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What Happened When These “Neoliberal” European Countries Tried Low Taxes and Low Regulation

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. On property rights, they rank third, twelfth on the burden of government regulation on businesses, and tenth on the effects of taxation on work incentives (they rank highly on the rest of the metrics I’ve used. I’m not cherry-picking data). They sit just in front of Luxembourg on the Tax Competitiveness Index, at fourth place.

The country is also known for its fiscal discipline; in 2001, 85 percent of Swiss voters voted for a “debt brake,” which essentially requires the government to spend money in concordance with revenue growth. Since the law went into effect in 2003, debt as a percentage of the Swiss economy has declined from 60 percent to 41 percent today.

Switzerland’s emphasis on direct democracy means that government money must be spent efficiently and prudently. One study found that direct democratization in the Swiss cantons (the equivalent of states or congressional districts) lowered welfare spending by 19 percent on average. Swiss voters clearly have a level of rationality which most politicians elsewhere would be terrified of. For instance, in a 2012 referendum, two-thirds of voters rejected a proposal to extend the country’s mandated annual leave, which “could have added 6 billion Swiss francs (5 billion euros, $6.52 billion) to employers’ labor costs, according to the Swiss Union of Arts and Crafts (SGV), which represents around 300,000 businesses.”

Switzerland’s overall tax take (28.5 percent of GDP) is one of the lowest in the OECD, and its social expenditure is 16.7 percent, far below its partners.

Yet, far from what the socialist economic model would predict, the poorest 10 percent in Switzerland are the third-richest in Europe.

Similarly to Luxembourg, Swiss labor productivity is incredibly high; the third-highest in the world. Taxes and red tape are low and, being the most globalized country on earth, foreign capital, technology, and investment have easy access to Swiss markets. That being said, the Swiss economy has been stagnating in recent years. In 2020, unemployment reached an all-time high—an unbearable 4.85 percent. Clearly, this suggests that low taxes and flexible labor market regulation can mitigate the impact of recession/economic stagnation.

Ireland

Ireland was not always an eager free market economy. In 1970, ridden by deep political and religious conflict, Ireland had a rating of 6.55 on the Fraser Institute’s Index of Economic Freedom, at an unimpressive nineteenth place. Thus, in 1980 Ireland’s per capita income was lower than that of every nameable Western European country; its unemployment rate was above 12 percent; inflation roared away at 20 percent.

However, the government began to make reforms: taxes and spending were cut, and since 1980, Ireland’s economic freedom rating has risen by 22 percent. Today, Ireland is famous for its 12.5 percent corporate tax rate and its attractiveness to businesses. Tax take is only 22.7 percent of the Irish economy, and social expenditure is a miniscule 13.4 percent. While below the two other countries we have examined, Ireland still ranks highly in terms of protections of property rights, regulatory flexibility, and tax rates on profits.

Many argue that Ireland’s prosperity arose only due to vast welfare transfers from the European Union. However, one study indicates that this position is flawed. Firstly, it points out, these transfers subsidized farming businesses. While they raised the incomes of rural communities, they discouraged migration to urban areas, where such people would inevitably have been more productive. Hence, the transfers were an impediment, not a boon, to economic growth. Secondly, the study points out, while growth rates in Ireland have increased, EU subsidies have actually diminished:

Ireland began receiving subsidies after joining the European community in 1973. Net receipts from the EU averaged 3 percent of GDP during the period of rapid growth (1995–2000), but during the low growth period (1973–1986) they averaged 4 percent of GDP. In absolute terms, net receipts were at about the same level in 2001 as they were in 1985. Throughout the 1990s Ireland’s payments to the EU budget steadily increased from 359 million Euro in 1990, to 1,527 million Euro in 2000. Yet, in 2000, the receipts in from the EU were 2,488 million Euro, less than the 1991 level of 2,798 million Euro.

Thirdly, the study indicates, if subsidies could explain Ireland’s growth spurt since the 1990s, we’d expect other countries which also receive significant EU payments to exhibit similar levels of prosperity. This, however, is simply not the case: “EU Structural and Cohesion Funds represented 4 percent of Greek, 2.3 percent of Spanish, and 3.8 percent of Portuguese GDP. None of these countries achieved anywhere near the rate of growth the Irish economy experienced. Spain averaged 2.5 percent GDP growth, while Portugal averaged 2.6 and Greece averaged only 2.2 percent growth from 1990–2000.” Thus, free markets, not EU investment, spurred Ireland’s prosperity.

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. For example, one study (p. 34) found that absolute poverty declined from 50 percent in 1993 to 20 percent in 2000 (a reduction more substantial than in every Nordic country). To reduce the poverty rate by 60 percent in seven short years is truly impressive. According to the Pew Research Center, between 1990 and 2010, the incomes of the low-income category rose by 73 percent (overall, median income has grown by 70 percent). This is further corroborated by Eurostat data, for since 2011 alone, the incomes of the poorest 10 percent of Irelanders have risen by a third.

Conclusion

Progressives use the Nordic countries as examples of successful socialist systems. While this simply isn’t the case, free marketers ought to use these three countries—Luxembourg, Switzerland, and Ireland—to show that it is not necessarily welfare spending and redistribution which raise the standing of the poorest. Rather, it is economic growth, productivity gains, entrepreneurship, and property rights which enrich the poorest among us.