Dogma Premise # 20

Taxes always impair the efficiency of capitalism by reducing the profit potential of any project.

Dogma Premise #20 is a specific application of Dogma Premise #19.  Dogma Premise #19 asserted that greater profits would lead to greater efficiency and productivity.  Dogma Premise #20 embraces the idea that profit levels are correlated with the relative performance of firms, and then adds an additional claim that a force that uniformly reduces the profitability of all firms will also reduce the efficiency or productivity of all firms.

This is a very important principle in the Capitalism Myth.  An implicit theme running through the entire Myth is that economic power exercised by private individuals over communities is more just than public or political power because economic power should be considered as voluntarily surrendered, and not as coercion.  Properly described, the two sides of the debate would be (1) individuals exercising power over the community on the one hand (private power), versus (2) the community exercising power of all its citizens equally (public power).

But Dogma Premise #20 introduces the notion that the exercise of government power is not only less legitimate because it lacks the voluntariness of private economic power, but the exercise of government power is also economically destructive because it impairs the healthy functioning of the economy by demotivating the capitalists who seek to build private wealth.

The conceptual flaw in this reasoning is that it falsely assumes that motivation to participate fluctuates with profit levels.  In analyzing Dogma Premise #1 we saw that profit is only one of many different motives for economic action.  In analyzing Dogma Premise #19 we saw that it simply was not true that productivity or efficiency of a medium- or large-sized firm would vary along with profit levels.

And this makes common sense.  Some industries generate relatively low profit margins, like Steel, Heavy Construction, and Hospitals, whereas other industries generate relatively high profit margins, like Publishing, Beverages, and Cigarettes.  No one thinks that the individuals working in those firms or running those firms are somehow less motivated, less productive, or less competent.  Nor has the lower profit margins in some industries prevented the investment necessary to support those industries.  There is no sign that varying profit levels cause any economic actors to lean back on their heels, as long as there is adequate profit to support a reasonable return and/or other motivations for participating.

It would, therefore, be even harder to show that a tax of 10% or 20% or 90% across any industry or all industries would result in employees or capital sitting idle.  Tax rates have varied dramatically in the United States with marginal rates on the wealthiest individual taxpayers above 90% or below 20% without any sign of capital strike on the high side or increased productivity on the low side.

Indeed, the only two things that really change when tax rates vary are (1) the percent of economic investment decisions that are made by the community as a whole (perhaps building bombs or libraries) versus investment decision made by private individuals (shopping malls or yachts), and (2) the distribution of wealth (ranging from very unequal with a higher tax rate to an astonishing gap that potentially precludes a middle class with a lower tax rate).

In sum, the effect of increased tax rates transfers economic power from private firms to public entities, and to some extent limits the concentration of private economic power.  These are real effects with political implications worth debating.  However, there is no reason in theory, nor evidence in the real world, that taxes reduce a firm’s productivity, efficiency, or the willingness of private investors to fund ventures.

On the contrary, investors have reasons to invest besides profit, and unless the marginal tax rate were to hit 100% private investors would still gain more profit from investing their money in productive activity than from hiding it under a mattress.  History shows that investor behavior conforms to this prediction, and the opposite conclusion -- that investment is somehow less effective in a high tax environment -- lacks empirical support. If anything, the recent experience of bondholders suggests that capital will nonetheless be made available at very low rates of return.

In other words, the idea that higher tax rates will result in lower profits, thereby reducing incentives, and impairing economic activity has a certain intuitive appeal, but there is no evidence to support it, and indeed experience suggests just the opposite, that higher tax rates do not impair the availability or the productivity of capital.

Dogma Premise 21

All Dogma Premises