What is the best way improve economic performance and boost living standards?
If you listen to politicians, they would like us to think that adopting Policy A or repealing Policy B is a magic elixir. And if that means adopting a flat tax or repealing Obamacare, I’ll certainly be happy.
But this video, based on analysis and data from the Economic Freedom of the World Index, shows that there is no silver bullet. Prosperity depends on several factors.
I mention this because I’m currently in the Dominican Republic for a conference on how best to improve competitiveness and growth (as you can see from the photo, this is hardship duty and I’m very sad that I’m missing the wonderful February weather in Washington).
My speech this morning was about tax reform, and I explained why a flat tax is the best way of collecting revenue in a way that minimizes economic damage and reduces opportunities for corruption.
But even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index, and as explained in the video, is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.
There are five major policy areas, each of which counts for 20 percent of a nation’s grade.
- Size of government
- Regulation
- Monetary Policy
- Trade
- Rule of Law/Property Rights
Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.
But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.
Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.
The moral of the story is simple. A country should have a small public sector and a pro-growth tax system, but that’s only 20 percent of the answer. Prosperity requires good policy in many areas.
Commentary by Jim Campbell
Two thins are certain, Dan Mitchell is absolutely correct and the current Obama led administration has no recipe for growth, why bother? The more people they can get to believe that the need to live off Uncle Sam and your tax dollars the better.
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For this reason the 2012 election is pivotal for the future of our Republic. Should Obama and his minions not be thrown out of office we will have reached a point where there are more of those who pay nothing and are the takers than those who pick up the tab. No society can survive with that mixture.
It should be said that the economic freedom measured by the EFW Index is not the same as the economic freedom _directly_ experienced by most citizens. The UK and Denmark have NHS-type taxpayer financed health insurance; their housing rental market is over-regulated (facilitating housing bubbles); and in my experience, hiring people for housing repairs or removal is a risky thing to do. None of the above applies to The Netherlands, and yet The Netherlands is placed significantly lower in the EFW Index.
Of course, to the extent that the economic freedom measured in the EFW leads to economic growth and more and better job opportunities, most citizens will benefit _indirectly_.
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