A Tax Proposal Against Progress and Democracy

It has become fashionable to believe that inequality and “extreme” wealth compromise democracy, and that, consequently, taxes on high incomes and wealth must be increased even further. Several left-oriented economists (such as Krugman, Stiglitz, and Zucman) and political and social leaders have endorsed this idea, which easily resonates with citizens burdened by stagnant real wages in societies sclerotized by state interventionism and excessive regulation. Faced with the facile slogan and the demagogic manipulation suggesting that if “those at the top” pay more, the social “contract” is reinforced and democracy is purified, it is the duty of every good economist to ask some uncomfortable questions. For example, who will ultimately end up paying more: the caricatured rich, or ordinary workers in the form of poorer jobs and lower future wages? And what real effect does all this have on democracy?

Well, economic science is stubborn: raising taxes on the rich punishes saving, investment, innovation, capital accumulation, and entrepreneurial creativity, thereby decreasing productivity and the real wages of the majority. At the same time, it further expands the discretionary power of politicians to grant privileges and subsidies to interest groups and to buy the votes necessary to remain in power. All of this occurs to the detriment of equality before the law, which a healthy democracy requires.

Suppose there are two workers—one Indian and one American—with the same working hours and the same effort. The former works with rudimentary tools and precarious irrigation and fertilizer; the latter works with a modern tractor and has state-of-the-art irrigation and fertilizers at his disposal. Who earns a much higher salary? Obviously the second, and this is due to the fact that he is much more productive, not because of state regulation, public spending, or income redistribution. It is simply due to the greater quantity and quality of capital equipment that makes the worker much more productive. Therefore, fiscally penalizing those who save, accumulate, innovate, and invest precisely in those capital goods is the surest way to slow down and halt the growth of wages.

Let us do some math: a wealth tax of 3.5 percent per year means that, for example, after 10 years, more than 40 percent of the capital goods that could have been accumulated at the disposal of workers will evaporate, at an immense cost to them in the form of foregone future wage increases. Suppose now that demagoguery ultimately triumphs and Amancio Ortega’s 80-billion-euro fortune is expropriated to be distributed among the 2 billion poor people in the world, which amounts to receive 40 euros per person. Seriously, can anyone claim that this would improve democracy? Because the cost in terms of prosperity, living standards, and social cohesion would be colossal: closed or decapitalized companies, canceled investments, blocked innovations, and, above all, destroyed jobs and lower-quality work with lower wages. To this, we must add the elephantine growth of the state, bureaucracy, and political patronage. Because the more income and wealth the state coactively detracts and the more discretionary its power becomes, the more effort and ingenuity “rent-seekers,” subsidy-hunters, and lobby groups devote to securing particular advantages, further corrupting democracy and the rule of “law.” Indeed, as the loot to be distributed increases (only in the short term) in a context of slowing economic development, social conflicts are encouraged and become unsolvable in an increasingly-polarized environment that hinders or makes the normal functioning of democracy impossible.

In short, taxation “against the rich” seriously harms workers, especially the most vulnerable, while simultaneously crippling and further corrupting democracy. Therefore, the recipe to be applied to reverse the social and democratic crisis of our time, which is an inevitable consequence of the virus of statism affecting us, is exactly the opposite: low and simple taxes, the elimination of taxes on savings and wealth, legal certainty, respect for private property, generalized deregulation, and strict limits on public spending to prevent the unproductive political caste from plundering and distributing—by buying votes—the wealth of those who generate it with their effort and entrepreneurial creativity.