Shortsighted Tax

March 23, 1964

On March 5, the House passed by 238 to 142 the Administration’s bill imposing a tax on the purchase of foreign stocks and bonds by Americans. It was a sad day for freedom of international investment. From the standpoint of the long-run national interest, it would be hard to imagine a more shortsighted measure.

The bill was passed ostensibly as a cure for the “deficit”—the net outflow of our dollars and gold—in our international balance of payments. Since the end of 1957, this deficit has been running at an average rate in excess of $3 billion a year, and has reached a total of more than $18 billion.

The cause of it has been our government’s own policies. For 30 years, with minor intermissions, we have been following a policy of inflation. The cost of living has more than doubled. Since the end of 1939 the supply of dollars has been more than quadrupled. Since the end of 1957 our active money supply has been increased 14 percent. When we count time deposits, our money supply since the end of 1957 has been increased nearly 40 percent. During this period our government has granted more than $24 billion, or $4 billion a year, in foreign aid. We have run a cumulative deficit in the last six fiscal years of nearly $38 billion, or some $6.5 billion a year.

BLAMING SOMEONE ELSE

On top of all this our monetary authorities have deliberately been holding down both short-term and long-term interest rates. This has been done “to encourage employment and economic growth,” but its effect is to discourage foreigners from investing here and to encourage Americans to invest abroad.

But under no condition will the Administration admit that the deficit in our balance of payments is the result of its own policies. It is determined to blame something or someone else. So it has decided to blame foreign investment and to penalize Americans for buying foreign securities.

Its decision to pick on the purchase of foreign securities as the scapegoat is purely arbitrary. If foreign lending and investment must be the villain, why not tax or forbid short-term bank loans abroad, or direct investments in new plants? Out of scores of major items in the international balance sheet that cause a net outflow of funds the most obvious is foreign aid, which has been running at some $4 billion a year compared with the total annual payments deficit of only $3 billion. The next most likely candidates are “luxury” imports of all sorts, from French perfumes to German cars. Or foreign pleasure travel by Americans.

ONLY TEMPORARY?

Instead, the Administration has pounced on the least plausible item. In the five years 1958 to 1962 the aggregate net outflow of $16.6 billion for new foreign investment was offset by $15.4 billion of income from previous investment. Even Secretary Dillon concedes: “In the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” At best, then, the tax is shortsighted. When we give away foreign aid we get no money back. In the long run reducing foreign investments must mean a corresponding reduction in our exports.

We have succeeded only in the last 30 years in making the U.S. the financial center of the world. Why kick this national asset away?

The proposed tax is being officially urged “only as a temporary measure to meet our problem pending more fundamental solutions.” But no fundamental solutions are being considered. Such solutions would be to balance our budget, to halt our inflation, and to permit our interest rates to go to levels that would halt or even reverse the pressure for lending or investment abroad. Instead the Administration is cutting taxes, planning continued huge deficits, and insisting that money be kept cheap.

The proposed tax, therefore, will not cure anything. If the situation grows worse, the Administration will look for other scapegoats—for example, foreign travel—to blame, tax, and control. And if foreigners suspect this intention, the foreign-investment tax will have exactly the opposite of its desired effect.