Early this year, the 2010 Index of Economic Freedom, the Heritage Foundation’s data driven policy guide, reported that our economy is no longer in the top tier of economically free countries. Worse, still, we slipped behind our northern neighbor Canada for the first time in the Index history. This disappointing news is vividly echoed in KPMG’s just released study, Competitive Alternatives 2010
The report provides an updated comparison of global business locations, focusing on costs of conducting businesses. According to the report, “Canada now holds a 5 percent business cost advantage over the United States—an improvement over the virtual break-even position reported in the previous edition of the biennial study, last released in 2008.”
Among other factors that contributed to Canada’s high level of competitiveness, the KPMG study pointed out that “a variety of tax cuts and reforms that have been implemented, or are in the process of being implemented, by both the federal and provincial governments, are also assisting the cost competitiveness of Canada for global business. Indeed, business taxes are now lower in Canada than in any of the other G7 countries.”
By contrast, America’s current complex and investment-squashing tax code is a major factor in reducing our competitiveness. Other countries are not standing still. As the 2010 Index reveals, since July 2008 more than 30 countries have introduced reforms in direct taxes or have implemented tax cuts as previously planned, despite the challenging economic and political environment caused by the global economic slowdown.
Governments’ policy choices shape business environments in the short term, but more importantly, over the long haul. Economies whose governments have responded to recession with higher stimulus spending are trading long-term competitiveness for short term gains that are proving ephemeral at best. Based on some of the early data available for the members of the Organization for Economic Development, the 2010 Index shows that higher government spending during the recent economic slowdown has not resulted in greater economic growth. When you add in the cost of ever increasing government deficits and ballooning public debts, the long term effect can be catastrophic.
Canadians have moved their economy to the direction of lower deficit, lower taxes, and lower debt. Canada’s relatively prudent federal budget management, coupled with sound fiscal reforms, has enabled the economy to sharpen its long-term competitiveness with better fiscal position. It’s time for the U.S. to follow suit.
A good first step would be for Congress to consider actions such as those proposed by Senators Wyden and Gregg. At a time when we are losing competitiveness, rhetorical promises or feeling-good slogans are not enough. We need real policy actions to loosen the grip of government and restore our economic freedom. That’s a change that would carry real benefits for the American people.