January 15, 2009

January 15, 2009 | Commentary on Taxes, Tax Reform

While the U.S. Expands Government...

The irony of it all. The United States is currently faced with the prospect of the biggest government expansion in American history in the shape of the giant stimulus package proposed by president-elect Barack Obama. The expenditures contained therein are so humongous that even Rep. Barney Frank has stated that he will need to take a Reagan-like "trust and verify" approach before signing on the dotted line and taking this major step towards socialism. Hearing Mr. Frank quote Ronald Reagan just boggles the mind.

At the same time, the release of the Heritage Foundation's 2009 Index of Economic Freedom yesterday proves once again that free market principles continue to work around the world. In fact, in moving towards vast government expansion, the United States under Mr. Obama will be bucking international trends. In Europe, the cradle of socialism and the welfare state, the trend is going in the opposite direction because Europeans have discovered what the stifling embrace of the state will do to economic growth.

In the Index of Economic Freedom the United States is currently ranked 6th in the world, behind Hong Kong, Singapore, Australia, Ireland and New Zealand. Over the 15-year history of the release of the Index, the same economic principles have proven themselves over and over - low tax rates, a stable currency, limited government, private property rights guarantees, openness to global trade and financial flows, and limited regulation all help encourage economic activity and the entrepreneurial spirit.

Now, the incoming president and vice president left no doubt during the presidential campaign what they thought about progressive taxation. Even though redistributionary taxes have been demonstrated to curb economic activity, they love them for ideological reasons. Mr. Obama spoke famously of "spreading the wealth," and Mr. Biden reminded voters of their patriotic duty to pay taxes. Their comments were reminiscent of the Swedish bishop who years ago accused Swedish emigrants fleeing the country's punitive tax rates of being "sinners."

In an introductory chapter to the Index, economist Stephen Moore of the Club for Growth reminds readers of the power of reducing corporate tax rates, eliminating the death tax, and adopting the flat tax. In Europe, the countries of the former East bloc have led the way towards a reformation in revenue collection. Lithuania, Latvia, Estonia, Slovakia, Romania, the Czech Republic, Ukraine, Russia, Georgia, Albania, Bulgaria, Kyrgyzstan, Macedonia and Mongolia all have flat tax rates, ranging from 27 percent to 10 percent. Compared to them, the prevailing tax rates in "Old Europe" of 40 to 60 percent look deeply unattractive from a growth and investment point of view.

But the lesson of cutting taxes has not been entirely lost on Western Europe. Corporate tax rates are falling throughout Europe. Ireland led the way here, slashing its corporate taxes to 12.5 percent from 45 percent, setting the stage for the Irish "economic miracle." Most European countries followed suit with the result that now the United States and Japan have the highest corporate tax rates in the world, 39.5 percent. (The average for developed countries today is 26.4 percent.) According to a 2008 study by the OECD (the Organization for Economic Co-operation and Development), "corporate taxes are found to be the most harmful for growth, followed by personal taxes and then consumption taxes." Estate taxes - or death taxes - are equally an obstacle for the U.S. economy. American death taxes remain at 45 percent while countries like Sweden and even Russia have slashed theirs.

Of course taxes rates are not the only factors in economic growth. Other factors like free trade, government regulation, and the size of government also have a profound impact on economic growth. Unfortunately, if Mr. Obama were to keep his campaign promises, all those factors will also be moving in a negative direction due to the pressure from trade unions against free trade agreements as well as the biggest workfare programs this country has seen since the Great Depression. And at that time the country suffered 25 percent unemployment, not the 6.7 it does today, which is too high but by no means catastrophic.

One can only wonder where on the ranking scale of the Index of Economic Freedom the United States will find itself next year. With the government bailouts in the last months of President Bush's term in office, and the potential trillion dollar package we may be staring in the face under Mr. Obama, this great country will likely be a lot further down the list.

Helle Dale is director of the Douglas and Sarah Allison Center for Foreign Policy Studies at the Heritage Foundation.

About the Author

Helle C. Dale Senior Fellow for Public Diplomacy
The Margaret Thatcher Center for Freedom

First appeared in the Washington Times