Why getting rich is better for the world than staying rich: Don Pittis

Capitalism works best when it taps the efforts of poor people to make themselves rich. Helping the very wealthy maintain their advantage should not be democracy's job.

Paradise Papers and U.S. tax cuts may be symptoms of a less dynamic kind of capitalism

While the people with luxury yachts are anxious to hang on to their wealth, capitalist economic growth is founded on the efforts of the less wealthy to improve their lot. (Yannis Behrakis/Reuters)

Capitalism makes poor people rich, but only when it's working at its best.

In last week's release of the Paradise Papers, CBC Investigates helped remind us of an alternative objective of capitalism echoed in Washington's quest for tax breaks for the wealthiest.

That is the pressure to make sure rich people are able to hang on to their advantageous positions.

The historic argument over exactly how much tax each person should contribute is as much political as it is economic.

Taxation is theft (or is it property?)

The polarized politics might be characterized by contrasting the assertion by 19th-century anarchist Pierre-Joseph Proudhon that "property is theft" with the modern anarcho-capitalist insistence that "taxation is theft."

Adam Smith, the father of modern capitalism, had a pragmatic take on taxes. He argued they were essential to a well-run state and so everyone should be required to contribute.

It was Scottish economist Adam Smith, often called the father of modern capitalism, who declared people should be taxed according to their ability to pay. (David Moir/Reuters)

Among his four basic requirements for a good tax system — which included the stipulation they should not be arbitrary and that they should be convenient to collect and to pay — was that they should be "proportionate to incomes or abilities to pay."

It was Smith, not Karl Marx, who gave us the principle that rich people should pay more tax.

Someone has to pay

As previously pointed out during the 2016 release of the Panama Papers, someone has to pay for the roads and ports, corporate subsidies and bailouts that keep the Canadian economy ticking.

Every penny that the well-off fail to pay falls onto the shoulders of poorer wage earners who have no way of escaping the clutches of the Canada Revenue Agency.

In a world where the rich have disproportionate clout in the corridors of power, it is no surprise that the richest 1 per cent are expected to benefit the most from the U.S. tax changes proposed last week.

That may not be good for the global economy.

There are good reasons to think that the world is returning to an era where what John Maynard Keynes called "the functionless investor" is once again superseding the active capitalist that makes economies dynamic.

If you believe in the power of capitalism to make the world a better place, it is hard to fault people like Steve Jobs and his financial backers who took risks to create an entire new industry.

From Russia with nothing

In Canada there are many examples, including the Bronfman family that came to Canada from Russia with nothing and made themselves and Canada rich. Frank Stronach, founder of car parts giant Magna International, could tell a similar story.

But since those days, Canada and the world have experienced what Bank of Canada deputy governor Sylvain Leduc recently called "declining dynamism."   

It is certainly hard to see the social contribution of passive investors who hold onto the wealth and power created by their dynamic forebears by using that power to convince governments to let them pay less in taxes.

As we are told repeatedly by advocates for people and businesses that keep billions of dollars in low-tax offshore funds, they really aren't breaking the rules.

Not illegal

"Offshore trusts are not illegal," said Ian Lee, former banker and now professor at Carleton University's Sprott School of Business.

Of course that raises the question of why the Government of Canada — as the representative of Canadian voters with a median income of about $30,000 — would create a set of laws that allows rich passive investors to avoid billions in taxes.

There is a consensus in mainstream economics that whether Proudhon was right or wrong, property ownership makes economies stronger. As even self-declared Communist countries such as China and Vietnam discovered, switching from collective farms to private small-holders caused a boom in agricultural production.

However, the breaking up of huge estates controlled by a passive landowning class has shown similar economic benefits. 

When it comes to money, there is increasing evidence that the funding of capital projects from what Keynes called "the savings of the rich out of their superfluity," is no longer as important as it once was. Certainly there is no shortage of cash to drive up the price of the world's safest assets.

Places like the South America and the Persian Gulf, where the rich control almost all the resources, are not models of democratic or economic health. The strongest economies are not built on selling or getting tax breaks on a few yachts and private jets. They are those with active dynamic populations where everyone can participate. 

If governments want to build strong capitalist economies, rather than using their laws to help keep the wealthy rich, the evidence is that legislators must let the already rich look after themselves, and turn their attention instead to making laws that help hard-working aspiring capitalists become rich for the first time.

Follow Don on Twitter @don_pittis

More analysis from Don Pittis


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