I heard something this week that really surprised me. On a morning talk show, I heard that private U.S. investment overseas amounted to somewhere in the neighborhood of
13.8 to 14 TRILLION dollars. I went to the Bureau of Economic Analysis website and looked up the last report they issued back in July, 2008; the actual number on their chart was 14.98 TRILLION dollars. These are dollars that are in effect, lost to America. These dollars are lost to businesses here that need capitol for expansion, and for entrepreneurs wanting to start business and industry here in America. We must find a way to entice these dollars back here to our shores where American workers, American entrepreneurs and consumers can benefit.
How can we accomplish this? How can we return these invested dollars that have been getting better returns than U.S. investments, back to our shores? The solutions are obvious. We must give incentives that are, at worst, revenue neutral to Government and that are revenue positive for the investor.
Those thousands of billions of dollars earn great returns for the investors and generate no revenue for our government in taxes, and no benefit to the vast majority of the nation. If government policy was altered to encourage those dollars back onshore, we would all benefit. The easiest way is to make any investment here more attractive than a similar investment overseas. The easiest way to do that is to change tax law to encourage investment in America. The extraordinarily high corporate tax rate, the second highest in the world, and the confiscatory rates on capitol gains drive dollars overseas, have driven dollars away from this country. What precisely should be the government’s response?
1. Eliminate any capitol gains on returned dollars that are invested here.
2. Exempt these dollars from corporate or personal tax liability on the profits.
The obvious response from many who favor the tax system as it is, would violently object to this suggestion. They would say that this is a break for the rich and that normal, average Americans would get nothing out of such a deal. I would argue that as of now, they get nothing anyway. Dollars overseas raise no revenue for the government. Although the government would be forsaking immediate gratification by taxing these dollars, they would notice an immediate change in available liquidity in the private sector as dollars entered our economy. As businesses were started or expanded, more workers would be employed and tax revenue would increase as payrolls began to increase and as commerce increases. This was seen in the 1920’s, 1960’s and in the 1980’s when tax rates were cut by the Reagan administration.
It is interesting to note :
1. The increases in the 1920’s after the income tax was re-established by constitutional amendment, The share of the tax burden paid by the individuals seen as rich (those making $50,000 and up in those days) rose drastically as rates were reduced. The share of the tax burden borne by the rich increased from 44.2 percent in 1921 to 78.4 percent in 1928. It wasn’t called the “Roaring 20’s “for nothing!
2. In the 1960’s, President Kennedy’s tax cuts increased revenue by 57 percent between 1963 and 1966, while tax collections from those earning below $50,000 rose only 11 percent. As a result, the rich saw their portion of the income tax burden climb from 11.6 percent to 15.1 percent.
3. In the Reagan years, the share of income taxes paid by the top 10 percent of earners increased by nearly 10%. The percentage climbed from 48.0 percent in 1981 to 57.2 percent in 1988. The top 1 percent of earners saw the share they pay in income taxes climb even more drastically; from 17.6 percent in 1981 to 27.5 percent by the close of 1988.
If the U.S. government implemented these sorts of tax policies, the increase in tax revenue would be demonstrable as has been seen on 3 separate occasions in the last century. These increases are by no means the only actions the government needs to engage in. Spending deficits must be brought under control, and the existing public debt must be brought down.
What must occur is a corresponding decrease in public spending in concert with the increases in revenues to conquer the debt. This would in turn, increase confidence in the U.S. economy overseas and at home. It would reduce interest rates as government would no longer be competing with the private sector for capitol. The available pool of investment capitol would increase, and investment in research and development would rise. We must do everything possible to encourage the increase reconstruction of the U.S. manufacturing base and the U.S. energy base.
We need to focus investments into areas of the country where unemployment and de-industrialization have occurred, but we must make it friendly for entrepreneurs and large businesses to start or expand in these areas, to reduce overhead, and to reduce interruptions in production and productivity. In areas where new business is desired, “Special Economic Zones” need to be established. Right to work laws need to be established to allow wages and work rules to be set by employers and individual workers. America is in a global economy, and employers need the flexibility and freedom to set and adjust wages and staffing levels without the additional burden of Union entanglements. All tax liability on capitol gains need to be waived indefinitely in these zones, and corporate income taxes need to be cut to a fraction of levels that exist today.
It has been demonstrated that if we enacted these steps, we would undoubtedly experience a financial, economic and industrial renaissance on the order of what we has in the 1950’s when we were the most prosperous nation on the planet. As countries like Communist China, and India, and other nations in the Far East and Europe rise to challenge us, we need to get our house in order now, before it is too late.