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Taxing Capital is a Big Mistake
31 Jul


Capital is what results from work: anything we have invented, moved, or built that finds a value in the marketplace. It is this search for value that drives free markets. Trading one’s capital for better value is what leads to profits. Or if one is the end user, the goal is trading for some satisfaction in having used one’s money well. Market efficiency depends upon this sorting through the relative values of whatever we have offered.

So if an efficient market is a better market, why would any self-respecting capitalist want the value of capital to be altered by taxes? Taxing capital necessarily affects the calculus of finding value, especially when tax rates vary. When the tax rate for different items in the marketplace can be 40%, 20%, 7%, or zero, depending upon who made it, where it was made, who’s buying it, and where it’s being bought, relative value is not being set by the market alone. Determined and yet somehow arbitrary government decrees are distorting what the market would otherwise say.

Taxes on capital might seem to be acceptable, as they have been around for all of our lives. But they never were inevitable. They arrived from the result of choices made that we either tacitly or explicitly accepted at some point in the past.

The distortion they cause, however, ought not to be acceptable for this reason; a good’s price must account for taxes in order for it to be a profitable good. Regardless if a purchaser pays tax on the purchase, the item’s producers and sellers are paying tax on its profit. A purchaser then, whether directly charged a tax or not, is paying a pricemoney-coins that is higher due to taxes. Nothing new here. This is how it is.

But by distorting the relative value calculus of the market, taxes on capital inevitably end up distorting the lifestyles of those burdened with paying them. These are the end users, who pay prices that producers set to preserve their own lifestyles, passing along their cost of taxes into the prices of their products. The poor however have no means to protect their lifestyles, not when they are already at the bottom of the earning scale. Economic competition can’t save them when the lowest price offered still includes the cost of taxes. And their saying no to a purchase of basic goods only diminishes their quality of life. In this way, income taxes and profit taxes, actually all capital taxes, wend through our markets, to be paid by the poor. Capital taxes tend to make the poor poorer, by making their lives more expensive than the market’s unadulterated assessment of value would dictate.

The same tendency is what gives us a politics in perpetual debate over how much help the poor need, and how much tax should fund that need. It becomes a ceaseless cycle, raising taxes to meet a need those very taxes help to cause. It’s an economic tautology. For so long as capital is taxed, regardless of the rate applied, this debate will never end.

Besides, you would think that capital is the last thing a capitalist would want made more costly by government.


About the Author

Written by Stephen Taft

I live in New York City, work on Wall Street, and think about justice...all the time.

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