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Bad Policy Can be Worse Than Regime Uncertainty: A Wealth Tax


Danny Sanchez, in a Circle Bastiat post ,”Yes, Rothbard Covered That: Wealth Tax Edition, used Rothbard to criticize yet another proposal to fight the imaginary evil of the left, income or wealth inequality (See Daniel Altman New York Times column, “To Reduce Inequality, Tax Wealth, Not Income).

Rothbard’s conclusion re a wealth tax:

“It is clear that the wealth tax levies a heavy penalty on accumulated wealth and that therefore the effect of the tax will be to slash accumulated capital. No quicker route could be found to promote capital consumption and general impoverishment than to penalize the accumulation of capital. Only our heritage of accumulated capital differentiates our civilization and living standards from those of primitive man, and a tax on wealth would speedily work to eliminate this difference. The fact that a wealth tax could not be capitalized means that the market could not, as in the case of the property tax, reduce and cushion its effect after the impact of the initial blow.”

Sudha Shenoy, in one of her last refereed journal articles, “Investment Chains Through History” (published in the Indian Journal of Economics and Business, (Special Issue ( 2007) edited by myself and Alex Padilla), provides historical data that supports the argument that it is ever more complex investment chains (structure of production) which are the embodiment of the accumulated capital that is the key to higher standards of living both now and in the past. As Hayek reminds us, but often missed in mainstream analysis, any capital structure must be continuously replaced and replenished just to maintain an income flow; investment must exceed replacement for prosperity to advance.

Shenoy’s abstract:

Technology is widely seen as the key to development. But this does not explain how a single innovative machine multiplies itself. An alternative tack: Menger’s analysis of investment chains. Begin with first-order (consumer) goods and examine the second, third-, and other successively higher-order goods required. The range of final goods produced in four historical contexts (Upper Palaeolithic Europe, early modern England, DCs in the late 20th century, Mali in the same period) are set out. In each context, for a selected first-order good, the investment chain of successively higher order goods is detailed. Such investment chains are most complex in DCs.

This attack on property rights, a proposed wealth tax, in the name of fairness, is just another example of the many factors impeding recovery of investment because of the current high level of uncertainty; policy uncertainty, economic uncertainty, but most important regime uncertainty (here and here).

In this case however, adopting such a policy, a wealth tax, would reduce or eliminate a portion of the regime uncertainty, but the effect, whether intended or unintended, would be more harmful to future prosperity than the uncertainty.

John P. Cochran (1949-2015) was emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He was also a senior fellow of the Mises Institute and served on the editorial board of the Quarterly Journal of Austrian Economics.

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