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Like those in political control in this country. It is often decried that the U.S. tax system encourages U.S. corporations to structure their operations so that profits are “shifted” to low-tax foreign locales such as Ireland, the Cayman Islands, etc.

The economic saviors have vowed to eliminate any tax incentive to further offshoring. Now ignore the fact that foreigners gain from our current policies. If the goal of such protectionist election rhetoric was to expand the employment opportunities of American workers by altering current policy, what options are in play? Remember, the problem is that U.S. companies are doing whatever they can to avoid paying “oppressive” taxes, and so therefore ship operations and profits overseas. Are there not two basic options for dealing with this?

  1. “Ending tax breaks for companies that move jobs offshore” – which is the favored policy of the incoming saviors. This is nothing more than forked tongue language to “find these profits, confiscate them, and raise taxes on businesses.”
  2. Reduce the tax burden on companies that operate here in America.

In other words, to make companies expand operations here, you can either INCREASE the costs of operating abroad, or DECREASE the costs of operating here at home. If you are only concerned about maximizing the number of people employed by American firms, which option makes more sense? If you focus only on substitution effects (that which is seen), you can argue that both increase the relative cost of doing things overseas, so each should increase employment here. But you should real a little Bastiat. What you don’t see as clearly is that each of these has vastly different scale effects. In other words, one program seeks to increase the overall cost and tax burden on American companies and the other seeks to reduce the overall cost and tax burden on American companies. What the scale effect tells us is that when companies have more resources, they are able to expand employment of all factors of production, including American workers, and when they have fewer resources, they actually restrict the employment of all factors of production.

Which would you pick if you actually cared about the well being of American workers and were not pandering to the economically illiterate general public or economically literate special interests? Reducing tax breaks is equivalent to saying “we will raise taxes.” People wonder why I am so cynical, but that is the wrong accusation. This is not cynical, this is simply explaining how things are. I might rightly ask others HOW they can continue to be so optimistic in light of the overwhelming buffet of outright nonsense that gets spread before them at each and every meal.

One Response to “Suppose I Support Protectionism”

  1. Michael says:

    “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” — Adam Smith (read it in a competitor’s blog today)

    I think I recall that they had this same discussion in the late 20’s and early 30’s. Two guys, Smoot and Hawley, had the answer, if I recall correctly.

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