the tax base expanded while simplified rules made taxation easier.

Now, the tax rate is 22 per cent. It should be brought down to 10 per cent so that Iceland can become a viable competitor for capital and corporations with Ireland, which has a 12.5 per cent corporate income tax (15 per cent for the largest multinationals). The special resource rent tax imposed on profitable Icelandic fishing firms should be lowered to the point where it only covers the costs of managing the fisheries.

Tax cuts on individuals

The personal income tax, which had become flat in the Oddsson era above a relatively low tax-free personal allowance, should again be a flat tax. Pensions, now taxed as personal income, should be taxed as capital income, significantly reducing the tax burden on the elderly. The inheritance tax (currently 10 per cent), which is really triple taxation (first on income, then on savings from what is left of that income, and then on the capital formed from those savings), should be abolished.

Extensive tax cuts would release capital that entrepreneurs and venture capitalists could use to create wealth, ultimately benefiting the whole population. Iceland has always faced a challenge: keeping opportunities so abundant on this remote island that capital and people do not move away.

Another crucial step would be deregulation. Since the 2008 bank collapse, regulatory agencies have become powerful and aggressive, imposing high but largely invisible costs on doing business in Iceland.

Curbing reckless spending

How would extensive tax cuts be financed? Partly by themselves, as has happened in the past, and partly by curbing the present government’s spending if and when it is replaced. But also partly by limiting expenditure on the asylum system. While immigrants from Europe, particularly Poland, work hard, make significant contributions to the economy and are welcomed by Icelanders, the asylum system places heavy demands on welfare, schools, the health sector and the legal system.

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