Mises Wire

A
A
Home | Blog | Flawed Economic Freedom Index

Flawed Economic Freedom Index

January 7, 2005

The Heritage Foundation has recently released a new Index of Economic Freedom. Yet the flaws of this index are so serious that the index cannot be taken seriously. First of all, they often use incorrect facts. They claim for example that Denmark has a 26,5% top income tax rate. The real number is 54%. But even setting aside they do not have their facts correct, the index would still be flawed. Other flaws include:

  • Too little weight given to taxation and spending. Only 1/10 of the index is made up of it. The category "Government Intervention" do seem to factor in government consumption too, but this is only a small part of all public spending and even if it had included all spendingit would still be insufficient.

 

  • Perhaps even worse is that they do not in fact have the level of public spending as a factor, only the change in public spending. Which means that if one country increases spending from 10 to 11% of GDP and the other reduces it from 55% to 54% the latter country is beingcounted as being freer. And in the other half of the 1/10 being given to taxing and spending they only include the top income tax rate and the corporate income tax. That is not only do they disregard the lower tax rate brackets for lower income people and the degree to which you can get away from these taxes through for example deductions, they completely disregard all other taxes, like capital gains taxes, payroll taxes, consumption taxes etc. Singapore-style forced savings is also not included. Because of these peculiar ways of measuring fiscal burden of government, Sweden and Denmark are being counted as having a lower fiscal burden than China, even though China do not have a welfare state, while Sweden and Denmark have the most extensive welfare states in the world.

 

  • The monetary system in the west and all other countries with only moderate inflation is ludicruosly being regarded as "free".

 

  • The strong monopolistic power of the unions (Who derive their power from the state) in a country like Sweden is briefly mentioned but do not seem to warrant any negative points. Even though that enables the unions to control the wages and sethigh minimum wages and in other ways infringe the freedom of businesses. That is even though that constitute in effect extensive regulation and high minimum wages it is not seen as something negative.

 

  • They regard the existence of a informal market, that is one not controlled by the government as a restriction of economic freedom. That's right, they believe a country where people successfully avoid taxes and regulation not only is not freer but in fact unfreer than countries where the state successfully prevents people from escaping its control.

There are probably more flaws in that index (You are all welcome to point out any additional flaws you can find)but these are the ones I can think of right now. And they are sufficient to make this index almost useless.

Follow Mises Institute

Add Comment