It seems every time a new Congress or president comes to Washington, DC, politically valuable special interests amp up their ceaseless clamoring for more favors from the ever-expanding government, usually in the sleight of hand known as “tax reform.” Much of the public discourse revolves around whether to cut taxes “for the wealthy,” often disparagingly referred to as “trickle-down” economics. The criticism is that putting more money in the hands of rich people so they can purchase more goods and services – consuming their own capital in the process – is not going to stimulate the economy.
Here’s one thing many people miss: If the point of tax reform is to foster greater economic activity, it is essential that it foster capital formation and accumulation. The wealthy aren’t looking to consume more; they are looking to invest more and to earn more. To do that, they need capital. And tax policies that prevent investment opportunities from emerging and that crush existing ones with onerous regulations and punitive tax rates do not encourage capital formation and accumulation, they discourage it or inspire it to move overseas via jurisdictional arbitrage.
Here’s another thing many people miss: Such capital accumulation is critical to raising the standard of living for the middle-class and the lower-income working class. Worker earnings depend on productivity. But the only way to sustain higher worker productivity over the long term is for entrepreneurs to invest more money, per capita, per worker, in productivity enhancements such as newer machinery or computers, newer software, or faster Internet connections.
It takes money – usually, somebody’s savings – to finance those enhancements. And if those savings cannot earn a competitive return on investment in one jurisdiction, they will go to another jurisdiction where they will. And this is about more than just tax reform; it’s about regulatory reform, too.