Cutting envy taxes makes us all rich

Despite what you've heard from Michael Cullen in response to Treasury's recommendation of yesterday, cutting the top tax rate is good. Unequivocally good. That sort of advice is not an "ideological burp," it is damn good advice. The truth is that -- despite what you've heard -- the richer the rich become, the better off everyone is.

I'll let you ponder that for a second. It's true.

In fact, cutting the top rate is so good it should be the primary fiscal goal of any honest government. Not cutting it is the perfect example of cutting off your nose to spite your face, except it's not Michael Cullen's nose he's cutting off, it's ours. These 'envy taxes' are paid for by all of us in lower savings, and in correspondingly lower productivity and lower real wages for all of us.

The richer the rich become, the better off everyone is. As George Reisman points out in Envy Unleashed at the New York Times, the reason is simple:

The extremely high incomes to which the Times objects are overwhelmingly saved and invested. In this way, they bring about large-scale capital accumulation. Capital is the foundation both of the demand for labor and the supply of consumers’ goods. Its continuous accumulation is the foundation of high and rising real wages and a high and rising standard of living for everyone...

Great wealth invested in business signifies precisely a great demand for labor and a great supply of consumers’ goods. It does not signify the heaping up of a massive supply of food, or other consumers’ goods, on the plates of fat capitalists who gorge themselves while the masses starve. But that is how the ignorant writers and editorialists of The New York Times and the whole “liberal” “intellectual” establishment see matters.

The key is capital -- "the foundation both of the demand for labor and the supply of consumers’ goods." Capital is the real fertiliser for growth and productivity, and the more of it an economy has, the better. For all of us.

The amount of actual labour each of us is capable of is the same all over the world -- in fact, workers in the third world work far harder than any of us. But first world workers don't work with picks and shovels, we work with capital goods that make us infinitely more productive than we would be otherwise, and that greater production is reflected in greater real wages. It is this greater capital that makes us more productive, and that capital comes from savings -- that's what capital is: money put aside for a rainy day and invested in production. It's a simple formula: More capital invested -- more production -- higher real wages. And it is overwhelmingly true that those on greater incomes save and invest more of their income as a proportion than anyone else. It is those savings that are the fertiliser for growth.

There will always be profligate waste, but the more you earn then the more as a proportion you save... and the more that is saved and invested, the more capital there is available for growth and productivity. The number one reason that New Zealand workers are relatively unproductive as compared with other western countries is our low level of capital, which reflects our low level of savings: it is greater capital that increases productivity, and it is greater productivity that lowers prices and increase real wages. Nothing else can.

Envy taxes are a tax on savings, a tax on productivity, and a handbrake on rising real wages. As Reisman explains in the last chapter of his book Capitalism:

Reductions in the upper brackets have the greatest impact in strengthening economic incentives and saving, and thus do the most to bring about economic progress. We need to make the public aware of how everyone benefits from these tax reductions--of how they operate to raise the demand for labor and thus wages, and, at the same time, progressively to increase the productivity of labor and thus the supply of goods relative to the supply of labor, which steadily reduces prices relative to wages and thereby steadily raises real wages.

Capital is the real fertiliser for growth and productivity, and the more of it the economy has, the better. Once you understand that, you will realise the foolishness of diverting the immense sums that would have gone into savings and investment into government coffers instead, to pay for intervention, regulation and keeping 300,000 New Zealanders on welfare instead of in productive employment.

Cutting the top rate of tax is not an ideological burp -- it is damn good advice.