Andrew Wilkow and I had an interesting discussion on his show Thursday about the global flight of capital. I want to address this on the blog and explain why it’s relevant to all of us.
It’s very simple. People flee persecution, and so does money. It finds its way to places where it is less likely to be confiscated. Money doesn’t like political and social risk, and it likes its privacy.
Historically, Switzerland has scored well on all three fronts in terms of foreign capital—taxation, risk, and privacy. Recently, however, the US and other European governments have threatened to sue Swiss banks for allegedly helping wealthy clients avoid taxation in their host countries. To avoid legal battles, these banks have agreed to share their financial information with the host governments…so much for privacy. Moreover, Switzerland is slated to raise taxes on foreigners in 2016. This is where Singapore comes in.
While Singapore has serious issues with certain personal liberty, it’s an attractive place for commerce and foreign capital. Singapore’s highest income tax rate is 20%. Its highest corporate rate is 17%. There are no tax on capital gains and no death taxes.
Many refer to Singapore as the “Switzerland of Asia.” Indeed, banks in Singapore are enjoying an influx of capital not only from individuals in Asian countries in like China, Indonesia and Malaysia, but also from those in the West. The Swiss still hold about a third of the funds controlled by wealth management firms, but that percentage is declining. Singapore’s share of the wealth management pie is still far behind Switzerland, but the nation is on track to become the new Switzerland for the entire world in the next decade.
There is a lesson here. Creating a less friendly environment for capital will cost the Swiss dearly. Even with higher tax rates, government receipts will likely decline over the long term as money seeks greener pastures. Singapore and other capital-friendly nations will reap the benefits. All things equal, capital always finds the best returns.
On a global level, Marxists campaign for global taxes and other regulations because they would restrict the ability of nations like Singapore to develop more attractive policies. You can only avoid a global tax if you leave the globe. From an American perspective, what we are witnessing in capital flight is further evidence that higher taxes and regulations not only stymie business activity but also fail to raise the revenue politicians seek in the first place. As long as individuals and firms are relatively free to make their own decisions, they will conduct their affairs in the most competitive nations. The U.S. could become the new Switzerland with the right policies, but we have a long way to go.