Can Americans learn lessons from the fiscal policies of other developed countries around the globe? Of course, as long as they’re the correct lessons from good examples. Alan Reynolds of the Cato Institute offers a helpful assessment of the developed world’s economic picture. Reynolds starts by documenting the disappointing performance of the so-called PIIGGS countries, then turns his attention elsewhere.
It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey).
Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group.
Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey.
In China, statutory income tax rates can still reach 45% on paper, but that is only for high salaries and is widely evaded. Investment income is subject to a flat tax of 20%, the corporate tax is 15-25%, and China’s extremely low payroll tax adds almost nothing to labor costs.
Lower tax rates and faster economic growth in these countries didn’t mean bigger budget deficits. On the contrary, only one of of the eight MIST and BRIC countries (India) has a significant budget deficit.
In short, the world economy has become divided into two groups: (1) sickly PIIGGS with chronic fiscal crises and (2) booming BRIC and MIST economies with modest government spending, lower tax rates and vigorous growth of both the economy and tax receipts.