Capital control


Capital control

In economics, capital control is the monetary policy device that a country's government (i.e., sovereign power) uses to regulate the flows into and out of a country's capital account, i.e., the flows of investment-oriented money into and out of a country or currency. The decade since the Asian Currency Crisis in 1997-1998 has rekindled debate over the wisdom of developing markets having capital controls. As globalization advanced with the formalization of the World Trade Organization and Uruguay Round of General Agreement on Tariffs and Trade (GATT), developing countries were urged by the International Monetary Fund and others to liberalize their capital controlled environments.

As it became clear that countries doing this, including Malaysia, Thailand and Mexico, essentially ceded control of their economies to external forces, namely international capital movements, hot money and capital flight; and countries that did not, like China and India, retained control and were not nearly as vulnerable to the volatility of international capital movement, some argued that capital controls were advisable for smaller economies to use, and to transition away from them only over long, general evolutionary timelines. Malaysia is an example of a country that switched regimes, from open in the late 1990s, to closed. Economists supporting capital controls in certain cases were not only from the left, but also liberal economists like Jagdish Bhagwati [Jagdish Bhagwati (2004) In defense of Globalization. Oxford University Press; pp.199-207] and news publications like The Economist [The Economist (2003) [http://www.economist.com/opinion/displaystory.cfm?story_id=E1_TSQRRJD A place for capital controls] ] .

Capital controls by nation

* Nazi Germany
**Nazi Germany attempted to prevent capital from leaving by imposing the Reichsfluchtsteur "Reich Flight Tax" or "Escape Tax". [ [http://www.edwardvictor.com/Holocaust/expropriation_main.htm Expropriation (Aryanization) of Jewish Property] ]

*United States
**The United States is one of the few nations to tax citizens irrespective of where in the world they live. If an American attempts to take capital out of the United States they are expected to still pay taxes to the US government on any income or rents it produces even if that American resides permanently outside the USA.cite web|url=http://www.economist.com/finance/displaystory.cfm?story_id=11554721 |title=America's Berlin Wall |publisher="The Economist" |date=2008-06-12 |accessdate=2008-08-26]
**In 2008 the United States Congress enacted the Heroes Earnings Assistance and Relief Tax (HEART) act, which President George W. Bush signed into law. One consequence of this act is that any person that renounces their US citizenship, for example so as not to be burdened with paying US taxes when they no longer live in or receive any benefits from the USA, will have to pay taxes on any unrealized capital gains they had on any property they owned. As the US has a progressive tax regime this would mean the individual would most likely be taxed at the highest possible rate, capital gains realized over a lifetime would be taxed at a lower rate as the amount realized each year would be a smaller amount and the payments would be in the future and therefore worth less due to compounding. In effect the person would have to have to sell a portion of their property before being able to renounce their citizenship.

Free movement of capital and payments

External links

*Christopher J. Neely, [http://research.stlouisfed.org/publications/review/99/11/9911cn.pdf An introduction to capital controls] (PDF), "Federal Reserve Bank of St. Louis Review", November/December 1999, pp. 13-30
*James Oliver, [http://www.uiowa.edu/ifdebook/faq/faq_docs/capital_controls.shtml What are Capital Controls?] , University of Iowa Center for International Finance & Development
*Ethan Kaplan, Dani Rodrik (2001) [http://ksghome.harvard.edu/~drodrik/Malaysia%20controls.PDF Did the Malaysian capital controls work? NBER Working Paper No. 8142]

References


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