Index Explained

The Heritage Foundation is a think-tank based in Washington, DC, founded in 1973. Since 1995, Heritage has published an annual ranking of developed nations based on their level of economic freedom – or put differently, the ease of doing business in these countries.

The Economic Freedom Index is based on such variables as the rule of law doctrine, property rights, fiscal health, business freedom, tax burdens, government spending and other indicators of economic freedom in 186 countries. Based on these criteria, each country gets an overall freedom index score, which then can be ranked against other countries.

As Heritage points out, there is good reason to focus on these measures of economic freedom, since they directly correlate with a country’s growth and prosperity. The latest report notes, “The affirmative link between economic freedom and long-term development is unmistakable and robust. The higher a country’s level of economic freedom is, the higher its income per capita also is.”

The good news is that economic freedom worldwide has been inching up for the past two decades. It went from a low of 57.1 in 1996 to 60.9 today, as of the latest report. But the U.S. has been falling in the rankings since the late 1990s and precipitously in the last eight years.

U.S. Economic Freedom Index Plunged From #6 to #17

The Heritage Foundation Economic Freedom Index for 2016 was just released and the U.S. continued to fall in the rankings.  The U.S. currently ranks a dispiriting 17th on the Heritage Foundation’s Index of Economic Freedom of 186 developed nations.

What’s important to know is that the U.S. is down from 6th when President Obama took office in 2009. So in just eight years, the U.S. has plunged from 6th in the world to number 17. The question is, why?

The bad news is that it’s been on the decline in the U.S. since 2008, when it stood at 80.7. Since then, it has dropped every year but one and now measures 75.1. That’s the lowest score for the U.S. since Heritage started this index 22 years ago.

As a result, the U.S. now ranks behind Hong Kong, Singapore, New Zealand, Canada, Taiwan, the U.K., Luxembourg and the Netherlands, among others. Even Lithuania currently has more economic freedom than the U.S… The Heritage report explains:

“The substantial expansion of government’s size and scope increased regulatory and tax burdens, and the loss of confidence that has accompanied a growing perception of cronyism, elite privilege, and corruption have severely undermined America’s global competitiveness.”

In other words, the U.S. Economic Freedom Index was dragged down largely by the anti-growth war on businesses, investors and other productive elements of the economy.

Not surprisingly, the past eight years have also been characterized by historically low economic growth rates, with annual U.S. GDP growth never once hitting 3% under Obama.

Turning this around should be a priority in Washington – for both Republicans and Democrats. Faster economic growth is desperately needed, not only to create jobs and increase prosperity, but also to reduce the federal government’s huge budget deficits and mountain of debt.

Unfortunately, Democrats and the mainstream press are entirely focused on destroying the Trump administration before it has the chance to put forward any of its pro-growth proposals, including tax cuts for individuals and corporations.

If the U.S. continues to slide down the scale of economic freedom and the economy continues to struggle, the blame will rest on the shoulders of these obstructionists. Of course, the liberal mainstream media will never admit these truths, but now you know.

How Upcoming Tax Reform Proposals Could Affect Americans

Donald Trump repeatedly promised to cut income taxes for most Americans and for U.S. corporations. He also promised to simplify the U.S. tax code significantly, suggesting that his changes could put H&R Block out of business.

But tax simplification isn’t a simple task, and changing the tax code isn’t something he can do by himself. The tax law, which has thousands of sections and subsections, is just that: law. A new law, or a change to an existing one, must be passed by both houses of Congress before it is signed by the president.

The House Republican leadership released a tax reform plan last year, which remains on the table although it has yet to get much traction in Washington. Mr. Trump has said that he will work with Congress to pass what he calls the “Middle Class Tax Relief and Simplification Act,” the provisions of which he proposed in September.

In his press conference, Trump said that “tax reform is going to happen fairly quickly” but that dealing with the Affordable Care Act had to come first. He said that would happen soon.

The House tax proposal and Trump’s plan differ – for instance, on whether to limit deductions for real estate taxes and mortgage interest. The changes that may actually result are still a mystery. However, it is unlikely that changes in the tax code would affect tax returns that must be filed this year, which cover last year’s income and deductions.

Summary of Major Tax Reform Proposals Under Consideration

With the caveat that any list of forthcoming tax changes is speculative, here is a summary of some of the major items that are under discussion and that may affect your tax returns:

Income Tax Rates. The Trump plan and the House plan would cut the top rate to 33% percent from 39.6%, raise the lowest rate to 12% from 10% and collapse the number of brackets – different tax rates at different income levels – to three from seven.

Itemized Deductions. The Trump plan would cap itemized deductions at $200,000 a year for married couples filing jointly and $100,000 for single filers. To take an itemized deduction, you subtract the specific item from your income, which reduces your taxes. But under the Trump plan, the standard deduction would increase; so many people who file itemized returns now may not find it in their interest to do so in the future.

Capital Gains Tax Rates. The Trump plan does not call for lowering the rates on long-term capital gains, which now top out at 20% for the highest earners – single filers with adjusted gross incomes above $415,050, and couples with incomes above $466,950. Taxpayers in the 10% and 15% brackets pay no capital gains taxes. The House plan would lower capital gains rates.

Mortgage Interest & Real Estate Tax Deductions. The itemized-deductions cap proposed by Mr. Trump would effectively limit interest and real estate tax deductions for the owners of expensive homes – a backdoor way of curtailing them. There has been talk in Congress for years about limiting or eliminating itemized deductions for mortgage interest (interest payments on up to $1 million in mortgage debt are now deductible), usually in conjunction with raising the standard deduction, although these changes are not part of the current House plan.

Filing Status. The president’s plan would eliminate the head-of-household filing category, which gives more favorable rates to some unmarried people who can claim dependents than to single taxpayers.

Standard Deduction. Mr. Trump would increase the standard deduction to $30,000 from $12,700 for married couples and to $15,000 from $6,350 for single filers.

Personal Exemptions. Mr. Trump has also proposed doing away with exemptions for taxpayers and their dependents, which are worth $4,050 each. (An exemption is like a deduction; you can subtract the amount of the exemption from your income and cut your tax bill.) Those exemptions now begin to phase out at an adjusted gross income of $259,400 for single taxpayers and $311,300 for married couples, and disappear completely for incomes above $381,900 for single filers and $433,800 for couples.

Medical Deduction. Taxpayers who itemize can currently deduct medical expenses that amount to more than 10 percent of their adjusted gross income. That amount rose from 7.5 percent (where it remains for people over 65) as part of the Affordable Care Act. If the act is repealed, will the rate go back down? That’s uncertain.

Again, these are just highlights of the current tax reform proposals. It will be interesting to see how these proposals change and morph as the debate goes on. I’ll keep you posted.

 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com