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It is a safe generalization that no nation should increase the
cost of raising capital except for compelling reasons. The lower the
cost of capital to a nation's entrepreneurs, the more that will be
purchased. When further units of capital are added to a fixed
number of units of other factors of production, the return to those other factors is increased. For example, hypothesize two complementary
factors of production that jointly produce products. The
first factor is capital, domestic and foreign. We assume it to be
extremely mobile. The second factor, domestic labor, we assume
to be fixed in amount. Governmental measures that reduce the
cost of capital will increase the return to labor as each additional
unit of capital purchased competes for the fixed units of labor.
Governmental measures that increase the cost of capital will in
turn diminish the return to labor.
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