What sections of the economy (if any) should be government owned? How might a company be chosen as the focus for an industry policy? How can companies be prevented from misusing tax havens?
The government can intervene in the economy in several ways. For instance, producing goods and services, such as infrastructure, education, and national defense. In addition, transferring income, both vertically across income levels and horizontally among groups with similar incomes and different characteristics. Lastly, taxing to pay for outlays, which can lower economic efficiency by distorting behavior. The nature of industrial policies is that they complement—opponents would say “distort”—market forces: they reinforce or counteract the allocative effects that the existing markets would otherwise produce. Tax havens make use of the limited reach of national regulations and of deficiencies in international regulations. Tax havens pose a challenge to the developing countries' ability to efficiently govern their own country. First, tax havens limit sovereignty, as they limit the scope for national governments in controlling, taxing and regulating private companies. Second, tax havens may foster institutional decay as they make it easier to get away with large-scale corruption and theft of resource rents.
The size and role of the government is one of the most fundamental and enduring debates in American politics. Economics can be used to analyze the relative merits of government intervention in the economy in specific areas, but it cannot answer the question of whether there is “too much” or “too little” government activity overall. That is not to say that one cannot find many examples of government programs that economists would consider to be a highly inefficient, if not counterproductive, way to achieve policy goals.
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