17 July 2011

International Economics

In which I disagree with Captain Capitalism:
Arguably the single largest threat to freedom in the world is the "harmonization" of tax rates. Of course politicians like to use euphemisms so the ignorant masses can continue on watching their Lady Gaga or the latest professional sports competition, but trust me it is a threat. The reason why is if tax rates are "harmonized" then there is no incentive for business, investment or labor to go to one country versus another. And if tax rates are moved in conjunction with one another, then the governments essentially form an OPEC-like cartel ensuring that labor and capital are more or less trapped at their home country. Since there is no advantage to moving investment and labor to one place or another, governments (if working together) and implement whatever policies they want on their people because "where you going to go? Every place is the same."
Tax rates are not the only concern, or even the largest, for a company looking to build overseas. Labor costs and capital costs are larger concerns for most companies since capital and labor tend to be the largest expenses a business faces. The reason companies chartered in America build crap in China isn’t because taxes are lower in China but because labor is cheaper in China.

I’m not trying to suggest, of course, that tax rates don’t factor in to the decision to locate overseas. I’m simply saying that taxes are, for the most part, a marginal concern, which in turn means that the claim that “there is no incentive for business, investment or labor to go to one country versus another” is simply economically ignorant.

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