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July 5th, 2011 2:26 pm
How to Solve Investment Outflow

David Malpass and Stephen Moore have a great column at the Wall Street Journal about investment money flowing out from the United States rather than into the U.S. from abroad:

Americans are taking their investment dollars abroad at a faster pace than foreigners are bringing capital to these shores. In 2010, for example, U.S. investment abroad was $351 billion—$115 billion higher than foreign investment here. Economic recoveries are periods when investment capital usually surges into a country, but since this weakling rebound began in the middle of 2009 the U.S. has lost more than $200 billion in investment capital. That is the equivalent of about two million jobs that don’t exist on these shores and are now located in places like China, Germany and India.

One cause of this bad situation is federal over-spending:

Today, foreigners are financing food stamps and the next bridge to nowhere while Americans are building state-of-the-art production systems abroad. This is the real pernicious “crowding out effect” of the federal government’s borrowing.

But another big cause is high corporate income taxes, which make investment here far less rewarding:

Capital flows to where it is most highly rewarded, and low marginal tax rates on the returns to capital and business income create a gravitational pull on global funds.

Even former President Clinton says so:

“We’ve got an uncompetitive rate. We tax at 35 percent of income, although we only take about 23 percent. So we should cut the rate to 25 percent, or whatever’s competitive, and eliminate a lot of the deductions so that we still get a fair amount, and there’s not so much variance in what the corporations pay.”

But President Clinton doesn’t go far enough. For a long, long time I’ve argued that the corporate income tax should be eliminated entirely.
The problem, in short, is that nobody has any incentive to invest those dollars, or to lend them for investment, here in the United States. Eliminate the corporate income tax and, immediately, every American corporation becomes more profitable by as much as a third. All the pensioners who own stock in those companies get richer — immediately. All the workers with company stock-share plans get richer. Prices will drop as companies can make more money, net, even with lower prices. Companies also would save billions of dollars spent in tax-form preparation, and in time spent figuring out tax-avoidance schemes. The economy will get more efficient when tax considerations no longer distort decision-making.

Real interest rates will drop due to market forces (rather than through panicky fiats from the Federal Reserve Board). And, wonder of wonders, companies that have been moving operations overseas will now reverse course and race back within our shores — bringing hundreds of thousands of jobs with them. All of those complaints about “outsourcing” will end, virtually overnight.

That’s why this is one “pro-corporate” reform that also is overwhelmingly pro-labor. The Congressional Budget Office has noted that “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.”

At last measurement, the corporate income tax was taking in $195 billion per year. I argue that a large chunk of that would be recovered, even without the dynamic growth effects of the tax cuts, via near-immediate growth in dividends and capital gains and therefore in the taxes on those dividends and capital gains. I further argue that, under any reasonably dynamic analysis, especially one which takes into account the tremendous growth in tax revenues after prior cuts in taxes on investments, the economy won’t actually lose any money at all — but the whole economy will be stronger, jobs will be more plentiful, and even the ethics of Washington will be improved:

Indeed, it is all the mucking around in the weeds of the tax code and in the pig trough of spending earmarks that leads otherwise well-meaning congressmen to become favor-dispensers rather than statesmen. Without a corporate income tax to fool with constantly, a huge chunk of the grounds for favor-dispensation will be taken away.

So, again, eliminate the federal corporate income tax entirely. Doing so would go a long way toward completely ending the recession.

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