Nov 28, 2007

Uncaging Korean Tiger

Uncaging Korean Tiger
Appeared in the Korea Times on Nov. 28, 2007

By Sean Hayes

The Nordic Tiger has been uncaged. Iceland has joined Hong Kong, Russia, Georgia, Macedonia, Slovakia, Ukraine, and a number of other countries, by adopting a flat tax on individuals and also drastically cutting corporate taxes, estate taxes, and capital gains taxes.

Iceland has moved from a sleepy nation in the middle of the frigid North Atlantic to one of the world's richest nations. The drastic cut in taxes has unleashed the Nordic Tiger and now places Iceland 10th in the Economic Freedom of the World's rankings up from 26th in the 1990s.

The move from a ``progressive'' personal income tax, which penalizes the most productive, to a flat personal income tax, coupled with the drastic cut of the corporate tax rate from 50 percent in the late 1980s to 18 percent today has drastically increased the incentive to invest, create, and innovate, thus, boasting economic growth.

Additionally, Iceland has assisted in proving the ``Laffer Curve'' and supply-side economics. The decrease in corporate income tax created a drastic increase in tax revenues.

In the late 1980s, the corporate tax rate was 50 percent and the corporate tax revenues were only 0.9 percent of gross domestic product (GDP). In the mid-90s the corporate tax rate was 33 percent and the corporate tax revenues were only a little over 1 percent of GDP.

Today, with an 18 percent corporate tax rate, which incrementally decreased since the 1990s, the tax revenues are now nearing 50 percent of GDP.

Korea must follow our Nordic friend. The Korean Tiger has been caged by excess taxes, a regulatory regime that is more reminiscent of former communist China, than a democratic market economy, and a bureaucracy that rivals our communist neighbors.

Korea ranks 33rd on the Economic Freedom of the World rankings, but the rankings, for Korea, are a little skewed, since Korean ranks very high in access to sound money, but dismally low in all other areas because of its restrictive trade policy, enormous size of government, high tax rates, and over regulation of credit, business and labor.

The ranking system provides an excellent tool in providing a measurement of what degree of economic freedom nations in the world enjoy.

According to the rankings, the very cornerstone of economic freedom is personal choice, voluntary exchange, freedom to compete, and the security of personal property.

The survey, thus, evaluates 42 data points under the five broad headings: size of government: expenditures, taxes and enterprises; legal structure and security of property; access to sound money; freedom to trade internationally; and regulation of credit labor and business.

A high level of economic freedom, according to numerous peer-review studies, promotes economic prosperity, the protection of civil and political rights, national health, and environmental consciousness.

For example, those that rank at the top quarter of the rankings have an average GDP of $26,000 per capita compared to the bottom quartile with a $3,300 GDP and life expectancy in the top quartile is 78 years and only 56 years in the bottom quartile.

Those at the top of the survey include: Australia, Canada, Hong Kong, Ireland, New Zealand, Switzerland, U.K., the U.S., and our Nordic Tiger friend Iceland. Germany ranks 18th and Japan ranks 22nd.

All of these countries have high GDPs per capita, high life expectancies, high levels of protection of civil and political liberties and respect for our environment. Those on the bottom include mainly the poorest of the poor nations and include many African nations and dictatorial regimes.

Those just outside the top of the rankings comprise many countries such as Korea that are struggling to uncage the Tiger, because of a bureaucracy and a political and business elite that rely on the cage to maintain their present livelihood.

The only way for the Tiger to be freed is for the people to demand that their nation respect economic freedom and for the people to realize that high taxes, over regulation, a bloated bureaucracy, regulatory protections for the vested elite and punitive tariffs are stifling the potential of the Korean people.

The Korean Tiger, to reach its full potential, must be freed or the tiger will simply be a mere tool of the bureaucratic, political and business elite at the expense of the people.

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SeanHayes@ipglegal.com