While foreign aid works in some situations, it has two huge problems. First, there is never enough money to go around. The second problem is that the money that does get distributed doesn’t always reach the people who need it.I like this idea. But, politically it seems like a tough sell. Tax breaks for setting up factories in other countries? Good luck with that one.
A solution to both problems would be to give tax credits to American companies that invest in qualified developing countries. A similar program that focuses on domestic poverty has been a resounding success. In 2000, Congress created a program giving businesses that invest in poor communities within the United States a tax credit equal to 39 percent of the cost of the investment. The theory was that poverty and joblessness in poor communities could be ended only by developing local businesses, not by an aid check. Seven years later, so many businesses want to invest in poor areas that only a quarter of the companies that applied for tax credits in 2006 received them.
Using the domestic program as a template, Congress should provide a 39-cent tax credit for every dollar of American investment in developing countries. If Company X were to build a $100 million factory in Madagascar, its tax bill would be reduced by $39 million. The lost tax revenue would be offset by reducing direct foreign aid by the same amount.