Economic Freedom = $

Interesting article that illustrates how economic freedom correlates with increased per capita income.
I particularly like the case studies involving China, Taiwan, and Hong Kong; and Botswana and Zimbabwe.

Economic freedom = $

[i]Not rocket science
By Richard W. Rahn
January 18, 2006

Suppose you were appointed global economic czar, and your task was to bring the world’s per capita income up to the level of Ireland’s (almost that of the U.S.). Would you:

(A) Insist the world's rich nations transfer substantial wealth though massive foreign aid to the poor nations? 
(B) Insist all nations adopt policies that would make them as economically free as the top 10 freest economies today?

If you answered "B," go to the head of the class. This shows you have a good understanding of both history and economic reality about what works and what doesn't. 

If you answered "A," welcome to the Kofi Annan, Jacques Chirac, Gerhard Schroeder school of willful economic ignorance. Graduates of this school are well represented among international institutions, such as the World Bank, and the Organization for Economic Cooperation and Development; the political left; and the media elites in such places as the New York Times editorial pages, the BBC and National Public Radio.

Fortunately, in their effort to roll back economic ignorance, the Heritage Foundation and the Wall Street Journal produce an annual “Index of Economic Freedom.” Their 2006 Index, the 12th edition, has just been released, and again it shows in stark and unambiguous terms that income, economic growth and opportunity are highly correlated with economic freedom. economically freest societies are the most prosperous, and the most economically repressive societies are the poorest.

The principal authors of the Heritage/WSJ Index -- Marc Miles, Kim Holmes and Mary Anastasia O'Grady -- use commonly accepted definitions of economic freedom, including trade and capital flow restrictions, levels of taxation, size of government relative to the economy, price stability, levels of economic regulation, protection of private property, etc. 

Ireland 30 years ago was among the poorest countries in Europe. It then made a major shift toward freeing up its economy -- e.g., its maximum corporate tax rate is only 121/2 percent (it ranks No. 3 out of 157 countries in the index). As a result, it now has the second-highest per capita income in Europe and is far ahead of the old leaders like Germany (No. 19) and France (No. 44). (Note, when I refer to per capita income, I do so using the Purchasing Power Parity measure which accounts for local price differences.) 

In Eastern Europe, Estonia is economically the freest (No. 7), and Romania the least free (No. 92), though the latter is now making progress. Both countries started out at roughly the same level 16 years ago, but now Estonia has almost twice the per capita income of Romania. Much of the credit for Estonia being the most successful transition country goes to its brilliant and able free-market former prime minister, Mart Laar. 

China, Taiwan and Hong Kong make an interesting case study. They are all inhabited by Chinese in the same part of the world. In 1947, they were all equally poor, but Hong Kong (No. 1) started its economic reforms in the 1950s, and a decade later Taiwan (No. 37) began major reforms, but China (No. 111) proper did not begin its reforms until the late 1970s. 

The result is that Hong Kong has a per capita income almost threefold that of China (accomplished without natural resources or foreign aid), and Taiwan has more than 21/2 times the per capita income of China. 

In central Africa, we have the contrast between Botswana (No. 30) and Zimbabwe (No. 154). Botswana, a relatively free market democracy, has roughly tenfold the per capita income (without U.S. aid) of the repressive Zimbabwe, despite having started at about the same level of development.[/i] 

I agree with the premise of this article more or less…socialism isnt THAT bad IMO… look at the GDP/c and several socialist countries are in the top 10 so some socialist countries will do well some capitalist places wont. flamer i dont want to be arrogant but i think the US is #1 as far as the ability to make it, or heck, as far as the ability to be an entreprenuer and do reasonably well

Jacktors, I agree that the U.S. is THE place if you want to be an entrepenuer. One of the best factors in establishing an atmosphere where they can succeed, IMO, is a low tax environment.

[i]January 20, 2006
Low-Tax Tiger
By Lawrence Kudlow

A year ago Gov. George Pataki asked me to chair a commission on tax reform that would improve New York state?s outlook for investment, job creation and economic prosperity. After numerous meetings, a review of the existing tax literature, and lengthy deliberation, we have come up with a statement of principles and a series of policy recommendations to promote an investment-friendly state tax structure that could, if implemented, restore New York to a preeminent economic position.

First and foremost, we concluded that there is a clear relationship between state tax burdens and state economic health. States with high and rising tax burdens are more likely to suffer economic decline; those with low and falling tax burdens are more likely to enjoy strong economic growth. Academic studies, as well as real-world experience, show clearly that low-tax states consistently outperform high-tax states.

Economic behavior, whether measured in terms of employment, work effort, saving, investment, risk-taking, entrepreneurship, or capital formation, is highly responsive to changes in marginal tax-rates. In other words, incentives matter. The economic power of lower tax-rate incentives has been proven at national and state levels. It is also borne out by the results of lower tax-rate systems put in place internationally. Allowing people to keep more of the extra dollar earned or the extra dollar invested by providing new incentive rewards is a tried and true prescription for economic growth. Raising after-tax rewards for work, investment and risk-taking is the surest path to long-term prosperity and competitiveness for the state of New York.

But there is a bigger picture here.

It is absolutely essential that New York be more competitive in the global race for capital. New York competes regionally, nationally and internationally. What is overlooked, however, is the state?s need for new capital and new capital formation. New jobs require new businesses, and new business formation requires new capital sources. Nothing will make New York more prosperous than improving its economic climate to make the state a more hospitable place for the treatment of smart money and smart people. We compete daily with low-tax states elsewhere in the U.S. and with newly attractive destinations for capital in places like Russia, Eastern Europe, China and India. Smart money and smart people are highly mobile. In the world race for capital, they go to where the return on capital is highest.

In the 21st century information economy, where capital is so vital in the creation of new technologies and the everyday application of these breakthroughs in the home and workplace, an expanded and well-trained workforce must be equipped with the low tax-rate benefits of easy capital access and large-scale capital inflows. For these important reasons the onerous and burdensome multiple taxation of capital in New York must be remedied and ameliorated.

So the commission recommended elimination of the state tax on capital gains and investor dividends. The multiple taxation of capital is a huge deterrent to growth. Eliminating these tax penalties on investment capital would set New York apart as the only state with an income tax that fully exempts capital. Removing the double and triple taxation of investment, which has already been taxed once as wage and salary income and again as corporate net income, would be a powerful stimulant for entrepreneurship and risk-taking. Similarly, we recommended the elimination of the corporate capital gains tax.

In addition, we recommended complete abolition of the state?s estate tax that penalizes family-owned and closely held businesses. This tax has accelerated a growing brain-drain and capital flight to Florida, South Carolina, and elsewhere. In a 2004 National Bureau of Economic Research paper, economists Jon Bakija of Williams College and Joel Slemrod of the University of Michigan, concluded that a 1% differential in estate tax rates was associated with a 4% reduction in the number of residents in a given state.

Our commission decided that waging class war against the wealthy is nonsensical; it merely wages war against the state?s non-rich working people who are deprived of scarce and valuable capital that is so necessary to creating new technologies, new businesses, new equipment, new jobs, and new job training.

On income taxes, we proposed a 5% solution for individuals and companies, down from the 6.85% tax rate on personal income and the 7.5% tax rate on corporate income. Additionally, we proposed to reduce the number of income tax brackets from five to three, along with a widening of brackets, as well as inflation-indexing to prevent tax-bracket creep. Complex supplemental taxes would be eliminated. And for businesses, all new investment would be cash-expensed to reduce complexity and lower the cost of capital. In all these cases, we adhered to a clear economic growth principle: tax something less and you get more of it. By raising after-tax rewards across-the-board for the entire state tax system, we believe that New York will generate significantly higher living standards and more rapid economic growth in the years ahead.

This complete restructuring will provide tax relief to taxpayers in every income class and would set New York apart from other states as the place for uninhibited growth and investment opportunities. In-migration will replace the high-tax population drain. Instead of voting against New York, people will vote with their feet and their money for New York.

New Yorkers have seen these economic growth tax principles work successfully in the past. When President Reagan and Gov. Hugh Carey lowered tax rates nationwide and statewide in the ?80s, New York shared in the U.S. economic boom. Gov. Pataki?s tax-rate reduction plan in the ?90s produced new jobs at a pace equal to or better than the U.S. average. President Bush?s 2003 tax cuts on capital gains and investor dividends ignited New York?s financial service and related industries, where employment, incomes, and tax revenues all soared in the aftermath of lower tax rates. But for all this progress, New York?s overall tax burden remains high. The Tax Foundation?s state business tax climate index in 2004 rated New York 49th. A huge tax hike in 2003 passed by the state legislature over the governor?s veto represented a body blow to current and future economic performance. This is why across-the-board tax rate relief is so vital to the economic future of the state. Economic rewards will replace penalties for those who live and work here.