Social destruction by the abuse of money

Sep 28, 2017·Alasdair Macleod

In Britain, the top 1% of earners pay over a quarter of all income tax collected, and while super-rich British residents perhaps don’t have the tax breaks the Macklowes enjoy, the bulk of the burden falls on lawyers, bankers, company executives and owners of successful private enterprises. And it should, say the collectivists....

One of the juicier stories doing the rounds in New York society is the Macklowe divorce. Harry, the husband, kept a French mistress for two years before seeking a divorce from his wife of 58 years. So far, this is a run-of-the-mill marital split. But what made it the subject of gossip is the extraordinary lifestyle of the Macklowes, the mud being slung, and the expectations of the wronged 79-year old wife, seeking a billion or so to see out her remaining days.

They say hell hath no fury, and all that. Here is one of New York’s richest couples, washing their laundry in public, and it emerges that Harry has not paid tax since 1983. Harry’s lawyer bluntly stated in court that “people in real estate don’t pay taxes”. It echoes Leona Hemsley’s infamous quote that emerged at her trial thirty years ago, when the Queen of Mean said “We don’t pay taxes, only little people pay taxes.”

This still surprises many of us little people, but we must believe a top New York lawyer when he makes a statement in a court of law. The source of immense personal wealth in cities like New York is often from property development, and if this is a tax-free activity, it makes a mockery of the state redistributing money from the haves to the have-nots.

And sociologists wonder why there is so much discontent aimed at the establishment! This discontent finds expression in doubled-down socialism – morality-driven socialism rather than the Marxian version perhaps. It seems obvious to the masses that government is failing to collect taxes through not trying hard enough. But all that the Macklowe divorce evidence proves is one of life’s truisms: the rich are very good at finding legal ways not to pay tax.

Wealth-destruction and the state

Government welfare promises are never funded by the very rich. Anyway, there are too few of them to make any difference to the enormous scale of statist demands for tax revenue. But there is nonetheless an enormous burden imposed upon the successful wealth creators. In Britain, the top 1% of earners pay over a quarter of all income tax collected, and while super-rich British residents perhaps don’t have the tax breaks the Macklowes enjoy, the bulk of the burden falls on lawyers, bankers, company executives and owners of successful private enterprises. And it should, say the collectivists.

But when we look at the next layer down, those that earn more than the average wage, we see the state’s taxes have caused the worst economic distortions. We are referring to taxes on the wages of skilled blue-collar workers, and upwards. These are ordinary people with aspirations to do better for themselves and their families. These are the people who pay most of the other 75% of the income tax and sales taxes collected by the state. These are the people, who, if allowed to keep their earnings, would be incentivised to become more productive for the benefit of everyone. These are the people who would reduce the welfare burden on the state, given the choice, by being able to save for private healthcare and to pay for the education of their children.

Instead, they are forced to subsidise a far costlier state system. I was recently told by a credible source that the only form of surgery in the US that has fallen in price in recent years is the one not covered by highly regulated Medicare and Medicaid: plastic surgery. Some time ago I did a rough calculation of the cost of educating a child of primary school age in Britain, and found that the “free” state system costs about twice as much as educating a child privately. Keeping a male young offender locked up in Britain costs £85,975 per annum all-in, while it costs less than £40,000 to educate a child of the same age at Eton. And it’s not as if British borstals are bristling with expensive upper-class facilities, either.

I can think of very few parents who prefer to put their children through the state system rather than private education. Even left-wing Labour politicians in the UK send their children to private schools. Trade unions offer private healthcare to their own staff in preference to facing the queues at the National Health Service, while publicly damning private healthcare for taking resources away from the state system.

Money diverted in taxes from productive use to bolster state spending is an enormous unseen drag on the economy. It destroys personal wealth, and produces inferior or unwanted services in return. And while we can debate the benefits to the lowest earners in society and the long-term unemployed, we should not ignore the wealth that might otherwise have been accumulated, upon which ultimately the standard of living of even the poorest in society depends.

Lifestyles are now based on debt

State intervention has become so extensive and costly, that those with ambitions to better themselves and improve the conditions for their families have long been unable to do so out of heavily-taxed earnings. Instead, they resort to borrowing. A typical young couple buying a newly-built home on a housing estate, parking two cars in the driveway, well-dressed, and with children who no longer walk to school but are driven by a parent, represent the aspirations of your country’s future.

But how much of this visible wealth does the model couple own? The mortgage deeds are with the mortgage lender, representing most of the home’s value. The cars are not theirs until the end of the loan agreement, and then they must relinquish them, buy them, or trade them in for another car on finance. And the credit cards are expensive borrowing which for many people are a necessary financial bridge to the next payday. It is a sad fact that most salaried people have no financial buffer at all, and if their next pay-check fails to arrive, they risk losing their credit rating and possibly their home as well.

The mortgage, the car loans and credit card debts have in effect replaced the earnings taken away in government taxes, and the savings that might otherwise have been accumulated. New housing estates are sold almost entirely on mortgage credit with 90% loan-to-value loans being the norm. The boom in car sales is also based on consumer finance. Consumer borrowing has now outstripped industrial borrowing for investment in production, by far.

The visible affluence of most people’s current lifestyles is founded on the unstable sands of debt. The absence of personal wealth, which would otherwise be a guarantee for the future, is replaced by a growing dependency on rising house values to inflate away mortgage debt, typically a family’s largest investment and liability. The scramble to buy housing, which would not otherwise occur, and the availability of credit for it, forces prices above where they would otherwise be. Ordinary folk become geared speculators in the prices of the roof over their own heads, putting them at the mercy of the ups and downs of the credit cycle.

Possibly the most insidious side effect of debt is social dislocation. When people save, they do so for their own benefit as well as for their families. People with savings to protect are socially and politically more stable. Aspirations for betterment include giving a better start in life for one’s children, and accepting responsibility for one’s parents, who may need day-to-day help and financial support in their old age. This is why saving is compatible with social cohesion. These objectives are incompatible with a lifestyle based on debt, and consequently familial responsibilities are eroded. After all, if the pact with the state is the state will provide for my children and elderly parents out of my tax payments, my responsibility towards them is lessened.

Furthermore, the widespread provision of facilities by local benefactors, such an important source of community amenities in the past, has all but vanished. The state tells these angels it will provide for communities instead, while compelling them to pay taxes to the state to do so. The fundamental decency of regard for local community and compassion for one’s neighbours has been displaced by state intervention.

Government is no replacement for human compassion

State help is no substitute for self-help. The state is unfitted for recycling taxes into welfare. The process is necessarily clumsy, costly and bureaucratic. The first thing the state needs is an address. If you are homeless and don’t have a bank account, you may have difficulty qualifying for welfare. The forms and procedures, even if you have an address, are necessarily complicated, so only the benefit cheats know their way round them, while the deserving often fail to get their entitlements.

Charitable citizens, who favour the redistribution of wealth to the poor, are motivated in the main by the compassion they would exhibit if they could personally afford to. But they fail to see that the bureaucratic mind is not suited for the task. If someone in genuine need turns up at the church, mosque, synagogue or temple, his or her needs are obvious, and any religious charity rapidly assists. Spongers are quickly identified and turned away. Local charity provided by religious organisations is extremely efficient. Contrast this with the state, which requires a form to be completed, then processed, and then for the distressed individual, hungry and desperate, possibly with mental health issues, to be told to report back in a fortnight, once the welfare application has been processed, for a decision. Yet, well-meaning supporters of state intervention seem blind to the appalling inadequacies and costly inefficiencies of state welfare.

It’s tempting to blame democracy for this state of affairs, because increasing numbers of voters benefit from state disbursements. This misses the point. It is possible to have a functioning democracy as well as an electorate imbued with a work ethic and a dislike of welfare dependency. If taxes are limited to a flat rate of income tax of no more than 20%, with a generous personal allowance for the lowest earners, the whole population becomes incentivised to improve its lot, and for wage earners to look after their families. Tax evasion almost ceases, with higher earners happy to contribute to the common welfare.

A slimmed-down government can then afford to pay a basic state pension, and to provide the basics of healthcare and education free at the point of use. You need look no further than island states such as Jersey and Guernsey, for proof that low-tax democracy coupled with civilised welfare works. The key is for the state not to tax ordinary peoples’ earnings and spending to the point where they must borrow to make ends meetii.

By destroying wealth, governments are feasting on society’s seed-corn. Not only do governments force their citizens into debt, but they actively discourage saving as well. Savings are put aside from taxed income, and then the income and capital gains on savings are taxed a second time. You can, of course, ring-fence savings in a pension fund. But most wage earners take no active part in contributing to pension schemes, and they do not see the money until they retire. Even then, pensions are subject to income tax as they are drawn down. The concession of tax deferral through pensions is generally being capped, eroded and raided by indebted governments. And with bond yields manipulated so low by the central banks, pensions are unlikely to deliver promised returns as well.

The future unfunded costs of all welfare-driven governments’ future liabilities have accumulated to many multiples of their tax revenues. The system of state provision of services, and the destruction of wealth to pay for them, when taken together are both financially and socially terminal.

Debt has become a trap from which there is no escape for both governments and their voters. Our typical young couple referred to earlier would no more willingly bring their spending under control than they would jump into a snake pit. Nor does the government want to see any diminution in credit-fuelled demand. Ordinary people have become both dependant on and unwitting victims of the credit cycle. And now, governments are similarly ensnared, because there is not enough private wealth left to sustain the liabilities they have taken upon themselves.

iTable 1:

iiA common misconception is that island states, such as those in the Channel Islands, are only viable as tax havens. Not so; they were successful long before high taxes drove individuals and businesses to seek low-tax jurisdictions. Business leaders in the islands through the ages have been skilled at both production of goods and providing services opportunistically, exploiting business opportunities of every sort as miniature trading nations.

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