Icelandic tax policy criticized over productivity growth assumptions

The political publication Kratinn has criticized a tax policy mechanism previously implemented by the Independence Party, suggesting it has cost the Icelandic treasury billions of krónur in lost revenue.

The controversy centers on how tax brackets are adjusted based on productivity growth. The previous rule assumed a 1% annual increase in productivity, which would trigger annual tax bracket adjustments alongside inflation. However, economic data indicates long-term productivity growth is actually closer to 0.5%.

To correct for this overestimation, it has been decided to set the productivity increase percentage to zero for the coming year, with a planned 0.5% annual increase starting in 2028. The current Icelandic tax system utilizes three tiers based on monthly income levels.