Eat the rich, or incentivise the rich to do the right thing?

Much of the debate on ending Ireland’s fiscal crisis has centred on the combination of tax rises and spending cuts required. The left have been particularly vociferous in calling for an increased tax burden on the rich, while at the same time wondering “where’s my stimulus package?”. Many years ago, TJ Rodgers, a tech entrepreneur and investor, put forward strong arguments for allowing the wealth creators to create wealth, rather than governments. Keynes argues that severe downturns create irrational pessimism dampening the animal spirits of entrepreneurs and investors. While Keynes suggested that the government should take their (wealth creators) place when they can’t continue to invest, getting out of this mess in the best possible shape may be more likely if the government helped raise their spirits instead.
The goal of redistributive policies – or tax rises and stimulus plans in today’s enivornment, is to take some of the wealth that the rich have accumulated (or earned) and redistribute it to the less well off in society. A government stimulus package would be used to generate state industries that would channel the redistribution by hiring workers, creating much needed jobs. This all sounds pretty good, as far as it goes, many super-rich have more than enough to live on and unemployment is high. Providing the stimulus plan is spent on investments that will yield a real return to the state the tax payer will come out a winner. The question remains – good as this option sounds, is it the best option?

Who are the best wealth creators?

Does the state & her politician’s and bureaucrats have all the answers? Are our civil servants the best investors of capital in the state? If so, then we should all gladly hand over any extra capital we have to the state, so that as a group we can all reap the collective reward in higher living standards.
Or is it possible, that the best investors of capital are distributed throughout the population, with no special increased density within the state sector? If so, how could we test this thesis and identify the best investors of capital? It is reasonable to assume that the best investors of capital would have proportionally more capital at their disposal, having had successful investments in the past. In other words the people capable of getting the best return from investment capital will be disproportionately present in the wealthiest cohorts of society.

Should all wealth be treated equally

All wealth is not equal, those rich who have inherited their wealth have displayed no great skill at gaining a positive return from capital. The same could be said of employees who simply refused to spend and merely saved and accumulated capital from their income. Others may have generated wealth from overseas investments and while this is positive, generating extra wealth that is controlled from within the state, it’s not quite as valuable as profitable investments within the state.

My point is this, sorting out Ireland’s problems is not as simple as increasing the tax burden on the rich and then assuming that the state will most efficiently and successfully reinvest the extra capital gained to the benefit of all. (Should the state feel so inclined and the government has shown no inclination thus far). Instead, we’d be better off instigating “use it or lose it” tax and tax relief schemes. Ireland suffers a severe budget deficit (thanks to both structural factors – e.g. reliance on transactional taxes and benchmarking, and cyclical factors – increased welfare payments and the like), as a result taxes probably do have to rise and spending should be cut. We should be very careful about how taxes are raised, and about what shelters are left in place. Individuals in an economy respond to incentives. Throughout the bubble the government incentivised property investment and development. Unfortunately, all to predictably, these incentives were successful in their own aims – to devastating effect today. It’s time for the government to incentivise sensible investments in sustainable businesses that will benefit the national economy. Raise taxes for sure, but only for those who won’t or can’t put their wealth to good use.

Encouraging genuine wealth creation

The ICTU were wrong to oppose the BES expansion. The BES is an example of the type of scheme we need now – to encourage productive investment with some of that €300 bn we have sitting unproductively on deposit, without necessarily resorting to statism. We do need to close the budget deficit as government borrowing is going balloon when we bail out the banks. I’m not convinceed we can borrow without limit either. While Japan’s debt to GDP ratio is close to 200%, unlike Zimbabwe, Japan has huge foreign currency reserves. If we need to raise taxes, surely the best policy is to ensure that there are clauses which allow those who know how to generate wealth, to use their own wealth to good purpose. In the common good it’s surely time to use it, or lose it?


I found the excellent TJ Rodgers article via Paul Graham’s latest essay – Graham is a tech entrepreneur and investor responsible for funding dozens of startups creating hundreds of jobs and in generating millions in new wealth for the US economy. TJ Rodgers on wealth creation, and investments – why the free market bests government subsidy and intervention. I thought the passage below enlightening –

So please allow me to reintroduce myself: I am an excess of the 1980s. Based on my ownership stake in Cypress, I am one of the people who, in the President’s words, “profited most from the uneven prosperity of the last decade.” I became a paper millionaire in the 1980s–eight times over, in fact.

How did I profit? I started a company in Silicon Valley. I obtained stock in that company when it had one employee (me) and one used computer. I worked with that company for a decade–sixteen hours a day, six days a week–to help get it where it is today.

And where is it? Over its ten-year history, Cypress has generated over $1 billion in cumulative revenue, made over $160 billion in profits on which we paid $60 million in taxes, created 1,500 jobs which paid cumulative salaries of nearly $500 million, on which our employees paid further taxes of $150 million. We have shipped cumulative exports worth $300 million. We have generated a market value of $500 million for our shareholders and employees–all of whom own stock in the company.

If that is an “excess of the 1980s,” let’s have more! As an entrepreneur, I should not have to apologize for my success and that of my company. I am offended by the administration’s divisive rhetoric. As we debate the virtues of raising taxes on individuals and corporations, let’s not debate abstractions. Let’s debate the realities of who pays taxes and the impact of raising taxes on those people and companies.

I don’t want sympathy. But I do want to expose the shaky foundations of the logic behind the administration’s program. I am a person of simple tastes; therefore, I still have most of the wealth associated with my Cypress shares. What have I done with that wealth? I invested it. In fact, I invested it in precisely the kinds of companies on which the administration wants to shower taxpayer subsidies–the world’s most advanced competitors in fields such as semiconductors, biotechnology, software, networking, environmental sciences, and health care.

Attached to my testimony is a list of 99 companies in which I hold investments through my participation in three venture-capital funds. Nineteen of those companies are innovators and leaders in high-speed data communications–real companies that are making real components of today’s existing data superhighway. Other companies are innovators in the field of high-performance computing–including MasPar.

Every incremental dollar that Washington takes from me comes directly out of my investments in these companies. I cannot sell my house or car or cut my food bills. But I am going to be forced to invest less. After all, the cash to pay my higher taxes has to come from somewhere. In essence, the administration is arguing that by taking my money in the form of higher taxes and “investing” it in subsidies, it can make better investments–more jobs and wealth–than the venture-capital firms with which I invest–firms that are the envy of Japan and Europe. That logic defies common sense. Does anyone believe that Washington invests more effectively in high technology than the free market?

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm