Why Capital Wants

In April 1961, President Kenne­dy presented to Congress a mes­sage relative to our federal tax system proposing, among other things, the taxing of income earned on American investments in certain foreign countries before such income is brought into the United States. It was further pro­posed to tax earnings on foreign investments to assure that the tax paid to foreign countries plus the U. S. tax would bring the total up to the 52 per cent corporate tax rate applicable to earnings of com­panies operating within the United States. "These proposals," it was argued, "along with more detailed and technical changes needed to improve the taxation of foreign income, are expected to reduce substantially our balance-­of-payments deficit and to increase revenues by at least $250 million per year."

The "problem" for which the President’s message proposes a "solution," is that at least some foreign countries have less burdensome taxes on industrial earn­ings than has the government of the United States. To the extent that this might attract investment capital out of the United States, the tax gatherers in Washington are inclined to look upon it as "un­fair competition," about which something ought to be done.

The United States government, of course, is not authorized to es­tablish and enforce the tax rates of other countries in order to raise them up to the U. S. level. But the new proposals would tend to produce that result.

If another government had of­fered low tax rates to afford op­portunity for profitable invest­ment, that government would scarcely welcome a move by the United States to siphon off up to 52 per cent of any profits produced by such investment—an act of interference in the internal affairs of their country. Such ac­tion, to nullify foreign tax incen­tives, undoubtedly would dampen the enthusiasm of many American enterprisers who might other­wise look abroad for opportuni­ties. And certainly, few foreign tax gatherers would be so foolish as to let the U. S. government skim off taxes they might just as well levy and retain themselves; so their tax rates on earnings by American investors would almost surely and automatically be raised to match the 52 per cent rate pro­posed by the United States.

Obviously, there is no founda­tion for any hope that these for­eign tax proposals of the Presi­dent would bring additional rev­enue to Washington. They would simply shut out certain opportuni­ties for the development of the economies of foreign countries through free enterprise, without opening up to private investors any new possibilities for profit either at home or abroad. This, in turn, would afford new excuses for taxing United States industries and citizens to support the gov­ernment-to-government programs of foreign aid that have done so much to stimulate government ownership and socialism instead of private enterprise in other coun­tries.

Investment for Profit

Consider next the effect the President’s tax proposals might have on the U. S. balance-of-pay­ments deficit. It is doubtless true that heavier taxation of earnings of American investors in foreign countries would tend to discourage an outflow of capital. But private investors rarely invest abroad, or anywhere else, without the expec­tation of ultimately getting back more than they put out. And the history of foreign investments af­fords abundant proof of the favor­able effect of such action on the American balance-of-payments.

As Professor Sennholz explained in his "Monetary Crossroads" in the December 1960 issue of THE FREEMAN, the build-up of foreign balances and the drain on U. S. gold stocks in recent years is the inevitable consequence of deficit spending and credit expansion by the American welfare state. In­flationary practices in the United States have finally outrun the in­flationary practices of many other countries, until this country no longer affords the one best market in which to buy goods or services. This is why foreigners prefer our gold to our goods and why Ameri­can savers turn increasingly to in­vestment opportunities outside their own country. It is precisely the same reason why East Ger­mans and others try to escape the welfare state beyond the Iron Curtain to comparative freedom in the West.

What must the world think, then, if the government of the United States has to erect a bar­rier to keep American capitalists and investors from free enterprise opportunities abroad? Is any further proof needed of the bank­ruptcy of the New Deal-New Frontier philosophy of taxing in­dividuals in order that the govern­ment may spend more?

The road to the welfare state is paved with the best of intentions. If prices of farm products seem depressed and farm incomes de­cline so that other employment op­portunities appear more attrac­tive than farming, grant price supports and other subsidies to the farmers! If American manufac­turers and processors are faced with stiff competition from more efficient foreign operators, grant higher tariff protection, erect more stringent import quotas, and place other barriers against foreign goods and services! If la­bor organizers have priced the services of their members higher than a free market can bear, grant unemployment benefits and other relief measures to the hapless victims! If changing circumstan­ces threaten to make a ghost town of a formerly prosperous com­munity, try to build it back and maintain the status quo through urban renewal subsidies! If in­dividuals fail to make provision for rainy days and later years of reduced productivity, give them social security and old age assis­tance and "free" medical care! If unwed mothers and roving fathers leave dependent children, subsi­dize them! If parents fail to pro­vide the education their children ought to have, give state and fed­eral aid to build schools and to hire administrators and teachers! If housing costs rise, impose rent controls and provide public hous­ing!

The Price We Pay

The often neglected aspect of the good intentions of the welfare state is the cost of all this sub­sidy and so-called security. Some­one has to pay, and it requires an ever-expanding police force just to collect the taxes. The creative and productive members of society are the ones from whom the rev­enues of government have to be drawn; there is no other source of goods and services. But to reck­lessly tax the fruits of a person’s labor is a disservice to that per­son. To take away the earnings from a business is to leave it un­profitable and unattractive and to set it up for another of the fail­ures that the government will be importuned to bail out. The high­er the rate of taxation upon the most productive, the less their in­centive to keep on producing at an extraordinary pace. This is why growth becomes such an aggravating problem in the welfare state, and why it appears that government spending is the only way to achieve future growth and productivity. And this is why a welfare government can’t stand to see any potential source of reve­nue leave the country for more at­tractive opportunities abroad.

A few domestic examples might help explain how tax burdens af­fect the movement of capital. Rent control, for instance, amounts to a form of taxation against owners of rental housing. The force of government is used to withhold from landlords rental income they might otherwise expect. It is fair­ly well understood (except per­haps in New York City) that the effect of such rent control is to chase capital away from housing and into better investment oppor­tunities. But tenants want more of the price-controlled housing, so they appeal to government to stop that flight of capital and build dwellings with it.

Or, consider the crowded and high-tax areas "downtown" in some of the larger cities. Capital rebels—heads for the suburbs and open spaces—not for space so much as for tax relief. Then comes the anguished cry to stop that flight of capital and divert it to urban renewal—via further taxa­tion.

Sometimes a state government, in its generosity with taxpayers’ money, offers extra welfare bene­fits and other attractions and runs the tax rate up until businesses pull out and capital flees to other states for investment opportunity. This leaves a "depressed area" which then appeals for federal aid.

So it goes, whether domestical­ly or internationally: tax business earnings severely, and capital will try to escape. Interfere with pro­duction and exchange, disrupt a market sufficiently, and the result will be balance-of-payments prob­lems. Condone a closed shop, or a closed society in any other respect, and each successive step leads on to some further restraint of trade and regulation of people and their lives. The more "advanced" the welfare state, the less freedom can it tolerate among its own citi­zens, and finally among outsiders. This is why our federal govern­ment wants to foreclose on more at­tractive profit opportunities in foreign countries. It’s also why Mr. Khrushchev would like to bury freedom wherever he finds it in the world.

If the people of the United States want to correct internation­al exchange problems and balance-­of-payments problems, why not try freedom? It attracts capital. And it begins at home.