What Do the Wealth Tax, the Estate Tax and RMD Have in Common?

The immense accumulations of fixed capital [has been] to the great benefit of mankind.” — John Maynard Keynes (1920)

“Free-market capitalism is the best path to prosperity.”

— Larry Kudlow motto on CNBC

Karl Marx got one thing right. He clearly identified the source of prosperity under free enterprise, or what Adam Smith called “the system of natural liberty.” He called it “capitalism” because it is “capital,” broadly defined, that drives economic growth and a higher standard of living.

Capital consists of saving, investment, capital formation, tools, machinery and equipment, entrepreneurship, technology, innovation, training & education and other supply-side factors that advance civilization to higher levels of prosperity.

What Drives the Economy, the Consumer or Business?

Too often the financial media gets it wrong when the news organizations report, “Consumer spending drives the economy.” In reality, consumer spending is the effect, not the cause, of prosperity. Consumers benefit because entrepreneurs and venture capitalists create new products and services.

It is business spending that drives the economy. See my column here: https://www.markskousen.com/says-law-vs-keynes-law-which-more-accurately-reflects-reality/.

As economist Larry Kudlow states, “Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs and then consumers spend. Profitable firms also purchase new equipment because they need to modernize and update all of their tools, structures and software.”

How to Slow Economic Growth: Tax Capital!

That brings me to the headline in today’s Investor CAFÉ. If you want to encourage long-term growth, cut taxes on capital.

If you want to slow down prosperity, raise taxes on capital.

The truth is:

–a wealth tax is a tax on capital.
–an inheritance tax is a tax on capital.
–an estate tax is a tax on capital.
–a capital gains tax is a tax on capital.
–a tax on interest and dividends is a tax on capital.
–a transaction tax on stock trades (Tobin tax) is a tax on capital.
–a progressive income tax is a tax on capital.
–Required Minimum Distributions (RMDs) on retirees after 70 ½ is a tax on capital.

All these forms of taxes reduce economic growth in the long run and can be quite dangerous.

The ideal is a zero tax on capital formation. One of the few countries to recognize this ideal is Hong Kong. It has a flat 18.5% tax on income, and no tax on capital gains, interest and dividends. Not surprisingly, Hong Kong now enjoys the highest level of income and growth in Asia.

Good investing, AEIOU,

Mark Skousen

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