Earlier this week the Heritage Foundation, along with the Wall Street Journal, released its 17th annual economic freedom index. Hong Kong, once again, ranked number one. The United States, however, slid down to number nine. So what’s Hong Kong doing right?
According to Anthony Kim, a policy analyst at the Center for International Trade and Economics at Heritage, the difference between the U.S. and Hong Kong lies in tax rates, spending, free trade, and regulatory burdens.
The late economist Milton Friedman supposedly once described Hong Kong as the world’s greatest experiment in laissez-faire capitalism. The city state, technically a special administration region of China, has the sixth-largest stock exchange in the world, has almost no public debt, and has a Gross Domestic Product (GDP) that grows just about every year.
That’s a far cry from the U.S. economy today.
Hong Kong’s corporate tax rate, at 16.5 percent, is among the lowest in the world. The U.S. has a tax system that goes as high as 35 percent, and according to Kim, it’s been that high for at least a decade, even though average rates for the 20 largest economies in the world is 27 percent.
“U.S. tax rates are increasingly uncompetitive compared to other countries,” Kim told The Daily Caller. “The U.S. corporate tax rate is roughly double that of Hong Kong, but we collect less as a percentage of GDP than Hong Kong.”
Kim also said Hong Kong’s tax system is more transparent, and the low rate provides “better incentives for long-term investment.”
In Hong Kong, it’s easier to start a business because there’s less regulatory uncertainty — and fewer regulations overall. The U.S. is hemorrhaging businesses overseas, which Kim attributes that to “ongoing regulator changes that hurts investment.”
“Hong Kong is free from those uncertainties,” said Kim. “Their regulatory process is very straightforward.” Those uncertainties, said Kim, are cause by ongoing regulatory changes as a result of the stimulus spending, health-care reform, and the Dodd-Frank Act. The regulations that resulted from Dodd-Frank, in fact, are still being written.
The two countries also responded differently to the global financial collapse. Because of Hong Kong’s devotion to non-interventionist economic policies, the city state largely did nothing and let the market correct itself.
The U.S. not only bailed out automakers and banks, but it spent billions of dollars on a stimulus package, then Congress passed an overhaul of the financial system with Dodd-Frank.
Then there is the lack of leadership on free trade. The U.S. still has yet to ratify three pending free-trade agreements with Colombia, Panama and South Korea.
So what should the U.S. do in the coming year to increase its standing in the economic freedom index? According to Kim, Congress needs to tackle timely tax reform, cut down on the ongoing regulatory uncertainty, and rein in government spending.
“We have to tame government spending in an urgent and effective way,” he told TheDC. “If we don’t, the U.S. could fall farther behind.”
“This is not just a political point, this is an economic reality” Kim added.