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
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.