Friday, August 31, 2012


Does taxation stifle creativity?

The notion that high taxes on people with more income than they can possibly spend discourages them from any activity that might further increase their incomes is a popular one with many people.  A Texas Senator used to say that he didn't know any poor man who might give him a job.  The implication was that this Senator had a job working for a rich man.  Well, perhaps he did.  It's not unheard of for elected officials to work for wealthy benefactors.  Mr. X, a very wealthy man, might approach the Senator and offer him a generous campaign contribution in exchange for a special deduction that he could use in preparing his tax return.  In that sense, the rich man had "hired" the Senator.

However, the belief that high taxes stifle innovation can not be verified by experience.  Innovators are usually young people, men or women, who are filled with energy and ideas but haven't yet made their fortunes.  We like to think of such persons as Bill Gates and Steve Jobs as important innovators.  They were, of course, and made a lot of money from their innovations.  But they had not yet acquired fortunes when they were innovating.  The taxes on their incomes didn't stifle them.

Gates' great innovation was the recognition that if nearly everyone were to possess and use a computer they would need a program that would translate the keyboard instructions they could remember and understand into the tedious machine language needed to operate the computer.  Such a program is called an Operating System.  An engineer whose name I do not know had created an operating system that didn't take up much memory and was well suited to the rather simple computers available at the time.  The engineer called the system "QDOS," which stands for Quick and Dirty Operating System.  Gates bought it from him and changed the name to "DOS" or Disc Operating System.  He peddled a version of it to IBM for use on the early IBM personal computers.  The rest is history.

This belief that high taxes stifle innovation is used to thwart attempts to make the super-rich pay a larger share than they do in the cost of governing.  In the case of our own federal government, the result is that the super-rich do in fact contribute a large share of the income, but not in taxes.  Their contribution is to purchase government bonds.  The result is almost the same as taxing them, except that the bonds eventually have to be repaid with interest.  The government is thus forced into a kind of shell game or Ponzi Scheme simply to acquire the income needed to provide all the services that we citizens receive.

Another part of the myth is that our government spends too much money anyway.  It should do less and spend less.  It acts as a drag on the economy because it sucks so much money into itself.  This part of the belief also fails the test of experience.  There's a simple question: what does the government do with the money?  It hires people to perform various functions and services.  The money goes right back into the economy.  A question for study is, is it better for the economy for the government to spend a certain amount of money, or is it better for private individuals and firms to spend it?  It depends on the specific project on which the money is spent.  A number of super-rich men are taxed, say a billion dollars, to pay for building a bridge across a river.  The bridge enables goods to be transported across the river cheaply and the resulting economic activity adds, say, a hundred million dollars to the economy.  The government has invested the money in a facility that provides a rate of return of ten percent.  If the super-rich men had been allowed to keep the money, would they have invested it in something equally worth while?  Maybe, maybe not.  Of course, not all decisions by government officials and employees are as valuable as the decision to build the bridge.  Government has been known to build bridges to nowhere just to please the constituents of an important Senator.

I welcome any comments, discussion, criticism, even castigation of my opinions.  You can post them here if you have a Google account.  In any event, you can send them to me by e-mail.

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