Capital Fight or Flight

09 Oct, 2012

 “If you’ve been successful, you didn’t get there on your own,” Obama stated on July 13th whilst completing a two day tour through Virginia and Pennsylvania. Obama is right; somewhere along the way, successful businesspeople have sought help, be it from a grade school teacher, their parents, or the government. We are thus indebted to those that have aided us in our success. In the case of the government, this compensation takes the form of taxes.

The age-old question– how much of our success do we truly owe in the form of taxes?—has been the epicenter of concern during the current U.S. presidential campaign period. Obama believes in taxing the wealthy to provide social services and create public sector job growth, while Romney espouses a top-down approach, which Obama has mockingly dubbed “Romney Hood.”

Across the pond, newly elected French president, Francois Hollande, has raised the income tax rate to 75% on income over 1 million euros. He believes that this will help lower the government deficit, in addition to “spreading the wealth” in a place where income inequality is growing. Sounds like a good idea, but herein lies the problem: France is only a hop, skip and a jump away from Monaco and Belgium and a slew of other countries where the tax rate is lower and the business environment is better.

That brings me to a place a little closer to home: Quebec. With Pauline Marois at the helm and plans to raise both taxes and royalties on natural resource firms underway, business leaders are on edge. Quebec’s tumultuous and unsteady political environment, growing language barriers, and now uncertain business regulation is creating fertile ground for capital flight; entrepreneurs, investors, and wealthy individuals will seek out a place where the risk-return profile for their investments, time and capital is the most attractive.

What do the United States, France, and Quebec have in common? I believe that they are presently at a crossroads; the United States, whose growth has historically been driven by innovation, entrepreneurship and private capital, is not the global powerhouse that it used to be. If the public sector captures a larger piece of the GDP pie, we can expect a slow capital drain, in addition to the brain drain that typically accompanies it. The repercussions of Hollande’s policies are already materializing, as France’s wealthiest man, Bernard Arnault, recently filed for Belgian citizenship. Quebec is not far behind; some investors and business owners will begin packing up their bags in search of a better business environment.

In the past, human and investment capital has flowed from around the world to places that represented freedom and economic opportunity. It is beginning to look like capitalism and entrepreneurship, two things that have created wealth, raised living standards, and increased individual liberty, are set to lose. How long until people pack up and leave? On the back of a debilitating recession and a weak global recovery, it is a dangerous line we are flirting with.

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