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Lower taxes + less regulation = a prosperous economy, says study

Fiscal restraint and free trade correlate with lower taxes and regulation

A recent study highlighting the international index of economic freedom states that the average amount of economic freedom is higher today than it has been in the past 20 years. Organizations such as the Wall Street Journal and the Heritage Foundation in Washington have been measuring countries that implement fiscal restraint to help improve the state of the economy for their citizens for over two decades. 

According to a Daily Advance report, those countries that have adopted fiscal restraint and free trade are recognized by earning high scores on the index for protecting the rights of contract and property ownership while avoiding excessive taxes or regulations.  Needless to say, countries that abuse their power and do not adhere to practices to help improve the state of their economy earn low scores.

In the past 20 years, global poverty has experienced one of the largest declines in history due to hundreds of millions of people who live in countries in Latin America, Eastern Europe, Africa and Asian that have liberalized their economies. It is up to each country’s government to put policies and processes in place to consistently maintain or improve their financial state, however, that is not always the case, particularly with the standard of living increasing due to escalating oil and natural resources costs.

For the countries that do not display acts of fiscal restraint or are up against hardships that prevent them from stabilizing their economies, they remain repressed and are experiencing lower scores on the index than ever. Unfortunately after enduring one of the biggest economic declines in U.S. history, the United States has fallen out of the top 10 countries in economic freedom, according to the index.

So what can the U.S. do to regain its independence towards economic freedom? It’s up to the state and local government to take charge to help reverse the downward trend. The first step is to curb our country’s fiscal recklessness and to stabilize regulatory burdens that result in tax increases. Next is for the government to begin breaking down economic freedom a step further by state since evidence proves that jobs and businesses created at the state level help to further support economic growth.

In the report, John Hood referenced a 2012 paper in the International Journal of Economics and Finance that stated that higher economic freedom tends to attract higher levels of investment from foreign firms, which then leads to more economic growth. In addition, a 2007 study in the Southern Economic Journal found that states attract another form of valuable capital, people, to the extent they embrace economic freedom.


For related news on financial regulation and tax reform, check out these recent reports on Inside Counsel:

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Contributing Author

Stefanie Mosca

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