Higher Taxes Don't Make Capitalism "Work Better"

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Submitted by James E Miller of Mises Canada,

“Would Capitalism Work Better With Higher Taxes?”

That’s the title of a new Globe and Mail editorial written by Doug Saunders. The question is innocent enough. The article treads lightly on the topic without ideological moralizing. The dilemma of how to make capitalism “work better” is a common trope in mainstream rags. Saunders wants to come off as a moderate thinker who’s just trying to do what’s best for everyone. I suspect there’s something more sinister behind his motives.=

Anyone who understands the basics of capitalism knows taxation acts as a hindrance. There is no question about this. Capitalism is the free trading of goods and services; taxation is the violent extortion of the gains of voluntary trade. Anything that gets in the way of the capitalist process necessarily hinders it.

In no possible way will higher taxes make capitalism “work better.” Those who claim otherwise are either one of two things: ignorant of what capitalism is, or insidiously plotting its demise. I suspect Mr. Saunders knows what he is doing. In his piece, he gives slight deference to the orthodox view that higher taxes create a disincentive to produce. He even cites the fact that the James Bond flick Moonraker was shot all over the globe, except for the place where the Ian Fleming story takes place: England. The producers did everything they could to avoid paying Britain’s top income-tax rate of 83%. Hardly anyone could blame them for taking such measures. Even the Beatles and the Rolling Stones departed their home country for places with a softer tax burden.

Saunders understands this but it affects him not. He is convinced data disproves the idea that people want to keep more of their own income. Like any good news columnist, he has an academic to back him up. Thomas Piketty, a French economist, has focused much of his latest work on diving into the historic trends of income inequality. He discovered that wide income inequality acts as a large deterrent to raising living standards. Saunders, being the susceptible stooge waiting for an excuse to flex his statism, now has a scholar to throw in everyone’s face. Of Piketty’s theory, he writes,

“normal market economies, if left to themselves, will always enter a dangerous spiral in which previously existing wealth will grow in value much faster than either wages or sales.”

For Piketty, in unfettered markets, the rate of return on capital putatively outraces worker income. This is bad because it necessarily puts the rich capital owners in a privileged position when compared to the lower classes. The buildup of “dead wealth” is acting as an anchor on economic growth since too much capital remains underutilized. Therefore, Piketty proposes a number of methods to jolt life back into the capitalist class by forcing them to put their assets to work. Saunders is all for this approach and says it’s “bound to become mainstream policy sooner or later.” The only problem is, this approach to economic micromanagement has been in use since the days of Keynes. There’s nothing novel about using government authority to rid the rich of their wealth.

The underlying basis for the Piketty view is the positively Keynesian idea that idle resources are somehow bad; that if machinery, factories, plant equipment, and other forms of capital are going unused, then people are losing the opportunity to work. Economist William H. Hutt destroyed this entire notion in his The Theory of Idle Resources, where he pointed out that unused capital is never really worthless. There is always the possibility for future use. As he wrote,

“[R]esources may, however, be held up for some more wanted employment in such a way that they are not actually idle. The process of investment in them, or of continuous receipt of ‘availability’ services is still present.”

The idea that sitting capital is somehow a benefit to the wealthy is asinine. Sitting, functionless capital doesn’t get a return. It must be put to work. If it appears to be out of use, there is a good reason for it. Either the owner sees no profit opportunities presently or has bigger plans waiting to be implemented.

Economic central planners tend to think they know how to best use other people’s property. Their goal is accounted for in aggregate terms rather than individual preference. They see resources as things that exist to employ others. The very concept of personal ownership screws up their plans; so they attack it in the name of curing unemployment.

In Piketty’s work, he does his best to come off as friendly towards markets and claims to be apprehensive about increasing the size of government. But even so, his worry over capital’s dominance is tainted with Marxist thinking. His solution to the wealthy becoming too powerful is, according to Saunders, “targeting inheritance and extremely high salaries with deterrent taxes.” He even claims that inheritance – that is passing down the fruits of your labor to your children – actually “contradicts the basic principles of capitalism.”

If handing down your own property to your loved ones contradicts capitalism, then so does profit-making in general. People don’t invest, produce, work, and risk their wealth to make sure the trains run on time for everyone. They do so for their own benefit. The same goes for inheritance; which by its nature is a long-view approach to accumulating wealth.

Holding capital does not exact significant harm on the lower rungs of society. On the contrary, it provides the very basis of elongated production methods that produce intricate goods. Without the capitalist, there are no funds to pay workers. The capitalist, as economist Richard Ebeling writes, “saves, forgoing consumption or other uses of his wealth, and those savings are the source of the workers’ wages during the production process.” Punishing someone who saves capital for a later date is a good way to guarantee the stagnation of rising living standards. It’s hard enough for producers and investors to foresee consumer wants; academics and pundits are necessarily in a worst position to decide.

So do higher taxes make capitalism better? The answer is unequivocally “no.” But that won’t stop statist apparatchiks like Doug Saunders from cherry-picking data and sources to make the case for higher taxes. There can be a number of reasons for low economic growth. Low taxation and capital-hoarding businessmen are never one of them.