While Lithuania lost almost all competitive advantages in taxing corporate income, Estonians do not feel any nostalgia for corporate taxation, ended three years ago. What has Estonia won and Lithuania lost?

         After the reform was implemented in Estonia, companies registered in this country ceased to pay the traditional profit tax. A 26-percent tax is levied only on dividends that are paid to individuals and foreign legal entities. No tax is charged on dividends that are paid to Estonian legal entities. Profits can thus freely circulate among companies.

         At the same time, personal income tax rules were tightened up, exemptions were removed and all expenses made for other than business purposes were taxed. The aims of the aforesaid changes were twofold: to ease the tax burden for economic activity and to prevent the concealment of profits that was possible by making outlays through companies. The new order created strong incentives to report real profits and to freely use them in furthering economic activity. The Estonian reform was an unprecedented step towards a new business ethics as it eliminated a factor that was eroding corporate governance. To be the first is a hard task. Mistakes happen to be inevitable. Due to this reason or due to international pressure Estonia may have to impose the same tax on all dividends in order to eschew discrimination of foreign entities for which it is being reproached

         It is important to note that income redistribution through the state budget in Estonia is almost the same as in Lithuania (35 and 33 percent respectively); however it is financed with a much lower, 26-percent personal income tax and without traditional profit tax. Estonia is planning to reduce personal income tax rate by 2 percentage points every year and to end up with 20 percent personal income tax in 2006. It also expressed disagreement with the EU Constitution norms regarding taxation issues. It means that Estonia is going to stand for reforms and sovereignty in the field of taxation.

         It is understandable why neighbouring countries reacted with dismay to Estonia’s bold move. Swedish officials publicly called Estonia a small predatory country. The meeting of the prime ministers of Estonia, Finland and Sweden ended up in scandal – because of its tax policy, Estonia was called a little predatory state that has nothing in common with the Nordic states. Swedish Prime Minister, social democrat Goran Persson said during the meeting that Estonia’s problem is the liberal tax policy. ‘In the future, it will not be possible that, for instance, Sweden and Finland put their taxpayers’ money to the EU budget so that Estonia could maintain the low taxes in the country’, he said. Ironically, the greediest state in terms of taxes – Sweden – calls the least greedy for taxes state – Estonia - predatory. However, mentioning Finland in the speech was not very proper. Competing for investment with neighbouring Estonia, Finland announced plans to reduce corporate income tax from 29 down to 26 per cent in 2005. Global competition explains the fears of global bureaucracy but still, competition works.

         Lithuania and Latvia are mainly used to quite a different type of official rhetoric followed by particular steps in the area of tax reform. “In line with the European Union directive requirements”. “This contradicts the practice in the EU”. “This is the way most European Union member-states do”. For the past few years, such taxation arguments have become familiar to our ears. Trying to adapt and comply and not to stand out, this is true even in those areas where no formal requirements exist. It is understandable why. This is convenient and safe for those who suggest and those who implement tax reforms since they claim: it’s not my idea, so responsibility is not mine either. As it can be seen, Lithuanian and Latvian politicians would certainly agree on harmonising all the taxes, there would be less trouble and thinking for them. As officials but not market participants represent countries in the international bodies, we may forecast what their vote will look like.

         As one may understand, small countries differ a lot from each other. Lithuania generated the most advanced ideas but did not implement them. On the contrary, it refused its competitive advantage in the area of taxation. Estonia said little about it but accomplished a lot. Latvia had never even stood out.

         Understanding that the world is dynamic, diverse and changing makes us to look for the answer to the question what must be achieved – uniformity or diversity of taxes. What kind of uniformity and what kind of diversity may contribute to the prosperity and competitiveness of the economy?

         Uniform or different? On tax harmonization

         The question is which is better for the countries (people, not only governments) – having the same or different tax systems?

         The tax competition and a certain level of harmonization is an existing fact. Attempts to harmonise all the taxes in the EU have failed, and so far a compromise solution - the Code of Conduct binding in the field of direct taxation seems to be considered as a satisfactory level of regulation. Nevertheless, this does not mean that alignment is not an item of discussion agendas. There were, are and will always be attempts to have uniform taxes in the European Union, or at least drive towards such uniformity. The rhetoric used referring to tax competition is more or less as follows (my quotation is taken from an information publication, a booklet on EU taxation system that is a perfect reflection of the prevailing views): “Tax competition. Decisions about investment, business activities, jobs and earnings are sensitive to differences in national tax regimes and social welfare systems. With increasing mobility and differentials in tax bases, business can identify the components on which they are taxed (taxable bases) and shop around to find the country where tax is lowest. Such competition between member-states puts downward pressure on the level of tax and contributions which may be damaging if it is not regulated, as it undermines the fairness and overall efficiency of tax system.” Quite a lot to think about.

         I would first of all like to say a few words about the political aspect of tax competition in order to exhaust this matter and to get to the exceptionally economic issues. So, a political aspect of tax competition is especially closely linked with democracy, as tax competition is first and foremost the result of democracy in a free world. People elect a government that sets certain taxes. Tax competition and democracy are two interacting factors. For democracy to continue to be a reality, people need to have a real and not a nominal possibility of choice. In case of universal harmonisation of taxes lower level governments would be deprived of an opportunity to exercise their influence in such a significant area as taxes, the public’s incentives to “participate in democracy” would be considerably diminished. Democracy itself would be diminished.

         The tax competition is safeguard of the democracy in the world. It is evident that if one (higher, more distant) government encroaches on the power of the other (lower, local), people will loose interest in the limited lower government, which will lead to undermining democracy. The latter sentence does not imply that I am against limiting government as a mechanism of coercion. However here we have a deal not with the limiting government as such, but limiting the rights of voters and shifting the decision making to the upper level of the authority.

         The modern world experiences tax competition, which is a result of an economic choice as well. Tax competition has clarified human choices, their preferences. What are the preferences in terms of taxes?

         Well, there is no simple and agreed answer as to what kind of creature a tax is. Is it a payment for service of a state, or just a tool of redistribution? (To go deeper, as Buchanan states, what may be a service to one citizen may be considered a distinctly negative “service” by another) Let’s consider that taxes combine both in all the countries; for that reason, when dealing with human choices, both cases should be considered.

         In the instances where taxes are payments for services provided by a state each rationally thinking individual is keen on getting a service of the highest possible quality at the lowest possible price. That means that, with other circumstances being the same, an individual always makes a choice out of the same quality services based on price. An individual always wishes to buy the cheapest desired service, and the fact that the service is provided by the state does in no way affect an essential criterion for choice. A person is ready to pay a higher price only in case he/she is buying a service of a higher quality or has no choice at all. My conclusion comes as a question: is there a better way than competition to promote higher quality services and lower prices? Competition and competition alone has the power of true consumer protection. It is for this particular reason that the European Union is so actively safeguarding competition between individual entities. Let's draw a parallel with services provided by the state then: modern tax harmonisation that resembles cartel arrangements should also be prohibited.

         In another approach to taxation, an individual is considered as a source of revenue and never getting anything from a state in return. In other words, taxes are an instrument of redistribution. In that case, an individual's necessity to have taxes as low as possible is obvious. Great as a sense of solidarity might be, sympathy for the weak can never eliminate an individual’s wish to sympathise and contribute in a personal and personified manner and reduce a compulsory contribution.

         Thus, the presence of one's need to pay low taxes does not call for proof supported by special studies or experiments. Life itself (as well as human choices made in their everyday lives) confirms one's preference given to low taxes. The proof lies in the popularity of offshore countries, the size of capital flows going there, and the depth and width of shadow economy; therefore the conclusion is that a human being is just human, and his/her wish to live better is still there.

         At this point I would like to return to my quotation about the harm of tax competition in the European Union, which argues that competition between member-states exerts pressure on the level of taxation. The European Union realises that tax competition is a precondition for tax reduction. A conclusion suggests itself that tax harmonisation is aimed at protection from such a pressure. A glance at the EU directives brings about immediate realisation that they set a minimum tax rate. What they really do is watchfully protect governments from too low a level of taxation. This motif underpins the endeavour of harmonising taxes in Europe.

         Is there another way of ensuring lower taxes than tax competition? Can tax harmonisation perform the said function? Referring to harmonisation, I do not refer to the one undertaken by the European Union by setting floor tax rules; I refer to the one when ceiling tax rules are developed, while a government's greed cannot overstep the set ceiling. First, an aforesaid solution cannot be expected in several coming decades, second, it would limit the possibilities of those who wish to see higher taxes and better government services, and third, where is the margin of the ceiling that must not be exceeded? What if the margin is set at a relatively high level and if everybody hangs onto it claiming that it is justifiable. Lithuanian municipalities serve as good examples of the latter. They enjoy the right to establish some taxes for their budget tax revenues within certain maximum limits drawn. The result is easy to guess - the municipalities do not doubt about imposing the highest tax rates.

         One would not dare to contest the truth that the lower the taxes the smaller the need to have them different. Tax competition is not beneficial in itself. It is a possibility of having low taxes that is beneficial. Should such an opportunity be offered by equal tax rates, need for different tax rates would be phased out.

         The presence of different taxes is encouraged by a strong economic-cultural, historic and geographic factor, thus numerous reasons, numerous externalities or developments have determined that income taxes prevail in some countries' budget revenues, consumption taxes are predominant in others, while some rely on natural resource taxes. For different reasons some countries have chosen one or another scheme of taxation, which has taken root in that particular state. Nonetheless, what suits and functions in one country may be a failure in another if an attempt is made to copy and implement the latter's scheme there.

         This rule is also applicable to a tax structure, i.e. what taxes are imposed, and what their rates are. Since countries differ in income levels, a tax burden on different country taxpayers' shoulders is different. We, in Lithuania, have experienced that disproportion ourselves when excise taxes have been and still are being raised to the European level in absolute terms in the recent years. In view of fundamental differences in income, Lithuanian people overpay for financing the needs covered by revenues from excise taxes. And as the imposition of excise taxes rests on the need “to finance mitigation of negative externalities”, the disproportion in taxation may lead to numerous negative consequences. Tax evasion grows, and labour gets more encouragement to migrate where it can have better possibilities to "carry the tax burden". A vicious circle of interdependent chains and developments is activated: the budget collects too little and inefficiently, possibility to finance externalities is reduced, attractiveness of a state to both labour and capital reduces, possibility to implement the state budget diminishes. Generally speaking, the countries that undertake to carry an unacceptable tax burden are destined to take a slow but straight road to becoming a province and are deprived of a chance to head to prosperity.

         There is no way one can deny the existence of fundamental country differences (mentality, traditions, income, a geographic and historical position), so what is left to do is to tolerate different taxes and consequently tax competition in hope of having efficient - most neutral and least costly - taxation. Any resistance to this reality, imagining things rather than facing the reality makes harmonisation either inefficient or simply impossible.

         There might be an impression that the harmonisation is an absolute evil. What was said before was that competition is a smart guy, and that harmonisation is faced with lots of challenges. Without denying what was said before, I want to stress that harmonization might be good and I will explain what particular harmonisation I am in favour for.

         When Friedrich A. von Hayek argues about the social order, he mentions two patterns of social order "an imposed order" and "a grown order", or "coerced" (sometimes even military) and spontaneous, or taxis  and cosmos . And even though Hayek tells about these orders in a broad legal context, these two patterns of order or the way they become prevalent can be successfully applied to the tax law.

         In reality, all the talking about a different or the same tax environment moves to another field. We are not talking about an end, all the results will be, most probably, accepted in the end if they are obtained by way of natural and non-coercive development. The same applies to taxes too, absolutely the same taxes would be acceptable if each country found, introduced and retained them in its own way. Such an instance of spontaneous harmonisation is fully possible, realistic and real. Let's have a look at the tax systems of different states; all of them have followed a similar evolution. The method must have been that of copying when some countries would take onboard other countries' systems. If they proved to be appropriate there, they would be retained, if they did not, they would be rejected. For that reason all the countries have income tax, and do not tax windows or beards. This does not mean that the similarity of taxes has been decided upon and commanded, what I suggest is that the process was closer to spontaneous. It has been dictated by the need (whether the need was reasonable is another story) rather than the declaration of a uniform tax regime. There is just one general argument against spontaneous tax harmonisation - a shortcoming typical of all the methods - spontaneous tax harmonisation is implemented by a government, but with only a small degree of certainty that it will not decide to expand "spontaneously". A spontaneous development and competition of governments provides more choice for people and by doing so limits government arbitrariness.

         May the harmonisation undertaken by the European Union be called spontaneous, or should it be labelled "coercive"? Evidence of spontaneity is in accession, which is voluntary, hence the result of choice. However, the key is the internal policy of the European Union and its attempt to raise an issue of harmonisation. As I mentioned at the very beginning, when I dwelt on the aims of harmonisation, the single (unified) Europe implies, beside other things, that it is the same all over. Non-acceptance of differences, wish to have in birds of a feather that flock together - this is an attribute of a coercive order.

         It would be only too naïve to think that if indirect taxes were harmonised in the European Union, competition would be eradicated. Of course, not. First, it would penetrate into other taxes. Second, competition between a taxed economy and an untaxed (shadow) economy would be more severe. Third and most important, the area of competition is the whole world rather than Europe or the European Union alone. A closed and uniform Europe could be a discussion item when the world was divided and closed by what may be called physical walls, when no physical, technological, informational possibilities for moving in space and time existed. There are different attempts made to localise and tax e-commerce and trade in derivative securities. But all the attempts are hopelessly lagging behind progress in the field of globalisation. Technologies, in this instance, serve for the purpose of realistic globalisation, and maybe, for the better, and maybe, for the worse, impede surrender and obedience to harmonisation.

         Choosing from between fight against progress and worldwide movement, on the one hand, and acceptance and realisation that the more diversified choices there are in the internal space, the smaller is the need to look for them outside, on the other. This is an important challenge to harmonisation. And now, the more progress is made in uniformity or synchronisation of taxation, the greater will the pressure to choose either - or… Either stay in the area or withdraw as the area of choice narrows. The European Union vitally needs competition in its area for the Union to be able to compete globally in trade, investment, i.e. economic activity area.

         To sum up what was said at length in this part let me to I draw the following conclusion. The world would be the happier about uniform harmonised taxes, the lower they were. In the real world of the high taxes and examples of compulsory harmonisation at high tax level, the tax competition is a way of stopping government’s intentions of constant tax increases. The reality of life makes the governments competing in taxes look for more effective ways of taxation, i. e. how to collect more income to the budget at the lowest possible costs without impoverishing and de-motivating the taxpayers too much and ensuring the growth of economic welfare. In order to optimise this double-purpose task, a certain spontaneous tax harmonisation takes place in the world, in the result of which the countries start applying similar taxation schemes not because the directives tell to do so, but because such taxation brings the best results. The essential condition for such spontaneous harmonisation to emerge is the absence of obligatory harmonisation.

         Having discussed the conceptual issues, let us move to the specific issues in the area f taxation. I shall discuss two important challenges, cast by the small countries to the European Union – proportional taxes and the abolition of the traditional profit tax.

         Spontaneous harmonization towards progressive or proportional income taxes?

         The idea about differentiated tax payment – the more you earn, the more you give – is attractive to many people. Progressive income taxation is based on the social democratic values, according to which the richer must pay more for the sake of “social justice”, and the principle that every additional euro earned is less valuable than the one earned before; therefore, the person can painlessly give away a larger share of the additional euro to the budget.

         Looking at the world’s income taxes, it would not be easy to find out that progressive taxation prevails over the flat (proportional) taxes. The same is valid for Europe’s income taxation systems. Countries with flat income taxes are in the minority both in Europe 15, and in the enlarged Europe 25. Progressive taxes are applied not only by the countries with social democratic opinions currently prevailing, such as France and Sweden, but also the countries with rather liberal economies, for instance, the US. It is interesting that some post-communist countries, including the Baltic countries and Russia, refused progressive taxation; Romania has expressed its intentions to refuse progressive taxes, Slovakia and Ukraine will implement proportional taxation from 2004.

         The question is whether these Baltic States with “untraditional” and uncommon for Europe flat taxes are ahead or behind of others? To which scheme – progressive or proportional - does income tax future belong to and what taxes the world is aiming at? Is there a room for flat taxation in “progressive” Europe and which taxes may enhance competitive economy?

         The answer to a question what has determined such an unbelievable popularity of progressive income taxes lies in the pervasion of the social democratic ideology itself: although in different time, it was spread in nearly all the countries of the world. However, this ideology rarely rests on the arguments of social values, it ignores the real market processes and dwells in the world of its own myths.

         Perhaps the most popular myth referred to by the advocates of progressive taxes is that progressive taxes embody the idea of taxing the rich for the benefit of the poor. The truth is only the fact that the progressive taxes are intended for taxing those who earn most, but because of the faulty principle, these taxes cannot assure that. The reality of life corrects the model in such a way that the rich often manage to avoid higher income tax rates in various ways or try to offset the costs by receiving substantial benefits from the budget in different forms.

         Progressive taxes particularly increase the motivation for having “double bookkeeping”, i. e. undeclared money and use them for paying the salaries of the employees. So, usually only a few pay the higher rates of progressive tax and the budget is not winning, but loosing.

         Both the theory and the practice of taxation speak in favour of other approaches if the aim is to increase budget revenue or tax the rich. A much more effective way to reach those goals is proportional (same for everybody) or regressive (decreasing with the increase of income) tax rate. When Russia refused the progressive income taxation and established the low uniform income tax tariff of 13 percent, its budget revenues from this tax grew substantially. Regressive taxes also encourage legalising the income and paying bigger amounts into the budget.

         Therefore, if the aim is to collect more income (in terms of money) to the budget, it is necessary to count the money instead the rates (to operate in absolute figures and not the tax rates), and the money is best guaranteed by proportional and regressive taxes.

         Another myth is the principle of the ability to pay, which is based on the statement that each additional unit is valued less than the one before. The marginal utility theory is applied with faulty corrections extending it to comparing values between different individuals. If this statement was correct, people would not try to earn more and would be satisfied with “the first euro”. But this is not the case – people want and try to earn more and they value their money without differentiating them by steps as the progressive taxes do.

         Strange, but ineffective, self-defeating systems often “sound” rather attractive. Meanwhile, effective and viable taxation systems do not seem convincing from the first sight. This is one of the paradoxes that are quite numerous in the area of taxation.

         It should be noted that those countries of the world that apply progressive taxes are already carrying out or planning to carry out such tax reforms that are intended for levelling the income tax rate for the residents: reducing upper tax rate and increasing the lower one. And, of course, they look enviously at those countries that apply proportional taxes – the discussions in the international press and in the academic circles testify that.

         Progressive taxes help achieving other goals than those being declared: income differentiation is not levelled, the budget is not getting increased and the principle of solidarity is not being fulfilled. This reason alone is enough, without questioning the validity of the goals themselves, to avoid the progressive taxes.

         To answer the question whether flat taxation is valuable to consider alternative for income taxation in the EU, it is worth to weight pros and cons of the flat taxes. I can only remind that simplicity, fairness and effectiveness are the main virtues of the flat taxation. These features were extensively proved theoretically and practically as well. And even given the libertarian critics to the aforesaid virtues suggested by Murray N. Rothbard: “we are willing to suffer some complexity in order to lower some of our monstrous tax burden”, “”fairness” is worth almost nothing” - we have to admit that low proportional taxes may be advocated by using the rhetoric of simplicity and fairness.

         However, one has to have in mind, that there is one difficult practical issue, which has to be solved by introducing (preserving) proportional income taxation. That is – social justification. Having in mind low general understanding of economic laws and incentives (disincentives) provided by taxation, social justification is rather tricky. To be honest, flat taxes are unpopular idea among population (electorate), so politicians eager to have such simple and effective system must employ vast educational campaign explaining how flat taxes benefit low income population rather that harm them. Furthermore, the flat tax system does it in more effective way. Progressive taxes are only a slogan of social justice that creates an illusion, but not in reality enrich poor.

         The argument that only progressive system may ensure that rich people pay more is vague. Rich people pay more in taxes in both systems – flat and progressive. Having in mind that flat system is income and incentives - neutral, it provides for rich paying even more in absolute amounts than under progressive system. Furthermore, progressive system has lots of “side effects” which have nothing in common with social justification. Under progressive system, jobs and earnings are discouraged and qualified labour is discriminated. People are given strong incentives to hide their income. Social responsibility is infringed and economic integration is hampered. Can these features of progressive tax system be called social justice? If social justice has to be achieved, it needs to be mostly done by proper targeting of public finances. The vast majority of “social injustice” is concentrated in the use of public resources. Redistribution has no clear direction from the rich to the poor in today’s budgets. So what needs to be done to achieve real social participation? No dangerous and harmful games with taxation should be played. Public expenditure should be targeted and focused instead.

         Is there still a dilemma for the Baltic countries? The answer is clear: countries with proportional taxes are ahead, not behind of others. And the task to implement tax reform needs to be given for other European countries, which are seeking effective taxation. The Baltic countries have a challenge to protect people from populist politicians. And I have sincere belief that economic lesson should be learned from growing transition countries by other European countries, which want to break away from current economic halt.

         With or without profit tax?

         Perhaps most questions and practical issues for the taxpayers arise from the profit tax, at least that is the experience of Lithuania up till now. The reason is that in the case of profit tax, the taxation base should be calculated according to the rules, which do not and cannot cover all the possible cases. This is essentially different from VAT, where taxation base is relatively clear – the price of goods (services). Since nobody has succeeded in precisely regulating the costs, the profit tax may either help to write off the costs or, on the contrary, tax the costs and income that is not received. Administration of the profit tax is very costly – according to the data of the survey carried out in Lithuania, accountants of the companies devote to it almost 2/3 of their working time, tax administrators receive most inquiries when administrating profit tax, this tax allows most interpretations. All the attempts to improve the rules of profit tax calculation ended up in new issues or in increased tax burden, when, instead of correcting the taxation base, new objects of taxation are introduced. After all, profit is an expression of successful activities, and the profit tax is kind of a punishment for the success.

         Main counterarguments against the abolition of profit tax are these: global practice and reaction of international organisations. It’s true, not many countries de jure  abolished profit tax (Estonia did), but nearly all the developed countries are moving towards the abolition of the profit tax de facto , i.e. they allow deducting more and more expenditures. Even without abolishing the law on profit tax, the real revenue from this tax is gradually decreasing. That way gives similar results, as the abolition of profit tax de jure , yet, is longer and more complicated.

         10 reasons why it is reasonable to withdraw profit tax:

         1. Abolition of the existing profit tax and tax accounting would allow companies to devote more time, money and efforts to the creation of value and new jobs, investments and business development. Liberation of business from senseless appeasement of bureaucratic requirements that creates no value would serve for more favourable investment climate.

         2. With the existence of VAT, the same added value is being taxed twice: first, by the income and profit taxes, then, by VAT. Applying income tax and VAT not only creates double taxation of the same value, but also the taxation of taxes.

         3. Legal persons (including companies) do not exist by themselves. They are organisations of natural persons. The income of a legal person is the income of the natural persons that stand behind it. Profit taxation means taxation of artificial object and subject as well as the possibility of double taxation of the same income. The mechanisms of tax deductions do not always help to avoid this double taxation. Murray N. Rothbard put it in this way: “Economists have come to recognize that there is no living thing called a corporation. A corporate income tax is a double tax upon shareholders, first as a “corporation”, and next upon their personal income. But while economists have been increasingly calling for the abolition of the corporate tax, the reformers have in their wisdom decided that since all entities’ income must be taxed uniformly, the corporate income tax must be included and even raised if necessary to be taxed at the same rate”.

         4. The object of profit tax – taxable profit – is artificially established, calculated object. In order to calculate the amount of the tax, one should first calculate the taxable profit. For that purpose, special rules of calculating taxable profit are created, which, although being developed for many years, are still inaccurate; they do not and cannot cover all possible life situations. Therefore, it is not the real result of activities – financial profit – that is being taxed, but an artificial value, a hybrid of profit and expenditure.

         5. The calculation of taxable profit is time- and labour-consuming, it leads to double accounting – financial and tax, therefore, it places a heavy burden of tax administration on the companies. According to business representatives, the bookkeepers of the company spend three quarters of their time on taxes and only one quarter on financial accounting, financial policy and asset management. This means that no provisions for saving and planning the financial assets of the companies are provided.

         6. In the absence of exact rules of tax calculation, the decisive role of determining the tax goes to the lowest management chain – tax administrator. Possibility of interpretations and the human factor of the tax administrator narrows the objectivity of the tax, transparency of administration, discredits both the institution of tax administrator and the very tax system.

         7. By abolishing the profit tax, the taxation of profit is not totally eliminated. It is only the faulty tax accounting that is being eliminated, and an objective base of tax calculation, i. e. dividends, distributable profit, is chosen.

         8. Profit tax is not only means of financing the budget, but also becomes a toll of economic regulation. Profit tax, by its essence, determines regulation, because profit tax is only applied to successful businesses. Punishment for the success has never been a good example of motivation or regulation. Besides, as long as there is profit tax, there is the state’s discretion in recognising income and expenses. Therefore, having renounced the role of tax regulator and seeking for tax neutrality, the necessity to abolish profit tax emerges.

         9. The burden of the profit tax is falling not on companies as is often claimed (so called tax incidence phenomena). If the company succeeds in selling its products, the burden of profit tax is transferred to the consumers who purchase goods and services. When the market of the goods and services of the company gets complicated, the burden of profit tax moves towards the employees. The owners of the company carry the burden of profit tax in exceptional cases, when all the possibilities of transferring the tax are exhausted and due to the taxation rules, the company is still having profit.

         10. Abolition of profit tax is close to the processes taking place in the world, when tax accounting is approximated to the financial accounting. Similar result is being achieved in a roundabout, more complicated way, by allowing deducting more and more expenditures.

         It is possible and logical to abolish profit taxation on the company level by moving to the taxation of distributed profit. The example of Estonia demonstrated perfectly well for those who do not believe theoretical arguments that the world is not falling apart without the profit tax, on the contrary, both the people of the state and the government are gaining from it.

         Conclusions. Challenges for small countries in the European Union

         For small countries, the very participation in the EU is as big challenge as the small countries are a challenge for the EU. The key challenges to be accepted by the small countries in Europe are to refrain from becoming “the obedient kids of Europe” and retain its uniqueness. Not all the countries manage to hold this challenge. Therefore, there are different countries among the small ones today – some are brave and resolved, yet, some are petty and bewildered. The brave small countries get big, perhaps even great tasks. The main challenge for the tenacious ones is to challenge Europe by providing innovative recipes of success. Knowing that small countries are flexible and able to make decisions way faster that the old and large ones, these countries really get a noble mission. To be the first, to be better and to be big in that sense, to prove that the size of the country can be measured in audacious reforms and the work accomplished for the sake of the country (I remind – its people). And then, admit it, the big-small classification of the EU 25 (let’s remember the 6:16:3 indicated in the beginning) would be rather different and the name of a “great state” will refer not to the traditionally big states. After all, the European Union itself will become a big country only when it is able to accept with dignity the challenge of the small brave member states.