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Posts Tagged ‘Rankings’

Back in 2014, I shared some data from the Tax Foundation that measured the degree to which various developed nations punished high-income earners.

This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.

But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?

To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.

They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.

Here’s what Englund and Lundberg wrote.

The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.

They then explain why they include payroll taxes in their calculations.

The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.

Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.

They then explain why they include a measure of consumption taxation.

One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.

Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.

And when you begin to add everything together, you get the most accurate measure of government greed.

Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.

Here’s their data for various developed nation.

Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.

And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.

Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.

For what it’s worth, the United States does fairly well compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.

By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.

Though none of this satisfies the statists. They actually would like us to think that letting well-to-do taxpayers keep any of their money is akin to a handout.

Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.

In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.

Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.

P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.

P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.

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For data-loving policy wonks, the World Bank’s Doing Business report is a fascinating look at the degree to which nations have a policy and governance environment that is conducive to economic activity.

Unlike Economic Freedom of the World, it’s not designed to measure whether a jurisdiction has small government. Doing Business is probably best described as measuring quality of governance and whether a nation has sensible business policy.

That being said, there’s a lot of overlap between the rankings of the two publications. Indeed, you’ll notice many free-market countries in the top 20 of Doing Business, led by the “unsung success story” of New Zealand, followed by the capitalist haven of Singapore.

The United States is ranked #8, and you’ll notice most of the Nordic nations with very good scores, along with two of the Baltic nations.

Here’s some of the report’s analysis, including the unsurprising observation that countries with market-friendly policies tend to have high incomes (a lesson one wishes Hillary Clinton was capable of absorbing).

OECD high-income economies have on average the most business-friendly regulatory systems, followed by Europe and Central Asia. There is, however, a large variation within those two regions. New Zealand has a ranking of 1 while Greece has a ranking of 61; FYR Macedonia stands at 10 while Tajikistan is at 128. The Sub-Saharan Africa region continues to be home to the economies with the least business-friendly regulations on average.

If you’re wondering where the rest of world’s nations rank, click on the table in the excerpt. One thing that stands out is that Venezuela – finally! – isn’t in last place. Though being 187 out of 190 is not exactly something to brag about.

While it’s good to give favorable attention to the nations with the highest scores, it’s also worthwhile to see which countries are moving in the right direction at the fastest pace.

Ten economies are highlighted this year for making the biggest improvements in their business regulations—Brunei Darussalam, Kazakhstan, Kenya, Belarus, Indonesia, Serbia, Georgia, Pakistan, the United Arab Emirates and Bahrain.

Kudos to Georgia (the one wedged between Turkey and Russia on the Black Sea, not the one that is home to my beloved – but underperforming – Bulldogs). It’s the only country that is both in the overall top 20 and among the 10 nations that delivered the most positive reforms.

Here’s the table from the report showing why these 10 nations enjoyed a lot of improvement.

The report observes that a more sensible regulatory approach is associated with higher levels of prosperity.

A considerable body of evidence confirms that cross-country differences in the quality of business regulation are strongly correlated with differences in income per capita across economies.

But here’s the part that should open a few eyes among our leftist friends.

A more market-friendly regulatory environment also is linked to lower levels of inequality.

There is a negative association between the Gini index, which measures income inequality within an economy, and the distance to frontier score, which measures the quality and efficiency of business regulation when the data are compared over time (figure 1.8). Data across multiple years and economies show that as economies improve business regulation, income inequality tends to decrease in parallel.

As I’ve said many times tomorrow, I don’t care about differences in income. I simply want economic liberty so everybody has a chance to earn more income.

Nonetheless, it’s good have some evidence for statists who fixate on how the pie is sliced. Here’s the relevant chart from the report.

And here’s another chart showing that lots of regulation and red tape in labor markets (inevitably imposed for the ostensible goal of “protecting” workers) is correlated with a bigger underground economy.

Reminds me of the research showing how “labor protection” laws actually hurt workers.

Let’s now turn to the tax component, which predictably the part that grabbed my interest.

The score for this component is based on both the tax burden and the cost of tax compliance.

While the size of the tax cost imposed on businesses has implications for their ability to invest and grow, the efficiency of the tax administration system is also critical for businesses. A low cost of tax compliance and efficient tax-related procedures are advantageous for firms. Overly complicated tax systems are associated with high levels of tax evasion, large informal sectors, more corruption and less investment.

Here’s a table from the report showing some of the good reforms that have happened in various nations.

Sadly, America did not make any improvements in tax policy, so we don’t show up on any of the lists.

But since we’re on that topic, let’s now take a closer look at the United States. As already noted, America is ranked #8, which obviously is a reasonably good score.

But if you look at the various components, you sort of get the same story that we saw with the World Economic Forum’s Global Competitiveness Report, namely that there are some sub-par government policies that are hampering an otherwise very efficient private economy.

I’m particularly displeased that the U.S. scores so poorly (#51) in “starting a business.” And just imagine how much the score will drop if statists succeed in forcing states like Delaware, Wyoming, and Nevada to alter their business-friendly incorporation laws.

And I’m also unhappy that we rank #8 when the United States started at #3 in the World Bank’s inaugural 2006 edition of Doing Business. Thanks Bush! Thanks Obama!

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The great contribution of western civilization is the notion that the power of government must be constrained by laws.

This doesn’t mean that all laws (or even most laws) are good. But, as explained in this video, if the choice is between the “rule of man” (the arbitrary and capricious exercise of power) and the “rule of law,” there’s no contest.

This is why issues related to the rule of law account for 20 percent of a nation’s grade in the rankings from Economic Freedom of the World.

And it’s why some people get very upset when, for instance, the Obama Administration chooses to unilaterally change – or simply chooses to not enforce – certain laws that are inconvenient to the President’s agenda.

But while the rule of law has been eroding in the United States, the good news is that we still rank in the top 20 in a new ranking from the World Justice Project.

Here’s how the WJP describes the importance of the rule of law.

Effective rule of law reduces corruption, combats poverty and disease, and protects people from injustices large and small. It is the foundation for communities of peace, opportunity, and equity – underpinning development, accountable government, and respect for fundamental rights. …The Index is the world’s most comprehensive data set of its kind and the only to rely solely on primary data, measuring a nation’s adherence to the rule of law from the perspective of how ordinary people experience it. These features make the Index a powerful tool that can help identify strengths and weaknesses in each country, and help to inform policy debates, both within and across countries, that advance the rule of law

And here’s a map showing the 113 nations that are included in the rankings.

All you need to know is that it’s good to be light-colored and bad to be dark-colored (though the map is a bit confusing since nations that aren’t ranked – much of Africa, for instance – also appear as light-colored).

One of the obvious conclusions is that the western world (Europe, North America, some nations in the Pacific Rim) does the best on protecting, observing, and maintaining the rule of law.

Simply stated, western civilization is superior.

But what can we learn by specifically examining the rule of law in developed nations?

What’s immediately apparent, if you look at the ranking of high-income nations, is that Nordic nations score very well. This is one of the reasons, I’ve explained, that they have a higher ability to tolerate and endure a large welfare state.

Germanic and Anglo-Saxon nations win the proverbial silver and bronze medals.

Looking at the rest of the world, I’m also not surprised to see strong scores for free-market success stories such as Singapore, Estonia, Hong Kong, and Chile.

Let’s close by taking a closer look at the data for the United States.

Among high-income nations, America gets a decent score, but it’s nothing to celebrate. Indeed, we actually do poorly when compared to other Anglo-Saxon jurisdictions.

In the above excerpt, I included the list of eight categories that are used to rank nations. Now let’s look at how America scores in those areas.

At the risk of oversimplifying, we do well in two areas. There are reasonably strong constraints on government powers and a reasonable degree of openness and transparency.

On the other hand, we don’t do very well (particularly when compared to other high-income nations)  for areas related to the judicial system.

Though I shudder to contemplate the scores America will receive after four or eight years of Hillary Clinton.

P.S. Is anybody surprised that Venezuela is in last place? Though I suppose I should repeat my caveat from earlier in the month that hellholes such as Cuba and North Korea would probably rank lower if they were included in the rankings.

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A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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Most folks in Washington are still digesting last night’s debate between Tweedledee and Tweedledum. If that’s what you care about, you can see my Twitter commentary, though I was so busy addressing specific issues that I failed to mention the most disturbing part of that event, which was the total absence of any discussion about the importance of liberty, freedom, and the Constitution.

But let’s set aside the distasteful world of politics and contemplate U.S. competitiveness. Specifically, let’s examine America’s position in the latest edition of the World Economic Forum’s Global Competitiveness Report. This Report is partly a measure of policy (sort of like Economic Freedom of the World) and partly a measure of business efficiency and acumen.

The bad news is that we used to be ranked #1 and now we’re #3.

The good news is that being #3 is still pretty good, and it’s hard to beat Switzerland and Singapore because they have such good free-market policies. And that’s where America falls short.

Indeed, if you look at the top-10 nations and the three major measurements, you’ll notice that the United States ranks extremely high in “efficiency enhancers” and “innovation and sophistication factors,” both of which have a lot to do with the private sector’s competitiveness. But we have a mediocre (at least for developed nations) score for “basic requirements,” the area where government policy plays a big role.

Moreover, if you look at the the biggest obstacles to economic activity in the United States, the top 4 deal with bad government policy.

The tax treatment of companies is easily the main problem, as you might expect since we rank #94 out of 100 nations in a study of business tax policy.

Let’s now look at the indices where the United States scored especially low out of the 138 nations that were ranked.

America’s lowest scores were for exports (#130) and imports (#134), though I take issue with the Report‘s methodology, which is based on trade flows as a share of GDP. The problem with that approach is that the United States has a huge internal market, equal to about 22 percent of the world’s economic output. That’s why our trade flows aren’t very large relative to GDP. Being surrounded by two major oceans also probably has some dampening effect on cross-border trade flows. Yes, America is guilty of some protectionism, but I think our ranking for trade tariffs (#33) is the more appropriate and accurate measure of the degree to which there is a problem.

America also got a very bad score (#128) for government debt, though at least we beat Italy (#135), Greece (#137), and Japan (#138). In case you’re wondering, Hong Kong was #1, as you might expect from a well-run jurisdiction with small government and a flat tax.  Though I must say that it is rather disappointing that the Report doesn’t include rankings for the overall burden of government spending. After all, government debt is basically a symptom of an underlying problem of a bloated public sector.

And there also was a very low score for the business cost of terrorism (#104), which is probably an unavoidable consequence of being the world’s leading superpower (and therefore a target for crazies). That being said, I imagine America’s score could be improved if we weren’t engaging in needless intervention – and thus generating needless animosity – in places such as Syria and Libya.

Here are two indices that deserve special attention. As you can see the United States gets a poor score for wasteful spending and a terrible score for the punitive taxation of profits.

With this information in mind, let’s now remind ourselves about last night’s debate. Did either candidate propose to control spending and reduce pork-barrel programs? Nope.

Did either candidate put forth a realistic plan to lower the corporate tax rate? Hillary’s plan certainly doesn’t qualify since she wants a bunch of class-warfare tax hikes. And while Trump’s plan includes a lower corporate rate, it’s not a serious proposal since he is too timid to put forth a plan to restrain government outlays.

And since neither candidate intends to address America’s looming fiscal crisis, it will probably be just a matter of time before America drops in the rankings.

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One (hopefully endearing) trait of being a policy wonk is that I have a weakness for jurisdictional rankings. At least if they’re methodologically sound.

This is why I was so happy a couple of weeks ago when I got to peruse and analyze the 2016 version of Economic Freedom of the World (even if the results for America were rather depressing).

Heck, sometimes I even can’t resist commenting on methodologically unsound rankings, such as the profoundly stupid “Happy Planet Index” that puts despotic hellholes such as Cuba and Venezuela above the United States.

Given my interest in rankings, you can appreciate how excited I am that my colleague at Cato, Chris Edwards, just unveiled the 2016 version of his Fiscal Policy Report Card on America’s Governors and that the Tax Foundation just released its annual State Business Tax Climate Index. It’s sort of like Christmastime for me.

Here’s the big news from Chris’ Report Card. As a Virginia resident, I’m not terribly happy the Governor McAuliffe scores a D (not that his GOP predecessor was any good). It’s also perhaps somewhat newsworthy that Governor Pence earned an A (so he seems committed to smaller government even if the guy he’s paired with doesn’t share the same philosophy).

And here’s the Tax Foundation’s map showing each state’s ranking, with top-10 states in blue and bottom-10 states in light orange.

If you pay close attention, you’ll notice that zero-income-tax states are disproportionately represented among the states with the best scores.

All this is quite interesting (at least to me), but it occurred to me that it might be even more illuminating to somehow meld these two rankings together.

After all, Chris’s Report Card is a measure of whether a state is moving in the right direction or wrong direction while the Tax Foundation is more of a comparative measure of how a state ranks at a given point in time compared to other states.

So I created the following matrix that looks only at the states that received A or F in the Cato Report Card and also were either in the top 10 or bottom 10 of the Tax Foundation Index.

As you might guess, the best place to be is in the top-left portion of the matrix since that shows a state that is both moving in the right direction while also having a very competitive tax system. So kudos to Florida and Indiana (with honorable mention for North Carolina, which received an A in the Cato Report Card but just missed cracking the top 10 in the Tax Foundation Index).

The bad news, if you look at the bottom-left quadrant, is that there are three states with good tax systems but bad governors. South Dakota, Oregon, and Nevada are in strong shape today, but it’s hard to be optimistic about those states preserving their lofty rankings since policy is moving in the wrong direction.

And the worst place to be is the bottom-right quadrant, which means that a state has both a bad tax system and a bad policy environment.

Last but not least, the sad news is that the top-right quadrant is empty, which means there aren’t any bad states moving aggressively in the right direction.

So the bottom line is that American citizens should think about moving to Florida and Indiana. Especially if they live in Vermont, California, or Connecticut.

P.S. It would be even better to move to Monaco, Hong Kong, or the Cayman Islands, but those presumably aren’t very practical options for most of us.

P.P.S. Actually, the best place for an American taxpayer to live is Puerto Rico since it’s a legal tax haven.

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When Economic Freedom of the World is released every September, it’s like an early Christmas present. This comprehensive yearly publication is a great summary of whether nations have policies that allow people economic liberty.

I eagerly peruse this annual survey every year (here’s what I wrote in 2015 and 2014 if you’re curious about a couple of recent examples). And this year is no different.

Let’s start with the table that gets the most attention. Here’s a look at the top nations, led (as is almost always the case) by Hong Kong and Singapore. Switzerland also deserves some recognition since it has always been in the top 5.

The United States used to be a regular member of the top-5 club, but we have fallen to 16th in the rankings.

Which is just barely ahead of the supposedly socialist countries of Finland and Denmark (which actually are very market-oriented nations in every area other than fiscal policy).

I don’t show the nations in the bottom half of the rankings, but I assume nobody will be surprised to learn that Venezuela is in last place (though, to be fair, the communist hellholes of North Korea and Cuba aren’t in the rankings because of inadequate data).

One of the other great features of Economic Freedom of the World is that you can look not just how nations rank today, but also how the have changed over time.

I selected some nations of interest from Exhibit 1.4 in Chapter 1. Keep in mind, as you review this data, that you’re seeing scores every fifth year from 1970-2005 and then the annual scores beginning in 2005.

A few observations on these numbers.

  • Chile’s improvement has been dramatic, even though the nation has slipped a bit since 2007.
  • Australia’s jump from 1975-today also is remarkable, as is China’s improvement since it entered the rankings in 1980.
  • Hong Kong has been consistently superb, though it’s troubling that its score has weakened slightly since 2008. Singapore also has a modest trend in the wrong direction.
  • I didn’t know Israel was so bad back in 1980, or that New Zealand scored so low back in 1975, so kudos to both nations for big reforms in the right direction.
  • I tend to give Estonia a lot of love, all of which is deserved, but it’s worth noting that its Baltic neighbors of Latvia and Lithuania also are big success stories.
  • Speaking of overlooked success stories, Peru’s upward climb deserves a lot of praise.
  • Switzerland isn’t overlooked (at least by me), but the praise it gets is very well deserved since it manages to be sensible while all its neighbors make mistakes.
  • Last but not least, scores for the United States and Venezuela have both been falling, though thankfully we started much higher and have fallen at a much slower rate.

Now let’s take a closer look at America. The good news is that we’re in the top 20 for economic freedom. The bad news is that we used to be in the top 5.

I’ve been grousing for years that the Bush-Obama policies have eroded America’s competitiveness and undermined economic liberty.

This year, EFW has a special chapter on the United States and it confirms my analysis. Here’s a chart from that chapter showing how America’s score has declined in recent years.

And if you want some additional details, America’s score is declining first and foremost because the rule of law is eroding and property rights are less secure.

Which is a point I made last year, but EFW‘s chart is much better than my homemade version.

You can also see that protectionism has increased since 2000. And one shudders to think what will happen in this area over the next few years given the protectionist utterances of Donald Trump and Hillary Clinton (though I hope Hillary is lying and trade is an issue where she’s actually on the right side).

Heck, I’m worried about the next four years for reasons that go well beyond trade. I hope I’m wrong, but it seems that America faces a choice of a statist Tweedledee or a statist Tweedledum.

It’s almost as if the two major-party candidates have read the recipe for growth and prosperity and have decided to use it as a road map of what not to do. Sigh.

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