Economic Freedom, Regulatory Quality, Taxation, and Living Standards

Using panel data for OECD nations for the period 2003-2009, the fixed-effects estimations in this study all provide strong support for the three central hypotheses considered here, namely: (1) the standard of living in a nation, measured in this study as the level of purchasing-power-parity adjusted per capita real GDP in the nation, depends directly upon the overall economic freedom index, presumably at least in part due to the ability of increased economic freedom to elevate the level of economic activity through incentives to work, invest, save, hire/dismiss, make market-based business decisions, and take risk and engage in risk-reward economic behaviors in a market-based economy; (2) the living standard depends directly on the index of regulatory quality, because high quality regulation interferes less with the efficient functioning of firms’ decision-making processes in a market-based economy and contributes less to firms’ production costs, and (3) the standard of living is a decreasing function of the tax burden, expressed as a percent of GDP because higher tax burdens reduce the growth rate of disposable income and thereby limit the growth rate of the ability to purchase new goods and services and hence reduce/restrict the level of economic activity.