20 February 2023
Jim Chalmers, Australia’s brilliant treasurer, has taken it upon himself the modest task of redesigning the country’s economy. That free economies were never designed in the first place is a fact of which Mr Chalmers is blissfully ignorant. Intent on remaining oblivious to reality he penned an intellectually pretentious 6,000 word essay1 revealing his colossal ignorance of both economics and economic history. Blind to his own intellectual shortcomings he grandly regurgitates Mariana Mazzucato’s neo-fascist economic policies2, policies that Mussolini called corporatism3. It’s no wonder the World Economic Forum considers her to be one of its biggest intellectual stars.
Like every statist before her Mariana Mazzucato, a professor in the Economics of Innovation and Public Value at the University College London, adores the ‘state’, attributing to this mythical entity intellectual powers so remarkable that she seems to think it invented everything from the wheel to sliced bread. What I found strange was not her primitive worship of the ‘state’ but her failure to define it. So what is the reality of the state? It is nothing more than those who govern us and the bureaucracy that is supposed to serve us. In Mazzucato’s fantasy world these people, meaning the likes of Jim Chalmers, Anthony Albanese, Malcolm Turnbull, etc., have the astonishing ability to pick economics winners and even determine which technologies will work and which ones will not. They even have the power to foresee and design markets. No wonder Chalmers loves her.
Given Mazzucato’s statist mentality in which the ‘state’ is the real engine of economic progress it is no surprise then that she is deeply antagonistic to genuine entrepreneurship. This is revealed in her hostility to any attempt to cut capital gains taxes which, in her humble opinion, only succeed in “emptying the government’s own the pockets”4, an opinion shared by the economic illiterates who run the Democrat Party5. Of course, it never occurred to this brilliant economist that the only money governments have was drained from the pockets of the public.
This statist economist, who advises leftist organisations and political parties, including the Australian Labor Party, gives the impression that she is utterly ignorant about the nature of capital gains.
First and foremost, real capital gains are economic profits, not accounting profits This is where capital gains taxes do the most damage. Any tax levied on the sale of assets, especially businesses and shares, will be avoided by not selling assets thereby reducing the number of transactions. Therefore, a capital gains tax is a financial transaction tax. For instance, if Mrs Cooper were to sell her shares in company A in order to use her realised gains to invest in a newly formed company she would be taxed for the privilege. The incidence of the tax will largely determine the rate at which individuals will transfer their savings to more productive investments. Therefore, a capital gains tax is also a resource allocation tax, a fact that is invariably ignored, especially by statists like Mazzucato.
In effect, it is a tax that punishes people for moving assets into more productive activities. Imagine for a moment what would have happened to the Industrial Revolution if, for example, investors had been punitively taxed by some Mazzucato-like character for committing the economic crime of trying to invest in railways instead of keeping their savings in canals or government bonds?
It follows that capital gains taxes erect a significant barrier to the movement of savings from old established companies to newer and more innovative enterprises. In fact, they become a tax on social mobility, as does a highly and effective progressive income tax structure. It protects those who can live off their family’s accumulated capital against those who are trying to accumulate capital: it is not a tax on the rich but on getting rich; it encourages those who have accumulated wealth to simply conserve it while reducing the flow of venture capital, the lifeblood of entrepreneurship.
Furthermore, the most important factor that the capital gains tax penalises is the decision-making ability of entrepreneurs. It is decision-making ability that largely accounts for the existence of high-cost and low-cost firms in any industry. Therefore the capital gains tax also becomes a tax on entrepreneurial rent. The more successful the entrepreneur becomes in satisfying consumers’ wants, the greater the financial penalty he will finally pay. This is guaranteed to restrict entrepreneurial mobility.
You cannot have a dynamic economy if venture capital is punished, entrepreneurial mobility is severely restricted and the rewards of successfully satisfying consumers’ needs are heavily taxed. What is more, high capital gains taxes are a lousy revenue raiser. In 1969, for example, President Nixon raised the capital gains tax from 28 per cent to 49 per cent. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent, and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. (So much for Mazzucato’s absurd “entrepreneurial state.”)
High-tech companies in Silicon Valley were hit particularly hard. Yet the Treasury had assured President Nixon that the tax increase would raise $1.1 billion in the first year and then $3.2 billion a year until 1975. This is obvious proof that taxes do affect behaviour. If you think about it, capital gains taxes are a great way to soak the poor.
(During a period of significant monetary expansion governments can enjoy a tax windfall because these expansions always inflate asset values6.)
In 1978 Congress slashed capital gains taxes; this triggered an explosion in the supply of venture capital. By the start of 1979 a massive commitment to venture capital funds took place, from $39 million in 1977 to a staggering $570 million at the end of 1978, a 1,361.5 per cent increase. Tax collections on long-term capital gains, despite the dire predictions of big-spending critics of tax cuts, leapt from $8.5 billion in 1978 to $10.6 billion in 1979, $16.5 billion in 1983 and rising to $23.7 billion in 1985.
By 1981 venture capital outlays had soared to $1.4 billion and the total amount of venture capital had risen to $5.8 billion. In 1981 the maximum tax rate on long-term capital gains was cut to 20 per cent. This resulted in the venture capital pool surging to $11.5 billion. Astonishingly enough, to conventional economists that is, venture capital outlays rose to $1.8 billion in the midst of the 1982 depression.
This was about 400 per cent more than had been outlaid during the 1970s slump. In 1983 these outlays rose to nearly $3 billion. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent. All because of Nixon’s ill-considered capital gains tax. But then Nixon never professed to know anything about economics, unlike most of his lefty critics.
In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut. The results were startling. Starting with $209 million dollars in funds, these companies had paid $350 million in federal taxes, generated $900 million in export income and directly created 135,000 jobs! Professor Laffer and his supporters stood vindicated, not that you would know this from the media. Yet these facts appear to have completely eluded Mazzucato.
This brings us to the Laffer curve. All that Professor Laffer said is that beyond a certain point the burden of taxation would cut investment and thus reduce, if not halt, economic growth. No sound economist would deny this proposition. And yet Laffer was lampooned, pilloried, grossly misrepresented ad nauseam — and now that I think of it, still is. Clearly, economic reasoning and economic history refute Mariana Mazzucato’s nonsensical contention that abolishing capital gains taxes would simply fill the pockets of the rich at the expense of the ‘state’. Like most leftists Mazzucato doesn’t care for facts when they contradict her phony narrative.
I shall be tackling Mazzucato’s parallel world in further posts.
2Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths,
Public Affairs, 2018, p. 26.
It’s interesting to note that Graeme Samuel a professor in the Monash Business School and who used to chair the Australian Competition and Consumer Commission is fully on board with this neo-fascist policy. Samuel is also full of praise for Larry Fink, boss of the huge Blackrock investment fund for trying to impose on Americans the greens’ ant-growth ESG policy. That Fink is in effect embezzling pension funds to finance his political activities eluded Professor Samuel. In addition, is the good professor aware of Fink’s arrangement with the Chinese Communist Party that allows him to do business in China? If Fink is so concerned with the environment why is he ignoring the fact that China is the world’s largest emitter of so-called greenhouse gases? Why is he ignoring the regime’s absolutely ghastly environmental record? And why is the destructive ESG policy necessary for us but not China’s communist regime?
3Fascism is just another branch of the socialist family tree. Mussolini called it corporatism, which is socialism with a capitalist veneer. Mariana Mazzucato’s version is called “values-based capitalism”. This inspired Chalmers to create “values-based capitalism”. The fact still remains that no matter how much lipstick you slap on a fascist pig it’s still a fascist pig,
Regarding the concept of value neither Mazzucato nor Chalmers knows what they are talking about. Capital and labour do not create value even though they produce value. It’s paradoxical but true.
4These socialists always refer to the citizens’ money as if it were theirs. What we need are politicians with a Gladstonian spirit and a firm grasp of reality.
The fanatics who wrote this garbage ignore the fact that congressional Democrats voted for the Covid policies that shut down the economy.
6Artificially low interest rates create inflation. This allows the rich to borrow cheaply and then use the loans to purchase assets the value of which will be driven up by inflation. By this process the easy money policy pursued by the central bank allows the rich to increase their wealth at the expense of the rest of the community thereby raising the wealth gape. This is called the Cantillon effect: in plain English, he gets the money first gets richer while he who gets it last gets poorer.
Round about 1730 Richard Cantillon wrote Essay on the Nature of Trade in General. Among the remarkable insights to be found in this work was his description of how inflation enriches a few at the expense of the many. The Cantillon effect can be used to explain how Keynesian policies increased the wealth gap.