The Foolish 'Windfall Tax' Idea

 

Of course, everyone with even a sketchy understanding of economics knows already that the ‘windfall tax’ is a bad idea. But for those who don’t yet know it, here are a couple of pointers. There are three main things we can do in an economy to make the world a better place; the first is waste fewer resources, which means consuming as optimally and efficiently as possible (which also includes allocating those resources in line with the information signals generated by prices in accordance with supply and demand curves). The second is work harder to provide more goods and services that people want and need, at better prices, using resources most efficiently. The third is to keep increasing our knowledge and our technological capacity so that the things we want and need become cheaper, easier and quicker than they were for previous generations. Whether in times of prosperity, in a pandemic, in a war, or whenever, there is nothing better that we can do for humans in an economy than those three things.

Perhaps now you can start to see why capital taxes like this (which includes tax on capital gains, interest, shareholder dividends and corporation income), dressed up as the ‘windfall tax’, are inimical to the threefold progress of the above. If you tax capital, you disincentivise saving and increase consumption, and if you tax capital, you disincentivise investment and innovation. If you increase consumption artificially, you decrease efficiency in point 1; and if you disincentivise investment and innovation, you tax (in the long run) labour, growth and innovation, which decreases the efficiency in points 2 and 3. 

Taxing capital disincentivises capital accumulation, and therefore negatively affects investment, production and labour. But it’s worse than that, because in the current tax systems money is taxed multiple times, which produces even greater inefficiencies and retardation of economic development. Taxing your earnings and then your capital amounts to double taxation, because capital gains are the fruits from the income that has already been taxed once. Taxing both income and capital is like fining a pedestrian for being drunk and then fining him again half an hour later for having too much alcohol in his bloodstream. Finally, taxing capital is also a deferred tax on labour, because capital is earned by past labour that has already been taxed at the point of earnings, and is therefore the deferred benefits of past labour. Tax the capital that is the present reward for past labour and you’re double taxing the original labour.

The upshot of all this is that a windfall tax is a terrible idea thought up by people who don’t understand economics, for the persuasion of people who are impoverished by listening to those people who don’t understand economics.