Higher tax rates don't necessarily increase revenues anyway : US reduction of tax rate from 73 to 25 increased taxes by more than 200% and increased the share the rich pay from 27% to 63%. Its the same story in the UK. In contrast revenues dropped after 50% hike in 1976 in Britain and VAT only rose 45% when the rate doubled. So raising taxes may not even be effective in taking money from the rich. There comes a point when its not worthwhile to go to work if taxes get beyond a certain point.
To start a small business, the main source of employment for the young poor, you need high levels of disposable income. Its ex-managers of other companies that mainly start such small companies and by taxing them heavily you reduce the number of new companies. New companies most often don't get funded by banks who only lend to established companies. Yet, it is only individuals that can be original, institutions shy away from unconventional ideas, so most of the new companies and concepts have to be funded from disposable incomes of managers, to tax that is to take away the opportunities and jobs of the young people they would otherwise employ.
Again contrary to popular belief, the rich are not a constant group .Of those with more than $60,000 in 1969 , 85% had emerged in that generation. Few inheritors keep the wealth for another generation, those that do are famous, but the vast majority do not.
Similarly, business people sacrifice much for the chance of being rich, most never get there: the median small business person earns less than a New York City rubbish collector. More than 2/3rds collapse within 5 years. Although arguably, business failures are capitalised in new business knowledge, this doesn't help the man who has risked everything and lost it. Capitalists should be encouraged rather than penalised. Such job creation is not without its possible costs to the entrepreneur.
The evil capitalist idea is a myth, capital for the most part is owned by everyone in society through ownership of shares, unit trusts, mutual funds, deposits at the bank, company pension funds and houses. When we are talking about capitalists in modern society we are talking about ourselves. One of the definitions of socialism is when the means of production is owned by the ordinary people, if this is the ideal then we're there already!
CAPITALISM LEADS TO LESS WARS
Statist countries need war, free markets don't want it: capitalism gave us the longest period in history with no major wars 1815-1914. Furthermore most borders between non-communist countries are unguarded as opposed to communist borders.
We need to produce greater growth from the rest of the world to be able to defend ourselves militarily from the rest of the world., especially hostile cultures like Islam and possibly China and even still communism to some degree.
Internally too, we also need growth to prevent the emergence of angry people whose expectations haven't been realised for example the Los Angeles riots. Unrest is always higher when people's incomes are not rising.
LOWERING TAXES IS EVEN BETTER FOR THE GOVERNMENT
Moving from one system to another this should not be a problem for governments. The current austerity programs are unnecessary if the state is simply privatised. Indeed general prosperity is favourable to the stability of all governments as is lower taxes.
On the other hand raising taxes caused the fall of a host of governments in history : the Duke of Alba in Netherlands 1580 lost it to Spain by raising taxes, George the 3rd lost America the same way , as did another George : George read my lips , no new taxes" Bush ". More recently still we see the loss of Britain to the Conservatives, Kenneth Clark's tax increases surely played their part - "22 new taxes" said Labour with great effect in billboards across the land, no longer could Labour be characterised as the only high tax party.
The insight necessary for governments to benefit politically from this programme is the concept of "Twinning" , that is that tax cuts and benefits should be simultaneous. People will always take tax cuts and not appreciate them if they are given separately and always complain about withdrawals of benefits. Not so if the two are done together. For example, if people are newly going to be paying for health direct but it is clearly stated that they are getting a tax cut of £2000 per year to pay for it. Most people will see the pound signs and they will never, ever vote to reverse it in the future because they will by that time be used to having the extra money resulting from the private system. If this policy is strictly adhered to it is a sure vote winner because the party in power are putting money into the voters pocket and that's what he primarily is concerned with. And this is no bad thing, because as he spends his new funds he will increase the efficiency of the object. If the government spends the object's efficiency will decrease. The moral is that we should never, ever give a tax cut without a strongly linked cut in benefits, otherwise its a wasted opportunity to improve the economy permanently. And certainly never give a benefit cut without giving the corresponding tax cut to compensate- remember the Duke of Alba and the Georges !
Furthermore, if you will allow an insight from Machiavelli, do the hard things quickly and all at once , at the beginning of the term and people will forget.Do the popular things gradually phased throughout the term. When I mention hard things in the context of our programme I mean things impossible to twin, like controlling of the money supply and the possible negative effects in the short term and reform of welfare where again the benefits take time to come through.
BUT GOVERNMENTS SHOULDN'T BE TRUSTED WITH RUNNING THINGS:
Especially now, though it has always been true, politicians (or anyone else) cannot understand the first and subsequent order consequences of the decisions that they make. Good decisions are based on knowing the relevant information in each case. Government Acts basically impose one decision on thousands of different situation that would otherwise be resolved differently in each case. Armed only with statistical aggregates it is impossible for governments to know even a small fraction of the information needed to make good decision. Furthermore, the optimal decision would involve many different applications in hundreds of different circumstances for which is impossible to legislate. Even if these problems were resolvable which they are not, such decisions would have to be reviewed on a weekly basis as circumstances changed to produce optimum results The conclusion of these impossibilities is that decisions should be left to the market where they will each be made by the thousands of individual decision makers who have the best information to make them, watch the consequence of their individual decisions and react accordingly. This applies to laws and regulations but taxes are analogous. When governments raise taxes and spending nowadays it has unpredictable negative consequences : large deficits, unemployment, benefit take up. Productive immigrants go elsewhere. The only thing that is predictable is that government economists will then appeal for higher tax rates. Governments are clearly not the best institutions to be making decisions about society.
This is contrasted with the price mechanism which is so familiar to most of us that we take it for granted. But the price mechanism is one of the most amazing features of a market economy. Whenever people buy more of a good , the price goes up and that tells people to supply more and when people buy less it goes down and that tells people to supply less of that good and concentrate on something else. For the thousands of goods and services that we buy every year the information expressed in the price tells suppliers exactly what the wants of society are. This is an outstandingly simple, cheap and effective way of making sure people get what they want to buy in our nation and that products that nobody wants are not supplied. Contrast this with the armies of expensive planners and statisticians that governments need to do a job of co-ordination that doesn't even begin to approach the simple efficiency and elegance of the price mechanism. Despite the expense of the planners most of Communist industries made things that nobody wanted to buy.
Markets are basically a process of discovery . Better ways of doing things are never discovered in some cases if there is no free market and this has dire consequences in the case of education and health, for example. If education and health were private then better ways of healing people would have been discovered, better ways of educating people. In a free market situation there are strong incentives for owners to try out new things and for others to copy them. In government institutions any taking of risks is all cost and no benefit, so very little is ever discovered.
For all the talk markets are not chaotic but highly ordered they are simply not ordered by an outside third party (the state) but by the individual decisions of thousands of individuals that know what to do because of the price mechanism. The fact they are unpredictable is because they are full of activity. When an industry is tied down by regulation it may seem more ordered and predicable but that's because little is happening, the dead are less chaotic than the living.
Protecting industries has never worked for example protecting Europe's high tech , only caused then to be overtaken by industries that were more lean and mean from America.. Korea is now facing the consequences of having created huge protected companies which were to some degree insulated from the market and Japan too may be regretting this policy in the 90s. Most previously protected industries in Africa are now having to be shut down.
Government involvement in business so often leads to dramatic failure that even the socialists don't often advocate it now. A good example is the British nuclear power industry which when privatisation was attempted , no none would take because its simply not economical ( counting decommissioning costs) - only a government would have built them in the first place. The British government in the days of nationalisation spent £300 per year per citizen to keep them afloat, now that they are privatised they pay £100 per citizen to the Treasury. Clearly government should never be allowed to be involved in business. The UK Labour party recognized this when they took clause 4 out of their constitution, the clause that held that the means of production were best held in government hands, and an idea that has been well and truly disproved. Vast numbers of privatisation around the world is a clear recognition that this is now well recognized.
We know now from the theory of public choice that governments aren't Platonic guardians but act according to their own interests. Politicians clearly don't act in the interests of the country but do what will get them votes which may well not be in the interests of the country. They also will usually do what is of short term benefit - such as inflating the economy before the election, despite the fact that it is well known that the consequences of such actions bear costs that far outstrip the benefits. Increasing the borrowings of the government so that we must pay in the future with interest is another example of governments responding to interests that are not those of you and I.. Since this democratic process is such a poor expression of our wishes we must turn instead to the market which really is the best democracy. We vote every time we shop ,prices reflect our opinions and desires most accurately and what we buy feeds back to producers who listen carefully to what we say. A far better democracy than any dreamed of in Athens or Virginia.
Government organisation have different incentive structures. In his well known and highly entertaining book Parkinson reveals the laws of public organisations: "work expands to fill the time allotted to it", "government departments expand to fill the degree of competence of the chief civil servant in extracting money from the centre". There is no profit motive and no price mechanism in government organisations. If the civil servant makes cost cuts he has no profit from this. If he adds more staff then his prestige increases. Costs in government organisations tend to increase and level of service decrease with time. What incentive does he have to serve his customers? They aren't going to pay him more for good service or less for bad. If they move their business elsewhere he cares not a jot. Proper procedure and orderly manner are everything , customer service and innovation are a closed book. Why do we allow any of our national resources to be exposed to this system when they could be part of the vibrant private sector, constantly striving to improve service, cut costs and thus prices, and bring out new and better products ?
Now our discussion above doesn't mean that capitalism and capitalists (which we all are ) are perfect. The system doesn't work perfectly and there a re no perfect people about. Managers sack profitable people from time to time, people do things that don't maximise profits, competition isn't always perfect and so on.. However its the best system precisely because it factors in that people are not perfect- no other system gets people working so hard to serve each others needs ! . It doesn't need to be perfect it just needs to be better than the alternatives, which it clearly is.
This is particularly true in the way that regulators come to create very strange and negative results in the areas they regulate. The reason for this is that when a regulator is initially designed the purpose is clearly defined but once the organization has achieved its purpose it has to create problems for it to solve otherwise everyone's jobs are at risk. So there is every incentive for organisations not to solve the problems they have been created to solve. Why are we so surprised that government organisations are so poor at solving problems ?
THE PROBLEM WITH HALF MEASURES
We have seen in recent years an attempt to introduce some decree of private enterprise into the public sector in order to help governments to contain costs. But this is sub ideal.
All the applications are institutions that are still in the public sector but using the private sector to try and save costs. Instead of having a profit motive with which we see improved service for lower costs, and which is demonstrated over time by virtually all industries, we have in the government sector only a cost cutting motive which I agree can produce significant drops in service since the companies gain little from improvement. .But surely the solution isn't continued inefficient and expensive government ownership but moving the institutions fully into the private sector so that they can have the usual profit motive dynamics to improve service instead of merely cutting costs. The problems of some of the government cost cutting programs shows that full privatisation is usually preferable and should be used wherever possible.
EVEN IN CASES OF "MARKET FAILURE"
The fact that the market fails from time to time is not a reason for government interference. Even in cases where the market is less than perfect it is still the case that government control is even more imperfect ! Many alleged market failures in fact aren't of course :lighthouses were provided commercially for a long time in the nineteenth century (11) Furthermore as we will discuss in another paper externalities can be solved without government ownership, control or regulation of the resources in question.
1. Economist World in Figures
2. Adjustment in Africa (IMF) . The analysis mentioned analyses the 66 of countries of the world, eliminates 18 with inflation over 50% pa ( as any effect on growth will be masked by the inflation effects). The top 24 and the bottom 24 countries are then analysed using simple averages. It is especially telling that these statistical results are this clear without needing to control for other variables or use more sophisticated techniques. Spreadsheet available at the website.
3. (Getting it right : Baro )
4. PFT : Preparing for the Twenty first century by Kennedy
5. SOE : Spirit of Enterprise : Gilder
6. WTF : Winning the Future by Robert Russel p91
7. WAP :Wealth and Poverty Guilder
8. Capitalism and Freedom :Friedman
9. CUI
10. Weber : The Religion of China.
11 Ec Aug 23 97
