be 03 capitalism

8/4/2019 BE 03 Capitalism

http://slidepdf.com/reader/full/be-03-capitalism 1/32

1

Copyright 2009Copyright 2009

CAPITALISMCAPITALISMRUTGERS UNIVERSITYRUTGERS UNIVERSITYSCHOOL OF BUSINESS CAMDENSCHOOL OF BUSINESS CAMDEN

David E. Vance, MBA, CPA, JDDavid E. Vance, MBA, CPA, JD

HHHH TAX SURVEYTAX SURVEYHHHH



2

SYSTEMS FOR ORGANIZINGSYSTEMS FOR ORGANIZING

SOCIETYSOCIETYThere are a number of ways to organize the productionThere are a number of ways to organize the productionand distribution of goods in a society.and distribution of goods in a society.

DespotismDespotism ± ± The strong take what they want fromThe strong take what they want fromthe weak. This is the prevailing economicthe weak. This is the prevailing economicorganization in many third world countries. In aorganization in many third world countries. In adespotic society there is no reason to work, plan for,despotic society there is no reason to work, plan for,or invest in the future because any gains are likely toor invest in the future because any gains are likely tobe confiscated.be confiscated.

Command EconomyCommand Economy ± ±

In a command economy,In a command economy,central planners tell everyone where to work, what tocentral planners tell everyone where to work, what todo, and what to make. There is no room for individualdo, and what to make. There is no room for individualinitiative. Central planners are not good atinitiative. Central planners are not good atanticipating the needs of individuals.anticipating the needs of individuals. East German East German c an opener s.c an opener s.



3

Systems for Organizing SocietySystems for Organizing Society

CommunismCommunism ± ± The state owns all assets for theThe state owns all assets for the³benefit´ of the people. From each according to his or ³benefit´ of the people. From each according to his or her ability and to each according to his or her needs.her ability and to each according to his or her needs.Since reward is based on need rather than talent or Since reward is based on need rather than talent or work there is no incentive to produce more thanwork there is no incentive to produce more than

absolutely necessary.absolutely necessary.

CapitalismCapitalism ± ± Capitalism is a system in whichCapitalism is a system in whichindividuals work for their own benefit. Anything theyindividuals work for their own benefit. Anything theyproduce they can keep. Those who want more, canproduce they can keep. Those who want more, can

work harder and produce more. Those who need lesswork harder and produce more. Those who need lesscan work less. Capitalism is based on a maximum of can work less. Capitalism is based on a maximum of personal freedom and a minimum of governmentpersonal freedom and a minimum of governmentinterference in the economy.interference in the economy.



4

CapitalismCapitalism

Aspects of capitalism: investment, personal Aspects of capitalism: investment, personalinitiative and reaping the rewards of work,initiative and reaping the rewards of work,have been around for three millennium.have been around for three millennium.

Adam SmithAdam Smith, in his landmark book ³, in his landmark book ³WealthWealth

of Nationsof Nations´ published in 1776, articulated´ published in 1776, articulatedcapitalism as a coherent economic system.capitalism as a coherent economic system.

Rational Self Rational Self--InterestInterest ± ± People work, tradePeople work, tradeand invest for their own benefit and that of and invest for their own benefit and that of

their loved ones.their loved ones.Prior to Adam Smith, it was though thatPrior to Adam Smith, it was though thatpeople produced for God, King and country.people produced for God, King and country.



5

Elements of CapitalismElements of Capitalism

Mutual BenefitMutual Benefit ± ± People exchange goods and services (labor)People exchange goods and services (labor)for mutual benefit. No one should be coerced to trade with, or for mutual benefit. No one should be coerced to trade with, or work for another. Both parties must benefit or no exchange willwork for another. Both parties must benefit or no exchange willtake place.take place.

This is in sharp contrast to Despotism, a Command Economy or This is in sharp contrast to Despotism, a Command Economy or

Communism wherein people are forced to do what theCommunism wherein people are forced to do what thegovernment wants.government wants.

Right to Own and Benefit from PropertyRight to Own and Benefit from Property ± ± The right to ownThe right to ownproperty means that people can keep the benefits of their work.property means that people can keep the benefits of their work.Because they can keep the benefits of their work, they canBecause they can keep the benefits of their work, they can

invest capital and plan for the future.invest capital and plan for the future.Investing in the future is pointless under Despotism, aInvesting in the future is pointless under Despotism, aCommand Economy, or Communism where the government canCommand Economy, or Communism where the government canseize property at any time.seize property at any time.



6

Elements of CapitalismElements of Capitalism Price is a Means of Controlling ProductionPrice is a Means of Controlling Production -- When societyWhen society

identifies a need it is willing to pay for, entrepreneurs will riseidentifies a need it is willing to pay for, entrepreneurs will riseto fulfill that need. Market forces determine what is produced.to fulfill that need. Market forces determine what is produced.If the price of something is high enough for an entrepreneur toIf the price of something is high enough for an entrepreneur tomake a profit, entrepreneurs will step forward and beginmake a profit, entrepreneurs will step forward and beginmaking it.making it.

No government edict, command, or order is necessary to directNo government edict, command, or order is necessary to directproduction in capitalism.production in capitalism.

Price as a Rationing MechanismPrice as a Rationing Mechanism -- The distribution of goodsThe distribution of goodsand services is controlled by people¶s ability and willingness toand services is controlled by people¶s ability and willingness topay for it.pay for it.

People always want more than their means allow, so they havePeople always want more than their means allow, so they haveto make budget decisions. Those who really want a Porscheto make budget decisions. Those who really want a Porschewill allocate the money to buy one. However, most peoplewill allocate the money to buy one. However, most peoplewould prefer to have a less expensive car and buy a housewould prefer to have a less expensive car and buy a houseinstead.instead.



7

Societal BenefitSocietal Benefit

One of the most remarkable insights that Adam SmithOne of the most remarkable insights that Adam Smithmade was that when everyone pursues his or her made was that when everyone pursues his or her own self own self --interests, society benefits more than if theinterests, society benefits more than if thegovernment dictated their actions.government dictated their actions.

This self This self --organizing, self organizing, self --optimizing principal is calledoptimizing principal is called

³³the invisible handthe invisible hand.´.´



8

John D. Rockefeller Saves the WhalesJohn D. Rockefeller Saves the WhalesCapitalists, acting in their own self Capitalists, acting in their own self--interest have saved more whales thaninterest have saved more whales than

Green Peace.Green Peace. Whale oil was used for smokeless candles, regarded as theWhale oil was used for smokeless candles, regarded as thefinest quality candles ever made. In 1846 there were 735 ships in the US finest quality candles ever made. In 1846 there were 735 ships in the US whaling fleet.whaling fleet.

In 1849, Gesner devised a method to distill keroseneIn 1849, Gesner devised a method to distill kerosene fromfrom petroleum. petroleum. But, theBut, theman most responsible for the commercial success of kerosene was Johnman most responsible for the commercial success of kerosene was JohnD. Rockefeller D. Rockefeller. Rockefeller set up a network of kerosene distilleries which. Rockefeller set up a network of kerosene distilleries which

would later develop into Standard Oil. Kerosene was a direct replacement would later develop into Standard Oil. Kerosene was a direct replacement for whale oil.for whale oil.

As kerosene became generally available, the demand for whale oil dropped As kerosene became generally available, the demand for whale oil dropped precipitously. The 735 precipitously. The 735--ship fleet of 1846 shrunk to 39 by 1876. The price of ship fleet of 1846 shrunk to 39 by 1876. The price of whale oil reached its high of $1.77 per gallon in 1856; by 1896 it sold for whale oil reached its high of $1.77 per gallon in 1856; by 1896 it sold for 40 cents per gallon. Yet it could not keep pace with the price of kerosene,40 cents per gallon. Yet it could not keep pace with the price of kerosene,which dropped from 59 cents per gallon in 1865 to a fraction over sevenwhich dropped from 59 cents per gallon in 1865 to a fraction over sevencents per gallon in 1895.cents per gallon in 1895. [1] [1]

The whales were saved, not by government or doThe whales were saved, not by government or do--gooders, but by angooders, but by anentrepreneur pursuing profit in the oil business.entrepreneur pursuing profit in the oil business.

[1] [1] James S. Robbins, James S. 1992. ³Abraham Gesner...saved more whales than Green Peace ever will, ³ James S. Robbins, James S. 1992. ³Abraham Gesner...saved more whales than Green Peace ever will, ³ TheThe Freeman,Freeman, August. August. published by the published by the Foundation for Economic Education (FEE)Foundation for Economic Education (FEE)..



9

Henry Ford Fights PollutionHenry Ford Fights Pollution American cities faced severe pollution caused by horses defecating between American cities faced severe pollution caused by horses defecating between

fifteen and thirty fifteen and thirty--five pounds of manure a day in the streets. The manurefive pounds of manure a day in the streets. The manurewas everywhere, ground up by the traffic, blown about by the wind, and was everywhere, ground up by the traffic, blown about by the wind, and tracked into people¶s homes. Manure produced huge numbers of fliestracked into people¶s homes. Manure produced huge numbers of fliesthat spread diseases such as typhoid fever. In 1908, 20,000 New Yorkersthat spread diseases such as typhoid fever. In 1908, 20,000 New Yorkersdied from "maladies that fly in the dust, created by horse manure." died from "maladies that fly in the dust, created by horse manure."

In 1880, New York City removed 15,000 dead horses from its streets, and lateIn 1880, New York City removed 15,000 dead horses from its streets, and lateas 1916 Chicago carted away 9,202 horse carcasses weighing an averageas 1916 Chicago carted away 9,202 horse carcasses weighing an averageof 1,300 pounds.of 1,300 pounds.

The automobile dealt a severe blow to use of the horse.The automobile dealt a severe blow to use of the horse. The drop in Model T The drop in Model T prices prices that followed after that followed after Henry Ford Henry Ford opened the first assembly line plant opened the first assembly line plant in 1913, led to the widespread adoption of cars.in 1913, led to the widespread adoption of cars. [1] [1]

Ford didn¶t set out to clean up the cities. He set out to make money buildingFord didn¶t set out to clean up the cities. He set out to make money buildingcars. The by cars. The by--product was dramatically cleaner cities. product was dramatically cleaner cities.

[1] [1] Mohl, Raymond, Ed. 1997.Mohl, Raymond, Ed. 1997. The Making of Urban America.The Making of Urban America. ³The Centrality of the Horse to the Nineteenth³The Centrality of the Horse to the Nineteenth--Century American City," by Clay McShane. NY: SR Century American City," by Clay McShane. NY: SR Publishers, pp. 105 Publishers, pp. 105--130.130.



10

Equality Equality Equality is a principal of capitalism.Equality is a principal of capitalism.

Equality of opportunity, not equality of outcome.Equality of opportunity, not equality of outcome.

What does equality of opportunity mean?What does equality of opportunity mean?

It means government should not dictate people¶sIt means government should not dictate people¶sprofession, aspirations, or limit how far they go if theyprofession, aspirations, or limit how far they go if they

are ambitious and hardworking enough.are ambitious and hardworking enough. Equality of outcome is a principal of CommunismEquality of outcome is a principal of Communism

and Socialism.and Socialism.

The only real way to achieve equality of outcome is toThe only real way to achieve equality of outcome is tolimit the aspirations of people who want to excel.limit the aspirations of people who want to excel.

Proponents of equal outcome argue for high taxes onProponents of equal outcome argue for high taxes onthe rich.the rich.

But, making the rich poor But, making the rich poor ------ will never make thewill never make thepoor rich.poor rich.



11

Equality of OutcomeEquality of Outcome If we were to enforce equality of outcome in the classroom weIf we were to enforce equality of outcome in the classroom we

would add everyone¶s grades together and divide by the number would add everyone¶s grades together and divide by the number of students.of students. Slackers wouldn¶t study or do their homework, assuming the workSlackers wouldn¶t study or do their homework, assuming the work

of others would pull them up.of others would pull them up. The best students probably wouldn¶t invest time and energyThe best students probably wouldn¶t invest time and energy

studying for this class because no matter how hard they worked,studying for this class because no matter how hard they worked,

they wouldn¶t be able to significantly change their grade.they wouldn¶t be able to significantly change their grade. The result would be minimal or no effort by most students. Under The result would be minimal or no effort by most students. Under

a regime of equality of outcome everyone would receive a D or F.a regime of equality of outcome everyone would receive a D or F.

Those who want equality of outcome economically, hobbleThose who want equality of outcome economically, hobblethe motivated and hard working so the whiners, those whothe motivated and hard working so the whiners, those whoalways have and excuse, helpless and slackers don¶t get tooalways have and excuse, helpless and slackers don¶t get toofar behind.far behind. Equality of outcome is antiEquality of outcome is anti--capitalist.capitalist.

Capitalism encourages people to be all that they can be.Capitalism encourages people to be all that they can be.

Capitalism is a philosophy of personal achievement.Capitalism is a philosophy of personal achievement.



12

Conspicuous ConsumptionConspicuous Consumption One of the criticisms of capitalism is conspicuousOne of the criticisms of capitalism is conspicuous

consumption.consumption.

Conspicuous consumption is spending extraordinaryConspicuous consumption is spending extraordinaryamounts on food, cloths, cars and houses.amounts on food, cloths, cars and houses.

Conspicuous consumption is meant to show other peopleConspicuous consumption is meant to show other peoplehow much one has.how much one has.

Vernon Hill, the founder of Commerce Bank was criticizedVernon Hill, the founder of Commerce Bank was criticizedfor conspicuous consumption when he built a $10 millionfor conspicuous consumption when he built a $10 millionmansion in Moorestown.*mansion in Moorestown.*

Was Vernon Hill¶s conspicuous consumption good or bad?Was Vernon Hill¶s conspicuous consumption good or bad? ___ ___ * Amounts are illustrative and not meant to be exact.* Amounts are illustrative and not meant to be exact.



13

Conspicuous ConsumptionConspicuous Consumption

Think about where the money went (amounts are estimates).Think about where the money went (amounts are estimates). Building MaterialsBuilding Materials 40%40% $4,000,000$4,000,000 Craftsman Labor Craftsman Labor 40%40% $4,000,000$4,000,000 Builder/Prime Contractor Builder/Prime Contractor 20%20% $2,000,000$2,000,000

The $4,000,000 spent on building material provided employmentThe $4,000,000 spent on building material provided employment

for unskilled and semifor unskilled and semi--skilled labor in a number of factories.skilled labor in a number of factories.

The $4,000,000 spent on craftsman represents wages for The $4,000,000 spent on craftsman represents wages for carpenters, plumbers, sheetrock mechanics and others.carpenters, plumbers, sheetrock mechanics and others.

The $2,000,000 paid to the Builder/Prime contractor enabled himThe $2,000,000 paid to the Builder/Prime contractor enabled himor her to hire supervisors and foremen to oversee the work. Itor her to hire supervisors and foremen to oversee the work. Italso provided him or her with profit.also provided him or her with profit.

So what some see as conspicuous consumption, others see asSo what some see as conspicuous consumption, others see as jobs. jobs.



14

The Impact of ConsumptionThe Impact of Consumption All the people who got jobs working on Mr. Hill¶s house paid All the people who got jobs working on Mr. Hill¶s house paid

state and local income taxes.state and local income taxes. Those that own houses paid real estate taxes and real estateThose that own houses paid real estate taxes and real estate

taxes support schools, police and municipal services. For thosetaxes support schools, police and municipal services. For thosethat rent, their landlord paid a portion of their rent in real estatethat rent, their landlord paid a portion of their rent in real estatetaxes.taxes.

After paying taxes, those that earned money either saved or After paying taxes, those that earned money either saved or spent it. Most of the money was probably spentspent it. Most of the money was probably spent..

Spending wages created employment for car dealers, storeSpending wages created employment for car dealers, storeclerks, gas station attendants, and department store clerks. Allclerks, gas station attendants, and department store clerks. Allof these people pay taxes and spend their remaining earningsof these people pay taxes and spend their remaining earningswhich created employment for other people.which created employment for other people.

Consumption, consumer spending, stimulates the economy.Consumption, consumer spending, stimulates the economy.

About 70% of the US economy is driven by consumption. About 70% of the US economy is driven by consumption.

The poor don¶t create jobs. The rich do.The poor don¶t create jobs. The rich do.



15

Is Conspicuous ConsumptionIs Conspicuous ConsumptionGood or Bad?Good or Bad?

In 1992, Congress and the Administration decided to ³put it to theIn 1992, Congress and the Administration decided to ³put it to therich´ by putting a 10% surtax on yachts.rich´ by putting a 10% surtax on yachts.

As a result, the rich stopped buying yachts and Viking Yachts in As a result, the rich stopped buying yachts and Viking Yachts inEgg Harbor laid off about 300 hard working craftsmen. WhenEgg Harbor laid off about 300 hard working craftsmen. Whenpoliticians try to put it to the rich they end up putting it to averagepoliticians try to put it to the rich they end up putting it to averageworking people.working people.

The more the rich spend on planes, trains and automobiles, yachts,The more the rich spend on planes, trains and automobiles, yachts,mansions, and shoes with complicated buckles, the moremansions, and shoes with complicated buckles, the moreemployment they provide.employment they provide.

The rich pay taxes AND the people who get jobs by selling goodsThe rich pay taxes AND the people who get jobs by selling goodsand services to the rich pay taxes and their expenditures make jobsand services to the rich pay taxes and their expenditures make jobs

for yet others.for yet others. So while some people want to make the rich poor through higher So while some people want to make the rich poor through higher

taxes, jobs created by the rich contribute to the fabric of society.taxes, jobs created by the rich contribute to the fabric of society.

Your objective should be to become rich so that you can provideYour objective should be to become rich so that you can providemeaningful employment to others by creating jobs as anmeaningful employment to others by creating jobs as an

entrepreneur OR by spending your money which will create jobs.entrepreneur OR by spending your money which will create jobs.



16

How are we doing under How are we doing under capitalism? capitalism?

Distribution of US IncomeDistribution of US Income(Amounts inflation adjusted to 2005 dollars, the most recent data available)(Amounts inflation adjusted to 2005 dollars, the most recent data available)[1] [1]

Average Average Average Real Income Average Real Income20052005 19671967 GrowthGrowth

Lowest QuartileLowest Quartile 10,65510,655 7,9237,923 34.5%34.5%Second QuartileSecond Quartile 27,35727,357 21,95521,955 24.6%24.6%Middle QuartileMiddle Quartile 46,30146,301 35,05435,054 32.1%32.1%Fourth QuartileFourth Quartile 72,82572,825 49,04549,045 48.5%48.5%Highest Quartile 159,583Highest Quartile 159,583 88,26388,263 80.8%80.8%

[1] [1] ³Selected Measures of Household Income Dispersion: 1967 to 2005, Table A³Selected Measures of Household Income Dispersion: 1967 to 2005, Table A--3. US Census Bureau.3. US Census Bureau.www.census.gov/hhes/www/income/histinc/p60no231_tablea3.pdf www.census.gov/hhes/www/income/histinc/p60no231_tablea3.pdf



17

Income MobilityIncome Mobility

Capitalism is dynamic.Capitalism is dynamic.Individuals have the opportunity to improve their position in life.Individuals have the opportunity to improve their position in life.

People in the lowest economic quintile don¶t have to stay therePeople in the lowest economic quintile don¶t have to stay there..[1][1]

19961996 ----------------------2005 Quintile2005 Quintile----------------------

Quintile LowestQuintile Lowest Second Middle Fourth HighestSecond Middle Fourth Highest

LowestLowest 42.242.2 28.628.6 13.913.9 9.9 5.39.9 5.3

SecondSecond 17.017.0 33.333.3 26.726.7 15.1 7.915.1 7.9

MiddleMiddle 7.17.1 17.517.5 33.333.3 29.6 12.529.6 12.5

FourthFourth 4.14.1 7.37.3 18.318.3 40.2 40.2 30.230.2

Highest 2.6Highest 2.6 3.23.2 7.17.1 17.817.8 69.469.4

[1][1] "Income Mobility in the U.S. from 1996 to 2005," Department of the Treasury."Income Mobility in the U.S. from 1996 to 2005," Department of the Treasury.November 13, 2007. www.treas.gov/offices/taxNovember 13, 2007. www.treas.gov/offices/tax--policy/library/incomemobilitystudy03policy/library/incomemobilitystudy03--

08revise.pdf 08revise.pdf



18

US Capitalism vs. Other CountriesUS Capitalism vs. Other Countries [1] [1]

Per Per Per Per

CapitaCapita CapitaCapita

GDP PopulationGDP Population GDP PopulationGDP Population

Angola Angola 5,6005,600 12.5M12.5M JapanJapan 33,60033,600 127.3M127.3M

ChinaChina 5,3005,300 1.33B1.33B North KoreaNorth Korea 1,9001,900 23.5M23.5M

ColumbiaColumbia 6,7006,700 45.0M45.0M RussiaRussia 14,70014,700 140.7M140.7M

CongoCongo 300300 66.5M66.5M South AfricaSouth Africa 9,8009,800 43.8M43.8M

CubaCuba 4,5004,500 11.4M11.4M South KoreaSouth Korea 24,80024,800 49.2M49.2M

EgyptEgypt 5,5005,500 81.7M81.7M United KingdomUnited Kingdom35,10035,100 60.9M60.9M

FranceFrance 33,20033,200 64.1M64.1M United StatesUnited States 45,80045,800 303.8M303.8M

GermanyGermany 34,20034,200 82.4M82.4M ZambiaZambia 1,3001,300 11.7M11.7M

IndiaIndia 2,7002,700 1.15B1.15B ZimbabweZimbabwe 200200 12.4M12.4M

WorldWorld 10,00010,000 6.68B6.68B

[1] CIA Factbook. www.cia.gov/library/publications/the[1] CIA Factbook. www.cia.gov/library/publications/the--worldworld--factbook/index.htmlfactbook/index.html



19

Income vs. Per Capita GDPIncome vs. Per Capita GDP

GDP is theGDP is the gross domestic productgross domestic product of a country. Itof a country. Itis the total value of the goods and services produced.is the total value of the goods and services produced.

Per Capita GDP is the average value of goods andPer Capita GDP is the average value of goods andservices produced by each man, woman and child inservices produced by each man, woman and child inthe country.the country.

Household Income is what people actually get.Household Income is what people actually get.

If a country¶s Per Capita GDP is low, it is impossibleIf a country¶s Per Capita GDP is low, it is impossible

for its average income to be high.for its average income to be high.



20

TaxesTaxesTaxes are part of the price of living in a civilized society.Taxes are part of the price of living in a civilized society.

There areThere are taxes for necessary purposestaxes for necessary purposes::

National DefenseNational Defense Policing and Criminal JusticePolicing and Criminal JusticeRoads and BridgesRoads and Bridges Public EducationPublic Education

Sanitation and Public HealthSanitation and Public Health

And there are And there are taxes for optional purposestaxes for optional purposes::

Art Art Income redistributionIncome redistributionTo save the whalesTo save the whales To subsidize failing companies, andTo subsidize failing companies, and

To make politicians look goodTo make politicians look good

The latest example of taxes used to make politicians look good is the recent housing bill The latest example of taxes used to make politicians look good is the recent housing bill which will spend about $300 billion to support people who bought a $600,000 housewhich will spend about $300 billion to support people who bought a $600,000 housewhen they could only afford a $400,000 house; people who were unable to makewhen they could only afford a $400,000 house; people who were unable to makehouse payments, but had their paperwork ³fudged´ to make them appear house payments, but had their paperwork ³fudged´ to make them appear creditworthy; and banks who made loans to people who couldn¶t pay.creditworthy; and banks who made loans to people who couldn¶t pay.



21

Who should pay taxes and how Who should pay taxes and how much? much?

In a perfectly fair tax system everyone would payIn a perfectly fair tax system everyone would paysomething and no one¶s tax rate would be tensomething and no one¶s tax rate would be tentimes higher than anyone else¶s tax rate.times higher than anyone else¶s tax rate.

The term tax rate in this context is somewhatThe term tax rate in this context is somewhatmisleading.misleading.

The minimum US tax rate is about 10%. However,The minimum US tax rate is about 10%. However,few people actually pay this amount of taxes. After few people actually pay this amount of taxes. After deductions, those in the lowest income strata have adeductions, those in the lowest income strata have afederal income tax burden far less than 10%.federal income tax burden far less than 10%.

Of course this shortfall means those making moreOf course this shortfall means those making moremust make up the difference. The question is howmust make up the difference. The question is howmuch is too much?much is too much?



22

Who bears the burden of taxes?Who bears the burden of taxes?EarningsEarnings Percent of Percent of Share of Share of

RankRank National IncomeNational Income Tax BurdenTax Burden

Top 1%Top 1% 22%22% 40%40%

Top 5%Top 5% 37%37% 60%60%

Top 25%Top 25% 68%68% 86%86%Top 50%Top 50% 88%88% 97%97%

Bottom 50%Bottom 50% 12%12% 3%3%

Progressive tax rates and a ³soak the rich´ political mentality areProgressive tax rates and a ³soak the rich´ political mentality are

pushing the country toward two economic classes. One that works,pushing the country toward two economic classes. One that works,

produces and pays taxes and one that pays no taxes, but enjoysproduces and pays taxes and one that pays no taxes, but enjoys

the benefits of taxes: defense, roads, public safety and transfer the benefits of taxes: defense, roads, public safety and transfer

payments.payments.



23

Do Higher Tax Rates Generate MoreDo Higher Tax Rates Generate MoreRevenue? Revenue?

Do higher tax rates generate more governmentDo higher tax rates generate more governmentrevenue or just ³punish´ the rich for beingrevenue or just ³punish´ the rich for beingsuccessful?successful?

Opinions vary.Opinions vary.

Politicians usually say that higher taxes generatePoliticians usually say that higher taxes generatemore revenue for the government.more revenue for the government.

Economists say, if you want to discourage somethingEconomists say, if you want to discourage somethingtax it. For example the tax on cigarettes is very hightax it. For example the tax on cigarettes is very highand getting higher to discourage smoking.and getting higher to discourage smoking.



24

The Laffer CurveThe Laffer Curve The Laffer CurveThe Laffer Curve [1][1] says that when tax rates are zero or says that when tax rates are zero or

100% government revenue is zero. At a 100% tax rate100% government revenue is zero. At a 100% tax ratethere is no point in working. Generally reducing tax ratesthere is no point in working. Generally reducing tax ratesencourage work and risk taking which results in higher encourage work and risk taking which results in higher government revenue because the taxable base increases.government revenue because the taxable base increases.

The idea behind the Laffer Curve was not original. IbnThe idea behind the Laffer Curve was not original. Ibn

Khaldun, a 14th century Muslim philosopher, wrote in hisKhaldun, a 14th century Muslim philosopher, wrote in hisworkwork T he Muqadd imahT he Muqadd imah: "It should be known that at the: "It should be known that at thebeginning of the dynasty, taxation yields a large revenuebeginning of the dynasty, taxation yields a large revenuefrom small assessments. At the end of the dynasty,from small assessments. At the end of the dynasty,taxation yields a small revenue from large assessments.³taxation yields a small revenue from large assessments.³

In other words high taxes discourage work andIn other words high taxes discourage work andinvestment.investment.

[1][1] Laffer, Arthur B. 2004. ³The Laffer Curve: Past, Present, and Future,´ The HeritageLaffer, Arthur B. 2004. ³The Laffer Curve: Past, Present, and Future,´ The HeritageFoundation for American Leadership. June 1.Foundation for American Leadership. June 1.www.heritage.org/Research/Taxes/bg1765.cfmwww.heritage.org/Research/Taxes/bg1765.cfm



25

Tax Rates, Tax Revenue & GDPTax Rates, Tax Revenue & GDPKurt Hauser, a San Francisco Investment Banker found that noKurt Hauser, a San Francisco Investment Banker found that no

matter what the top tax bracket was, the government got aboutmatter what the top tax bracket was, the government got aboutthe same percent of GDP in taxes.the same percent of GDP in taxes. [1][1] However, high tax ratesHowever, high tax ratesreduce overall GDP.reduce overall GDP.

[1][1] Ranson, David "You Can't Soak the Rich," Wall Street Journal May 20, 2008 A23.Ranson, David "You Can't Soak the Rich," Wall Street Journal May 20, 2008 A23.



26

Tax MigrationTax MigrationOne of the adverse consequences of high taxes, isOne of the adverse consequences of high taxes, is

tax migration. People are mobile. Capital is mobile.tax migration. People are mobile. Capital is mobile. The CEO of Cypress Semi The CEO of Cypress Semi--Conductor, Inc. indicated he has beenConductor, Inc. indicated he has been

moving his facilities out of California because of high taxes.moving his facilities out of California because of high taxes.[1] [1]

Over the past decade, 330,000 Massachusetts residents moved toOver the past decade, 330,000 Massachusetts residents moved toone of the nine states that have no state income tax.one of the nine states that have no state income tax.[2] [2]

Since Connecticut instituted its income tax in 1992, there has beenSince Connecticut instituted its income tax in 1992, there has beenexactly zero growth in the number of new jobs. Over this sameexactly zero growth in the number of new jobs. Over this same

period the rest of the country added 22 million jobs. period the rest of the country added 22 million jobs. [3] [3]

[1] [1] Rogers, T. J. ³Golden State Drives Out Business,´ Wall Street Journal August 2 Rogers, T. J. ³Golden State Drives Out Business,´ Wall Street Journal August 2--3, 2008.3, 2008.

[2] [2] __ ³Boston Tax Party,´ __ ³Boston Tax Party,´ Wall Street Journal Wall Street Journal. August 5, 2008. A18.. August 5, 2008. A18.

[3] __ ³Jodi Corzine, Review and Outlook,´ Wall Street Journal, August 29[3] __ ³Jodi Corzine, Review and Outlook,´ Wall Street Journal, August 29--30, 2009. A12.30, 2009. A12.



27

Tax MigrationTax Migration After New Jersey passed the ³millionaires tax´ the president of a After New Jersey passed the ³millionaires tax´ the president of a

local bank indicated that he was moving to Florida to avoid thelocal bank indicated that he was moving to Florida to avoid thetax and he was taking the Bank¶s corporate headquarters withtax and he was taking the Bank¶s corporate headquarters withhim.him.[4] [4] There are indications others will follow.There are indications others will follow.[5] [5]

In 2007 Maryland passed a ³millionaires tax,´ a higher tax rate onIn 2007 Maryland passed a ³millionaires tax,´ a higher tax rate onthose making over $1 million a year. Since then one third of those making over $1 million a year. Since then one third of

Maryland¶s ³millionaires´ have left the state.Maryland¶s ³millionaires´ have left the state.

One commentator suggested that One commentator suggested that Anheuser Busch allowed itself Anheuser Busch allowed itself to be acquired by InBev as a way to move the company from theto be acquired by InBev as a way to move the company from theUS to Belgium to get lower tax rates.US to Belgium to get lower tax rates.[7] [7] As a matter of fact, As a matter of fact,corporate moves to lower tax countries has been an ongoingcorporate moves to lower tax countries has been an ongoing

problem. problem.[8] [8]

[4] [4] Speech to The Business Development Leadership Seminar. President, Farmers and Merchants Bank. SpringSpeech to The Business Development Leadership Seminar. President, Farmers and Merchants Bank. Spring2005.2005.

[5] [5] Hester, Tom Jr. ´Poll finds many hoping to leave New Jersey behind,´ Hester, Tom Jr. ´Poll finds many hoping to leave New Jersey behind,´ The Associated PressThe Associated Press. October 17, 2007.. October 17, 2007.[6] __ ³Jodi Corzine, Review and Outlook,´ Wall Street Journal, August 29[6] __ ³Jodi Corzine, Review and Outlook,´ Wall Street Journal, August 29--30, 2009. A12.30, 2009. A12.[7] [7] Rush Limbaugh Show Rush Limbaugh Show ± ± August 4, 2008 August 4, 2008

[8] [8] Veronique de Rugy, Fiscal Policy Analyst Cato Institute for Senate Appropriations Subcommittee on Treasury Veronique de Rugy, Fiscal Policy Analyst Cato Institute for Senate Appropriations Subcommittee on Treasury and General Government Hearing on "Corporate Moves to Tax Havens " Chairman Byron Dorgan (Dand General Government Hearing on "Corporate Moves to Tax Havens " Chairman Byron Dorgan (D--ND)ND)



28

The Magic LanternThe Magic Lantern There are a number of constraints on a capitalist democracy.There are a number of constraints on a capitalist democracy.

Many people think the government is aMany people think the government is a Magic LanternMagic Lantern. If they. If theyrub it, they can get anything they want: free art museums, freerub it, they can get anything they want: free art museums, freehealthcare, free food, free housing, free, free, free.healthcare, free food, free housing, free, free, free.

Businesses create wealth; but government creates nothing.Businesses create wealth; but government creates nothing.

When the government gives something to someone, it mustWhen the government gives something to someone, it must

take something from someone else.take something from someone else.

In a democracy, people can vote for the candidate who says heIn a democracy, people can vote for the candidate who says heor she will give people the most ³free stuff.´or she will give people the most ³free stuff.´

To pay for that ³free stuff´ government will have to tax, punish if To pay for that ³free stuff´ government will have to tax, punish if you will, those who are most productive.you will, those who are most productive.

If benefits of work are taxed away, there is little point in workingIf benefits of work are taxed away, there is little point in workingand producing.and producing. The productive can leave, or as inThe productive can leave, or as in Atlas AtlasShruggedShrugged, simply stop producing., simply stop producing.

As the number of takers overwhelms the number of As the number of takers overwhelms the number of producers a capitalist democracy will collapse. producers a capitalist democracy will collapse.



29

Paying TaxesPaying Taxes

Nobody likes to pay taxes, yet taxes are necessaryNobody likes to pay taxes, yet taxes are necessaryfor a civilized society.for a civilized society.

No matter how much you dislike paying taxes, PAYNo matter how much you dislike paying taxes, PAYTHEM.THEM.

If you are unhappy about the amount you have toIf you are unhappy about the amount you have topay, or the way the government is spending YOURpay, or the way the government is spending YOURmoney, call them, write them, email them, or organizemoney, call them, write them, email them, or organizea protest. Campaign against spendthrift politicians or a protest. Campaign against spendthrift politicians or run for office yourself.run for office yourself.

But stay on the side of the angels. As long as the taxBut stay on the side of the angels. As long as the taxlaw is what it is, pay what the law requires.law is what it is, pay what the law requires.



30

What you should have learned in thisWhat you should have learned in thislecturelecture

1. There are a number of systems for organizing society: Despotism,1. There are a number of systems for organizing society: Despotism,

Command Economy, Communism and Capitalism are examples.Command Economy, Communism and Capitalism are examples.2. In Despotism, Command Economies and Communism, the state2. In Despotism, Command Economies and Communism, the state

dictates what people do, what they make and how goods aredictates what people do, what they make and how goods aredistributed.distributed.

3. Capitalism is a system of maximum individual freedom and minimum3. Capitalism is a system of maximum individual freedom and minimumgovernment interference.government interference.

4. Features of Capitalism include: (i) Rational Self 4. Features of Capitalism include: (i) Rational Self --InterestInterest ± ± People workPeople work

for their own benefit (ii) Mutual Benefitfor their own benefit (ii) Mutual Benefit ± ± People exchange goods andPeople exchange goods andservices for mutual benefit. No one is coerced; (iii) Right to Own andservices for mutual benefit. No one is coerced; (iii) Right to Own andBenefit from PropertyBenefit from Property ± ± The right to own property means people keepThe right to own property means people keepthe benefits of their work, can invest capital, and plan for the future; (iv)the benefits of their work, can invest capital, and plan for the future; (iv)Price Signals ProductionPrice Signals Production ± ± as price goes up entrepreneurs will fulfillas price goes up entrepreneurs will fulfillneeds, government production mandates are not needed; (v) Price as aneeds, government production mandates are not needed; (v) Price as aRationing MechanismRationing Mechanism ± ± Goods and services are allocated to thoseGoods and services are allocated to thosewilling and able to pay for them.willing and able to pay for them.

5. The result of everyone working in his or her own self interest does more5. The result of everyone working in his or her own self interest does moregood for society than government mandated programs. This is thegood for society than government mandated programs. This is the³invisible hand.´³invisible hand.´

6. Capitalism has done more to save the whales and clean up pollution6. Capitalism has done more to save the whales and clean up pollutionthan government or dothan government or do--gooders.gooders.



31

What you should have learned in thisWhat you should have learned in thislecturelecture

7. Equality of opportunity is a capitalistic principal. Equality of outcome is a7. Equality of opportunity is a capitalistic principal. Equality of outcome is acommunist / socialist principal.communist / socialist principal.

8. There is great income mobility under US capitalism. Those in the lowest8. There is great income mobility under US capitalism. Those in the lowestincome quintile in one year may be in a higher income in other years.income quintile in one year may be in a higher income in other years.

9. The poorest fifth of Americans are better off than most of the world.9. The poorest fifth of Americans are better off than most of the world.10. Taxes are part of the price for living in a civilized society.10. Taxes are part of the price for living in a civilized society.11. Government spends tax dollars on11. Government spends tax dollars on necessarynecessary items like nationalitems like national

defense, criminal justice, road, bridges, sanitation and education anddefense, criminal justice, road, bridges, sanitation and education andoptionaloptional

items like art and income transfer.items like art and income transfer.12. The tax burden is uneven. The top 25% of earners pay 86% of taxes.12. The tax burden is uneven. The top 25% of earners pay 86% of taxes.The lowest 50% of earners pay 3% of taxes.The lowest 50% of earners pay 3% of taxes.

13. Higher tax rates discourage work, investment and risk taking. Lower 13. Higher tax rates discourage work, investment and risk taking. Lower tax rates encourage these activities. Lower tax rates might result intax rates encourage these activities. Lower tax rates might result inhigher tax revenue.higher tax revenue.

14. Some people thing the government is a Magic Lantern giving them free14. Some people thing the government is a Magic Lantern giving them free

goods and services. In the long run such an attitude will collapse agoods and services. In the long run such an attitude will collapse acapitalist democracy.capitalist democracy.15. Pay the amount of tax that is legally required. If you don¶t like the way15. Pay the amount of tax that is legally required. If you don¶t like the way

taxes are levied work though the political system to change them.taxes are levied work though the political system to change them.



32

THE ENDTHE END

CapitalismCapitalismBy David E. Vance, MBA, CPA, JDBy David E. Vance, MBA, CPA, JD

be 03 capitalism

Documents