Getting a head start can help you in a race. But just because you start in front doesn't guarantee you'll win. Sometimes, as in the fable, the steady tortoise really does defeat the swift hare.
That's one lesson we can draw from The Heritage Foundation's annual Index of Economic Freedom. For the 12th straight year, Heritage experts studied all the economies in the world. We ranked them according to 50 independent variables that measure economic freedom in 10 major categories. As in past years, we found that the best-performing economies in the world are also the ones with the most freedom.
This year, the United States edged back into the top 10, finishing in a tie for ninth with Australia and New Zealand. That's a welcome development. While the U.S. had the world's fifth-freest economy as recently as 2000, by 2005, we had slid to 14th, a drop we've finally arrested this year.
Good thing, too. Without economic freedom, none of us can prosper. Simply put, countries with a higher degree of economic freedom enjoy a higher standard of living.
Such freedom generates a race. As it spreads, countries compete to see which can be freer and more successful. In recent years we've learned that, despite the fact the U.S. had such a large lead on so many nations when this race started (we were ranked fourth in the first Index in 1995), we can't afford to stand still. This was really a case of the tortoises passing the hare -- the U.S. was losing ground not because we were making any big mistakes, but simply because other countries were improving, slowly but steadily.
In short, we became complacent. But with simple changes in a few areas, we can start climbing the ladder of economic freedom again.
Begin with income taxes.
The highest individual rate in the U.S. is 35 percent. Though not as high as the 60 percent top rate Swedish citizens pay, it's higher than the maximum charged in 82 other nations. Estonia, where the top individual rate is 24 percent, cut its top rate by two percentage points, and the government plans to drop the rate to 20 percent by 2009. No wonder Estonia -- a former Soviet satellite state -- has overtaken the U.S. in the Index rankings.
Our corporate tax rates are also too high. Our top corporate rate of 35 percent is higher than 116 nations. There's a motto we can chant when someone wants to open a business here: We're number 117!
It's a simple concept. Lower taxes mean less government intervention, and thus more freedom. And the "fiscal burden of government" is the only category on the Index in which the U.S. is truly lagging.
The fact is, government doesn't create jobs or generate real growth. The growth of bureaucracy and government power instead saps freedom and dampens growth. To improve our score and increase our freedom, we'll need to cut tax rates.
The tax cuts enacted in 2003 were a good start, but we'll need to make those permanent. Indeed, if we want to remain competitive and protect our economic freedom, we'll need to lower those rates further.
That's just for starters. In the years ahead, we'll also need to fix our struggling entitlement programs -- especially Medicare, Medicaid and Social Security. If we don't get them under control, they'll eventually drive federal spending to unsustainable levels, which would decrease our freedom and global competitiveness.
The good news is that, when it comes to economic freedom, there are no permanent winners or losers. Any government can make the right choices and improve its people's lives. But the bad news is that the United States is in danger of losing ground in the global competition for economic freedom. We need our leaders to heed the warnings of the Index, and improve our country's score in the years ahead. This is one race we literally can't afford to lose.
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