Americans have always been fans of the power of free enterprise -- and rightly so. But they used to make a distinction between free enterprise, monopolies and financial power. This wasn't always so. In the previous century folks could more easily see the distinction between ownership as a property of effort and possession and ownership as a legal or financial title; and between investment as a property of effort and improvement and investment as a property of loaning money or buying ownership. For Henry George (as an example):
"It is obvious that all taxes come from the product of land and labor. There is no source of wealth other than the union of human exertion with the materials and forces of nature."
But in our recent period people were befuddled about this subject. We are sold confused monopoly and paper investments as if these were the "human exertion to harness the forces of nature" and create "production" that folks like Henry George and economists of yore were talking about. This has been a deliberate confusion. Since Ayn Rand first cast her main Character "John Galt" as an extraordinary individual there has been a deliberate effort to confuse financial entrepeneurship and actual entrepeneurship on the part of many of her self-styled disciples. (http://en.wikipedia.org/wiki/Atlas_Shrugged/http://www.truthout.org/110608J) She was a prophet in a way, bad taxation and investment policies led to financial resources from our country being exported -- but this had more to do with the financial folks being pirates than them "going on strike". They could still make money here, they just decided they could make more money in China or other Communist Countries. They still seem to feel this way (http://seekingalpha.com/article/101917-who-is-john-galt-we-ll-soon-find-out :-)
This occurred because we were befuddled by all the paper wealth created by wall street into thinking that this is our real source of wealth. But it isn't. Folks like Henry George were right.
Economists have also always suggested regulation and tax policy. Lloyd George made these points more than a 100 years ago:
But equal taxes may have very different effects on production, depending on how they are imposed.
Taxes that reduce the rewards of producers lessen the incentive to produce. Taxes based on the use of any of the three factors of production -- land, labor, or capital -- inevitably discourage production. Such taxes introduce artificial obstacles to the creation of wealth.
Modern understanding of tax policy simply restates what has been obvous for more than 120 years.
The method of taxation is, in fact, just as important as the amount. A small burden poorly placed may hinder a horse that could easily carry a much larger load properly adjusted. Similarly, taxes may impoverish people and destroy their power to produce wealth. Yet the same amount of taxes, if levied another way, could be borne with ease. A tax on date trees caused Egyptian farmers to cut down their trees; but twice the tax, imposed on land, had no such result.
The point is that taxes have to be imposed intelligently or they "kill the goose that lays the golden eggs." Or in this case cause farmers to cut down date trees. Had they taxed a percentage of the dates produced, or even given credits for planting such trees, the effect might have been opposite.
More than 120 years ago, Lloyd George stated the key principle of wise taxation:
Now, taxes on labor as it is exerted, on wealth as it is used as capital, or on land as it is developed will clearly discourage production -- much more than taxes levied on laborers whether they work or play, on wealth whether used productively or fruitlessly, or on land whether cultivated or left idle.
The key is "on wealth as it is used as capital." I don't follow Henry George verbatum. I'm just pointing out that some of his points are still factual. Now what are capital investments? Certainly not derivative instruments -- though these did free up money that could have been used for capital investment if we had sane tax policy. No you aren't going to get much agreement on much, but basic definitions are basic definitions. Capital is:
We need to avoid taxing money that is actually invested in capital goods. Taxing the rest, is another matter. Henry George notes:
These include all taxes on manufacturing, all taxes on commerce, all taxes on capital, and all taxes on improvements. All such taxes tend to reduce the production of wealth. Their tendency is the same as the Egyptian tax on date trees, though their effect may not be seen as clearly. They should never be used when it is possible to use means that do not check production.
The key here is that he's not saying all taxes on financial investment, but that portion of taxes that goes to capital, to public and commercial improvements, to manufacturing and to commercial efforts. We need, as a society, to be encouraging, not discouraging those things.
The great class of taxes that do not interfere with production are taxes on monopolies. The profit of monopoly is in itself a tax on production. Taxing it would simply divert into public coffers what producers must pay anyway.
The principle here is that when a monopoly forms, one is no longer talking about simple ownership, but about Government. A person who owns a market (like the Queen of England) governs that market (unless the people in that market have democratic rights to limit his behavior). Better to break up monopolies.
There are various sorts of monopolies. Some businesses are, in their nature, monopolies. These are generally the proper function of government. Delivering the mail, for example. For the same reason, railroads should belong to the public, as roads do.
Henry George makes two important points here. He next tries to make the case that copyrights are good and patents are bad, but to me his arguments aren't convincing on either side, so I'll skip to the one here that I think stand the test of time:
Finally, there are also onerous monopolies resulting from the aggregation of capital in certain businesses. (See Chapter 20.) It would be much better to abolish such monopolies than to try to tax the returns of their monopoly.
Theodore Roosevelt was influenced by these ideas when he tried to engage in trust busting. He found that it was almost impossible to break trusts once they formed. Power, once arrogated is difficult to break. The powerful tend to turn to violence, to law, or even criminal behavior when threatened. In the case of our country that usually takes the form of bribery and bribe written laws. The Railroads owned the country during Henry George's time, and continued to run some states until they drove themselves in the ground and were supplanted by other oligopolies.
For more on Henry George's ideas:
Posted by cholte at December 28, 2008 01:11 PM