Property Investment Research - Is the USA still economically sound?
Published on 2nd May 2008 by Don Ross
The United States scores higher than the world average in eight areas and 30-40 percentage points higher in five: business freedom, investment freedom, financial freedom, property rights, and freedom from corruption. Foreign investment is subject to the same rules as domestic capital. Financial markets are open to foreign competition and are the world's most dynamic and modern. The judiciary is independent and of high quality.
America could do better in its scores for fiscal freedom and government size, which are 7 and 8 points below average, respectively. Total government spending equals more than a third of GDP. Corporate and personal taxes are moderately high and are getting relatively higher as other advanced economies reform with lower tax rates.
Background:
The United States is the world's dominant economy. With over two centuries of a fundamentally free, constitutionally protected economy, America benefits from its massive scale and intrastate competition. Trade barriers among the 50 states are unconstitutional, for example, allowing for the free movement of goods and labor. However, there have been troubling developments in recent years. Property rights have been threatened by the Supreme Court's 2005 ruling in Kelo v. City of New London. Congress has been active in raising the minimum wage, whichhas harmed labor freedom, but inactive in lowering corporate taxrates, unlike most other advanced economies. Most alarming, America's major political partieshave been unwilling to curb growing government expenditures, particularly public entitlements.
The overall freedom to start, operate, and close a business is strongly protected by the U.S. regulatory environment. Starting a business takes an average of six days, compared to the world average of 43 days. Obtaining a business license takes much less than the world average of 19 procedures and 234 days. Bankruptcy proceedings are very easy and straightforward.
The weighted average U.S. tariff rate was 1.6 percent in 2005. High out-of-quota tariffs, anti-dumping provisions, countervailing duties, some export controls, service market access restrictions, and export promotion programs and subsidies add to the cost of trade. An additional 10 percentage points is deducted from the U.S. trade freedom score to account for non-tariff barriers.
U.S. tax rates are burdensome. Both the top income tax rate and the top corporate tax rate are 35 percent. Other taxes include a property tax, an estate tax, and excise taxes. In the most recent year, overall tax revenue as a percentage of GDP was 26.8 percent.
Total government expenditures, including consumption and transfer payments, are high. Government spending has been rising and in the most recent year equaled 36.6 percent of GDP.
Inflation is moderate, averaging 3.2 percent between 2004 and 2006. Relatively moderate and unstable prices explain most of the monetary freedom score. Price controls apply to some regulated monopolies; certain states and localities control residential rents; Hawaii caps gasoline prices; and the government influences prices through subsidies, particularly for the agricultural sector, dairy products, and some forms of transportation. An additional 5 percentage points is deducted from the U.S. monetary freedom score to account for policies that distort domestic prices.
Foreign and domestic enterprises are legally equal, and foreign investors are not required to register with or seek approval from the federal government. Foreign investment in banking, mining, defense contracting, certain energy-related industries, fishing, shipping, communications, and aviation is restricted. The government also restricts foreign acquisitions that might impair national security. There are no controls or requirements on currency transfers, access to foreign exchange, or repatriation of profits. Purchase of real estate is unrestricted on a national level, but the purchase of agricultural land by foreign nationals or companies must be reported to the government.
The U.S. has the world's most dynamic and developed financial markets. Reform in 1999 permitted a wider range of services and eliminated barriers to entry and barriers between commercial banks, insurance companies, and securities firms. Regulations are generally straightforward and consistent with international standards, although concerns have been raised about the intrusive nature and cost of the 2002 Sarbanes-Oxley Act. The instability of the housing market in late 2006 and ongoing concern about sub-prime lending could affect financial stability. Foreign financial institutions and domestic banks are subject to the same restrictions. There were 7,549 banking and thrift institutions in mid-2005. The Federal National Mortgage Association and Federal Home Mortgage Loan Corporation account for about half of home mortgages. Foreign participation in equities and insurance is substantial and competitive.
Property rights are guaranteed. Contracts are very secure, and the judiciary is independent and of high quality. The courts recognize foreign arbitration and court rulings. Individual states' land-ownership limitations do not normally affect foreigners seeking property for commercial or manufacturing purposes. A well-developed licensing system protects patents, trademarks, and copyrights, and laws protecting intellectual property rights are strictly enforced.
Corruption is perceived as minimal. The U.S. ranks 20th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. The U.S. is a leader in fighting corruption domestically and overseas. In 1977, it became the first country to pass a law making bribery of foreign officials a crime. The corruption perceptions score apparently was influenced by a series of scandals involving both U.S. corporations as well as members of Congress in recent years, highlighting some relatively few incidents of special interests' attempts to buy more access and influence.
Don Ross
General Manager of Ward & Co, has a vast range of experience in both financial services and property development. As an international speaker he has provided the inspiration that has led to wealth creation around the globe.
