Suppose all the hype about a Republican return to power turns out to be true. People on both the left and right accuse the Rs of having a dearth of ideas. It’s the same old nostra, they say.
Since the other week’s Pledge was released, it’s hard to disagree.
Then again, getting government out of the way never sounds terribly sexy. If the Republicans had gotten any more earnest with their plans, they might have come across as extreme.
It’s all in the way you package things, I guess. But if you want ideas – not just abstractions but proven ideas – it wouldn’t hurt to see what the rest of the world is doing.
Here are five policy prescriptions that would go a long way to setting this country back on the right track from an economic standpoint. Each corresponds to the country that has been successful with them:
Estonia (et al) – The First Flat Tax
Estonia started something big — all because Mart Laar read Milton Friedman’s Free To Choose, in which he recommended a flat tax. A bandwagon effect has taken hold and the “Baltic Tigers” are flourishing. As Dan Mitchell writes:
In a remarkable development, former communist nations are leading a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 percent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 percent rate and Lithuania picking 33 percent. Along with other free-market reforms, the flat tax significantly improved economic growth, and the “Baltic Tigers” became role models for the region. Learning from its neighbors, Russia stunned the world by adopting a 13 percent flat tax, which went into effect in 2001.
The flat tax revolution has been so successful that Estonia is lowering its rate to keep pace with other nations. The Estonian flat tax is now down to 24 percent and will drop to 20 percent by 2007, and Lithuania is in the process of lowering its 33 percent flat tax to a more reasonable 24 percent. Poland's government just announced that it will implement an 18 percent flat tax, and lawmakers in Croatia, Bulgaria, and Hungary are also considering tax reform. Last but not least, the opposition parties in the Czech Republic have promised to implement 15 percent flat tax regimes if they win the upcoming elections.
The rest of the world is jumping ahead of us in terms of tax policy. Our complicated tax code – with all its exemptions, exceptions and byzantine caveats is a tax preparer’s dream. But it’s a collosal waste of time and resources for taxpayers. Let’s follow the Eastern Europeans and get flat.
Singapore – A Healthier Healthcare System
In Singapore, they’ll put you to death for selling drugs and fine you for chewing gum on the street. But when it comes to healthcare, Singapore is doing something right. I’ve written about this before, so allow me to quote myself at length:
1. Medical Savings Accounts (MSA) – Every citizen of Singapore is required to put a portion of each paycheque into a healthcare savings account, from which they pay for out-of-pocket health expenses. This goes very far in controlling costs.
2. Private healthcare providers are required to publish price lists to encourage comparison shopping. These appear virtually nowhere in countries like the US and the UK, dominated as these systems are by third-party payer models for primary care (public and private).
3. The private and public healthcare systems compete, which helps contain prices all around.
4. Government focuses on basic healthcare services – narrowly defined – offering mostly catastrophic insurance. Parties are subject to stringent means testing and co-pays – which means Singaporean society doesn’t subsidize the rich in the name of ‘equality’.
Wait, we already have MSAs (known here as HSAs). So instead of limiting the annual contribution, allow us to put in as much as we like. And instead of requiring payroll taxes, why not require that people deduct a portion to go into the HSA and Social Security private accounts for their individual use? At least give people the option to do so. Just one of these measures would amount to a tremendous savings as people became more cost conscious and doctors became more cost competitive. (Note: Singapore spends less than 4 percent of GDP on healthcare compared to more than 15 percent in the U.S.)
Hong Kong – Corporate Tax Rate
Hong Kong’s corporate tax rate is 16.5%. (Macao’s is even lower, at 12%.) By comparison, the U.S. has the second highest corporate tax rate in the world at 38% (35% federal plus state, yes state does vary a bit). This causes all manner of problems. The primary problem is that capital available for economic reinvestment is significantly reduced. Second, it creates a perverse incentive for companies to off-shore their dollars. If you lower corporate tax rates, it becomes less beneficial for companies to move offshore or to avoid taxes. U.S. dollars can be repatriated. The U.S. could lower it’s corporate income tax to 17 percent and see tremendous positive effects–including higher tax revenues due to increased economic activity.
New Zealand – Ag-Subsidy Free
“What would the world look like without agricultural subsidies?” asks Laura Sayle of the organic farming Rodale Institute. “What would the United States look like? If a crystal ball exists for those questions, its name is New Zealand, one of the first and still one of the few modern countries to have completely dismantled its system of agricultural price supports and other forms of economic protection for farmers.” (Emphasis added.)
Why would a bunch of hippie organic farmers want free-market agriculture? Easy: government subsidies benefit Big Agribusiness and put small organic farmers at a competitive disadvantage. Organic farmers like to “go local,” but they want to get the government out of the farming business. And for good reason. U.S. farm subsidies usually total about $20 billion a year.
But has New Zealand survived without subsidies?
“Brace yourself.” says Sayle, “this is free-market faith to make Adam Smith proud. But the New Zealand experience is pretty persuasive. Well into its second decade of subsidy-free farming, New Zealand enjoys a worldwide reputation for its high-quality, efficient and innovative agricultural systems.”
U.S. farmers can wean themselves, too. Of course, we’ll have to move the caucuses out of Iowa to do so. (Currently politicians on the left and right are in the grip of Big Agribusiness.)
Chile – Social Security Success
Guess what? Our beloved social security system went bust this year. We now pay out more than we take in. So whatever the polls say, the system needs to be fixed. So what do we do? Here comes the “p word”… Yes, we privatize. But that would be risky, potentially catestrophic! cry the voices of redistribution. But is that so? Let’s ask Chile:
“Chile faced that problem in the late '70s,” says José Piñera.
As secretary of labor and social security, I could have postponed the crisis by playing at the edges, increasing payroll taxes a little and slashing benefits a little. But instead of making some cosmetic adjustments, I decided to undertake a structural reform that would solve the problem once and for all.
We decided to save the idea of a retirement plan by basing it on a completely different concept — one that links benefits and contributions.
Chile allowed every worker to choose whether to stay in the state-run, pay-as-you-go social security system or to put the whole payroll tax into an individual retirement account. For the first time in history we have allowed the common worker to benefit from one of the most powerful forces on earth: compound interest.
Some 93% of Chilean workers chose the new system. They trust the private sector and prefer market risk to political risk.
Now, we can let bureaucrats tinker around the edges and eventually reduce benefits, or we can give people more freedom of choice. Which is America about?
There you are, Republicans. You can thank me later…that is, if you win big and can escape the clutches of the special interests. And those are big ifs.