Friday, June 15, 2007

In A Free Market, Money Is Free To Leave

From Richard Rahn's article on TCSDaily about the international trade connections between the US and Europe:

This past year more than one trillion dollars flowed between the U.S. and the EU. The EU now accounts for 21 percent of U.S. merchandise exports and 19 percent of U.S. merchandise imports, and about 34 percent of U.S. services exports and 37 percent of U.S. services imports.

The U.S. is not only the largest recipient of foreign direct investment, but far and away the world's largest investor elsewhere. Of the more than two trillion dollars the U.S. has invested directly abroad, a little more than half ($1.1 trillion) is invested in Europe. Europeans account for 70 percent ($1.2 trillion) of the direct investment in the U.S.

It is statistics like this that highlight the stupidity of protectionist trade policy. The US and Europe need each other, and any effort to "protect" the citizens of one at the expense of the other can only hurt both sides. Both sides of the Atlantic rely on trade, and need to realize that it is impossible to keep resources and capital locked up in a free economy. No law compatible with a free society can force local investment, or prevent those with the means from fleeing the country to someplace that offers them better opportunities. Such measure unfailingly do more harm than good, raising prices and unemployment for the benefit of politically connected industries.

Already, Europeans are fleeing their countries for the lower taxes and greater economic freedoms of the US. However, this is not a one way street. While US is a more attractive option for many individuals, the same can not be said for corporations. As Rahn notes, the EU has an average maximum corporate income tax rate of 25 percent (with some members as low as 10 percent) while the US average is 40 percent. When France and Germany both have lower taxes than the US, it is obvious something has changed. As the regulatory burden in the US rises (carbon credits, Boxly, etc.) the benefits of the lower taxes abroad become more significant.

This brings us to the flip-side of my earlier statement that laws can't force capital to stay. Though laws can't force it, they can be crafted to attract investment. If we want the US to continue to be competitive in a global market place, we should cut our corporate tax rates. I would advocate cutting them to zero. Corporations cannot pay taxes, since all costs are just passed on to the investors or consumers. If we cut corporate taxes, the money will still be taxed when it flows out to investors and employees, but not when used for reinvestment within the company. As Eastern Europe continues to cut taxes, the US cannot ignore the pressure being brought to bare as a result. If US taxes remain high, or are allowed to rise, the global markets will flow away from us, toward nations that offer a more hospitable environment.

To summarize, in a free market a nation cannot demand investment and growth, it must seduce it.


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