Thursday, November 11, 2010

How tax can "crowd in" private investment

There has long been an idea fashionable in economic circles that higher taxes and government spending, or higher borrowing, can "crowd out" private investment - that is, if the government raises taxes in the short or long term, this reduces private consumption. Well, this has surely happened in some cases. But this, from the latest African Economic Outlook, provides a refreshing alternative view:
"Every effort should thus be made to ensure that aid does not “crowd out”, or discourage, domestic resource mobilisation, in general, and public resource mobilisation, in particular.

Yet, with so much of Africa’s private savings channelled away from productive private investment, or fleeing the continent, the risk of crowding out private savings is relatively limited. Public resource mobilisation actually allows a greater share of savings to remain on the continent and be spent on economic development. One of the dividends of effective tax systems is thus greater ownership of the development process, whereby the government shapes an environment that is more conducive to foreign and domestic private investment, sustainable use of debt and effective use of ODA."
So public investment in roads, education and so on, can lead to a more attractive investment environment, which stimulates private investment and economic activity, and curbs illicit financial outflows, among other things. Get your tax system right, and locals keep more of their money at home. It stands to reason, really.


Blogger Robin Smith said...

I think you’ll find that public capital works, a great thing, no matter how funded, and unless misadventures, always add to the value of locations. Yes they have given employment for a short while. But the value of land, manifest as rent or house price, will have risen far more and to all intents, forever.

These good schemes will always increase rent in the same way does a subsidy on the land, such as housing benefit or council tax benefit. I’m not saying I disagree with benefits or public works. I am saying what is there for all to see, plain and simple.

Now, if rents have increased, but are still collected privately by land owners, what do you think will happen? You will have to pay more to employ labour. Labour will have to move out toward the margin to live. Life for labour will get harder in proportion.

Under free conditions, something that has never existed, I believe you are correct. Under present monopoly private state conditions, work and production will have suffered and be lower in proportion to what it could have been.

To reach free conditions yes the correct tax system must be put in place. But that is a system that does not tax production and does tax rent.

8:32 am  

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