Fiscal Freedom in Transition Economies and the OECD: A Comparative Study

Abstract

Each year the Heritage Foundation and The Wall Street Journal publish the Index of Economic Freedom. This major study compiles economic data on more than 150 countries. The compilers divide the data into ten categories, ranging from business freedom to labor freedom. One of the ten categories is fiscal freedom. The variables for fiscal freedom include individual income and corporate income taxation and tax revenues as a percentage of GDP. These three variables are weighted equally. The range for each variable is 0 to 100. Table 1 shows the extent of fiscal freedom for the transition economies that were included in the study. The figures are for the 2007 study. The perfect score is 100. The scoring of fiscal freedom is computed using a quadratic cost function where each component is converted to a 100-point scale, using the following equation: FFij = 100 - 200(Componentij)2 where FFij represents fiscal freedom in country i for component j and Componentij represents the raw percentage value, which is between 0 and 1, in country i for component j. The present study analyzes the scores and compares them between countries and between years for 28 transition countries. A comparison is also made with OECD countries to determine how well or how poorly transition economies are doing in the total scheme of things.