January 18, 2007

January 18, 2007 | Commentary on

Entitlement programs soak up money that could boost business

Teachers give report cards for a reason: So students (and their parents) will know what subjects they're doing well in, and where they need to improve.

This week marks the release of the 13th annual Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal. It gives each nation an overall grade, and it also measures economic freedom in 10 distinct categories, so each country can identify its strengths and weaknesses.

This year, Americans have reason to cheer -- and reason for concern.

For the moment, the United States is doing quite well in the index. We're ranked fourth overall, trailing only Asian tigers Hong Kong and Singapore and fast-rising Australia. Our economic freedom score, 82 out of a possible 100, is a solid B. (The Index editors are tough graders; nobody got an A.)

But consider our lowest score in any category, 67.5 in "Freedom from Government." We get a "D" in this category because it includes government spending. Put simply, our government spends far too much (as a share of GDP) -- and makes far more promises than it can afford to keep.

The evidence is overwhelming. Real annual federal spending has nearly doubled since 1980 and seems to be picking up speed. Indeed, it's up 45 percent since President Bush took office. At the end of last year, federal spending topped 20 percent of our entire Gross Domestic Product.

Most worrisome is the growth of entitlement programs. Social Security, Medicare and Medicaid are all promises. And politicians are always on the lookout to sweeten benefits for today's retirees, who are avid voters. The problem is that it will be virtually impossible for the next generation of taxpayers to pay for these expensive promises.

How bad is it? If today's entitlement-driven budget is simply left on autopilot, federal spending will reach 50 percent of GDP by 2050. Americans would be working as much for the government as for themselves. So much for "freedom from government."

The index reveals problems on the other side of the budgetary coin: taxation. Here, our biggest shortcoming is particularly obvious, and the rest of the world is exploiting it.

The problem? The United States has the world's second highest corporate tax rate, trailing only Japan. Even socialist France has a lower corporate tax rate, and French President Jacques Chirac recently introduced a proposal to slash his country's rate from 33 percent to 20 percent.

Higher corporate tax rates put American companies at a significant competitive disadvantage. They penalize workers, and cost consumers, too. After all, corporations don't pay taxes -- people do. American corporations pass on the cost of their higher tax burdens to their customers where possible and also sharpen the pencil on payroll costs.

America's top personal income tax rate is nothing to brag about, either. It's 25 percent higher today than when Ronald Reagan left office, and things may soon get worse. If we allow the 2001 and 2003 pro-growth tax cuts to expire, the top tax rate will climb to nearly 40 percent. That would create huge economic problems, slowing growth, investment and job creation.

The lesson of the new index remains the same as it was in past years: Economic freedom and prosperity are inextricably linked. In nation after nation, year after year, greater economic freedom yields greater riches for the people.

Our report card shows the United States is thriving -- for now. We're doing better than last year, when we were No. 10 globally. But that's principally because the index has been revised to include labor freedom, and the United States has one of the least restrained labor markets anywhere, while European economies have choked off employment opportunities with red tape that pushes up unemployment.

Still, we have plenty of work ahead. We need to slash spending and lower tax rates. That way, we can ensure the United States remains a beacon of economic freedom for the world.

Edwin Feulner is president of The Heritage Foundation (heritage.org), a Washington-based public policy research institute and co-author of the new book Getting America Right.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

First appeared in the Chicago Sun-Times