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These European Countries Beat Poverty and Increased Wealth with Low Taxes and Low Regulation | Mises Wire

Posted by M. C. on May 15, 2021

By American standards, Ireland is still a relatively poor country. However, since economic liberalization, Ireland has made tremendous progress in reducing poverty and raising incomes through economic growth.

https://mises.org/wire/these-european-countries-beat-poverty-and-increased-wealth-low-taxes-and-low-regulation

Eben Macdonald

Democratic socialists frequently laud the Nordic countries as examples of the success of progressive taxation, generous welfare states, and powerful labor unions. Free marketers have responded by pointing out that not only did these countries get rich long before these policies were implemented, but they also have as much regulatory flexibility as the United States, according to World Bank data. However, we should also point to countries that embraced so-called neoliberalism as a means to getting richer and reducing poverty. It turns out that this strategy has been proven to work and these areas of Europe have living standards that are just as high, if not higher, than that of the Nordics. Here, we’ll look at three examples.

Luxembourg

The World Economic Forum is famous for its belief in “resetting“ capitalism to accomplish the aim of ”[s]teering the market towards fairer outcomes, bearing in mind environmental and social risks and opportunities and not just focusing on short term financial profits.” However, annually, they present the Global Competitiveness Index. It aims to discover the most economically developed and productive countries on Earth, in terms of infrastructure, education, and public health. This composite index has twelve main pillars: the two most relevant ones for our purposes are the first and seventh pillars, “institutions” and “labor market efficiency.” Within each pillar, there are smaller subcomponents. Under institutions, are included factors such as “property rights,” “burden of government regulation,” and “wastefulness of government spending,” while labor market efficiency includes ”effect of taxation on incentives to work.”

One can easily use the WEF’s data to demonstrate that the world’s most prosperous countries are market oriented and proenterprise. Here, our example is Luxembourg. According to the Pew Research Center, somebody on a low income in Luxembourg is richer than a lower-income person in any other Western country (the Nordics included), and moreover, the country can boast about having the second-strongest middle class in the world and the highest median household income in the world. Unfortunately, Pew Research Center does not define the income percentile boundaries of each category. However, for more perspective, information from Eurostat shows that as of 2019 the bottom 10 percent in Luxembourg is the fourth-richest in Europe.

What explains this? Does the Luxembourgish government spend vast amounts on welfare? While social spending is slightly above the Organisation for Economoic Co-operation and Development average at 21.6 percent of GDP, Luxembourg remains below many of its neighbors. In fact, tax take is 33.8 percent of the Luxembourgish economy, much below the average—many even consider Luxembourg to be a tax haven. Due to favorable property, corporate, and capital tax rates, they rank fifth on the Tax Competitiveness Index.

Here’s where the WEF’s data become relevant. Admittedly, Luxembourg ranks low in terms of the ease of starting up a business; however, in the burden of government regulation on business (referring to how free an enterprise is from red tape), they rank ninth; on property rights, they rank fifth; on “intellectual property protection,” they rank third; on “effects of taxation on incentives to work,” they rank tenth; on “effects of taxation on incentives to invest,” they rank eighth; and on “total taxes as percentage of profits,” they rank twelfth. By these metrics, Luxembourg is a definite free market economy. Luxembourg has a long history of embracing economic freedom. Between 1970 and 2001, they consistently occupied the top ten places on the Fraser Institute’s Index of Economic Freedom.

Ludwig von Mises taught us that marginal labor productivity, and hence wages, are determined by the ease with which businesses can invest in and accumulate capital—free of red tape, taxation, bureaucracy, government debt, and inflation. Luxembourg’s business-friendly environment explains why it has the most productive workers in the world. Hence, the poor in Luxembourg have, by international standards, a very high standard of living.

Switzerland

Switzerland sits with Luxembourg at the top of the WEF’s market-oriented categories.

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Author:

Eben Macdonald

Eben Macdonald is a 16-year-old student, a keen free-marketeer, and he wants a society which is predicated on liberty.

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