America’s Decline in Economic Freedom

Last week, Terry Miller lamented the decline of the United States in the 2011 Index of Economic Freedom (a joint project of the Heritage Foundation and The Wall Street Journal). The good news, Miller wrote, is that “One hundred and seventeen countries, mainly developing and emerging market economies, improved their scores, and the average level of economic freedom around the world improved.” However, the U.S. fell to 9th place and the UK fell to 11th overall.

But in a letter to the editor James D. Jameson, member of the Global Advisory Board of Trilantic Capital Management (and a Reason Foundation trustee), argues the U.S. rank should probably be worse:

Regarding Terry Miller’s “The U.S. Loses Ground on Economic Freedom” (op-ed, Jan. 12): For all of its methodological strength, the Index of Economic Freedom entirely leaves out one of the most treasured individual freedoms—the freedom to migrate out of one’s own country without undue interference from government. As long as a person has remained current on tax payments, the ability to leave a nation to establish citizenship elsewhere should be a sacrosanct human right. As Article 13 of the Universal Declaration of Human Rights states: “Everyone has the right to leave any country, even his own.”

In the U.S., the economic penalty for permanent expatriation is so severe that it is unduly burdensome to exercise the “right to emigrate.” If the Index were to account for this freedom (or lack thereof), there is no doubt that our country would finish even further down the list.

Under U.S. tax law, a citizen who wishes to renounce his citizenship must pay a mark-to-market exit tax. This tax treats all assets in excess of $600,000 as if they had been sold, and thus liable for immediate payment of capital gains taxes. There is also a 10-year reporting requirement to the IRS, post expatriation.

Other countries have found more fair ways to deal with this issue. Ireland taxes its expatriating citizens only when they actually sell their assets within three years of emigrating. Denmark gives its former citizens the option to pay when they sell their assets anytime in the future. Switzerland avoids a mark-to-market exit tax and requires only that a citizen be current on his existing taxes when he leaves.

Adding this metric would enhance an otherwise interesting set of measurements on economic freedom. It would also further demonstrate our eroding economic freedom.

James D. Jameson

Rancho Santa Fe, Calif.

See here for the piece at WSJ.