Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

22
International Stock Returns and Real Exchange Rates

VICTOR A. CANTO

Theory and common experience postulate that differences in domestic economic policies across countries will have a differential impact on national economies. It would seem only natural that differences in domestic economic policies would also elicit corresponding responses on domestic equity values. When a country's tax rates fall relative to the tax rates of other countries, it is likely to experience an acceleration of its economic growth. (Tax rates are broadly defined here to include any distortions generated by national economic policies.) Due to the connection between domestic economic policies (e.g., tax rates) and economic performance, the values of assets located in countries that are altering their policies will fluctuate in a predictable direction. Assets will tend to become more valuable in countries that are cutting tax rates while tax-rate increases will tend to depress asset values.

Consider two identical steel mills, one located in northern Minnesota and the other located just across the border in Canada. If both steel mills sell identical products in the U.S. market, competition will force the mills to sell their products at approximately the same price. Given this situation, consider what would happen if Canada does what it did several years ago: increased tax rates while the United States lowered tax rates. Because the steel market is highly competitive, the Canadian company would not be able pass the tax hike on in the form of higher prices.

Initially at least, the Canadian steel mill would have to absorb all or part of the tax hike through lower after-tax profits. This drop in profits would be reflected

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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