Fraser Forum

Freedom takes a hit—we’re now tied with the Americans

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Well, that didn’t last long! For July 1st’s 150th birthday of Confederation I posted a piece about this country’s most impressive achievements, including how last year we were in 5th spot on the Fraser Institute’s Economic Freedom of the World Index. Hold that thought!

On this year’s list we’ve fallen to 11th, where we’re tied with the United States. True, it’s a list of 159 countries, so 11th isn’t horrible. But it’s not as nice as 5th. At 5th, only Hong Kong, Singapore, New Zealand and Switzerland were ahead of us. Now we’ve also lost bragging rights to Ireland, the United Kingdom, Mauritius, Georgia, Australia and Estonia. And again, we’re tied with our southern neighbours.

As Hillary Clinton might say, what happened?

As with Secretary Clinton’s explanations for her defeat in last November’s presidential, there are several culprits. But it turns out the main nemesis—our version of FBI Director James Comey, as it were—was tax hikes.

The Freedom Index ranks countries on a 0-10 scale of how they do in five main categories: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation. Each of the categories has sub-categories. The index takes an equally weighted average of the sub-categories to get a category score in each of the five areas. Then it takes a weighted average of the five areas. Both the weights and the different items included in the index are arbitrary to an extent. But just about all measurement is arbitrary. What counts is: whether the index makes intuitive sense, how it changes over time, and whether it lines up with pertinent outcomes such as GDP or indexes of human happiness. Several decades now of research suggest it does.

So what happened to us between 2014 and 2015 that cost us six full places in the rankings?

We’ve always done well on sound money and nothing changed there. Our score fell slightly, from 9.60 to 9.58—but that’s hardly worth worrying about. (The scores are set up so that lower means less freedom and higher means more.) Over 9.5 out of 10 is pretty good whatever the sport.

On regulation, our score actually went up slightly, from 8.54 to 8.55. The improvement was mainly in labour market regulation, where changes to hiring and firing rules and centralized collective bargaining moved slightly toward greater freedom.

On freedom to trade internationally, our numbers are still decent, despite a fall from 8.01 to 7.87. We had a similar decline in legal system and property rights, from 8.05 to 7.85. Here the damage mainly occurred in the “legal enforcement of contracts” section, where we began with a mediocre 4.81 that fell over the year to 3.65. (Our main problem is how long our courts take to decide anything.)

As mentioned, the biggest hit came in size of government, where our score fell from 8.20 to 7.94. And the biggest damage in that category was done in two areas: “government enterprises and investment” and “top marginal tax rates.”

Our government enterprises and investment score fell from a super-healthy 10.0 to 8.0, while our score for top marginal tax rates fell from 6.0 to 4.0. If you think twin declines of exactly 2.0 points are suspiciously round numbers, you’re right. The way the scoring works for government enterprises and investment is that countries where public investment is less than 15 per cent of total investment get 10, while those where it’s between 15 and 20 per cent get 8.0. Between 2014 and 2015 we crossed the line, with the government share going from 14.71 per cent of total investment to 16.11 per cent. Hence the 2-point drop in our score.

The score for tax rates is decided in much the same way. There’s a matrix of possible scores that depend both on your top rate and at what income it kicks in. If your top rate is below 21 per cent, you get 10 no matter where it kicks in. If the top rate is between 21 and 26, you get 10 if it applies only over US$50,000. But if it kicks in below that, you get 9. And so on as rates get higher and higher. If they kick in only at a higher income, the score isn’t quite so bad. In the limit, if your marginal rate is over 70 per cent, you get zero no matter what rate it kicks in at.

Between 2014 and 2015 we moved from top federal plus provincial income tax rates that ranged from 39-50 per cent to rates ranging from 40-55. So our score dropped from a mediocre 6.0 to an even more mediocre 4.0.

In the 2015 numbers, we tie for 11th place with the Americans. Given their and our traditional views of freedom, I still think that’s pretty impressive—even if not as impressive as beating them by 11 places, as we did last year.

Ah well, we’ll always have 2014.
 

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