Capitalism vs Socialism

by Harvey Golub

Here’s the appeal of socialism compared with capitalism as many millennials and other ignorant see it:  the capitalist system generates plenty of income and wealth but the wealth created is distributed unfairly. This lack of fairness can be remedied in part by having the more economically successful pay more in taxes and use those taxes to help the less well off. On the surface this seems reasonable.  As they would describe it, our tax system generates revenue of over $4 trillion annually for the federal government, about 18% of GDP. If we raise it to, say, 22%, all coming from the wealthy, the nation would be better off.

What are the premises that must be true for this logic to hold:

1. You can raise the taxes in this way and produce the same or more GDP. Very unlikely. It assumes people who pay these new high rates would continue to work as hard and produce as much. Much more likely is that they would reduce their taxable income in any number of ways and clearly reduce the level of their investments since the acceptable after-tax required rate of return would have to increase.

2. GDP would continue to rise at the same rate, thereby generating sufficient taxes to fund all those worthwhile programs they admire. The assumption here is that you could take, say,  $1 trillion out of the private sector and not affect economic growth. After all, they say, government spending (excuse me, government INVESTMENT) will generate the same economic growth as private investment. Clearly, if you give everybody a check, most will spend it and that will create economic growth. It will create some economic growth to be sure, , but at a rate substantially below what  private investment would yield. Remember all the infrastructure spending on “shovel ready” projects by Obama that resulted in more bicycle paths, but no improvement in roads, bridges and the like.

3. They assume no more people will make the choice of living on government support and continue working. Those who believe this know nothing of human nature. If people have the choice of working for $50 thousand a year or live on government programs at $ 40k, a raise from $30k, more will choose not to work, thereby increasing the cost of the helpful programs and reducing the tax base (all these numbers are simply to illustrate the point and are not actual numbers. The actual effects may be much larger than I assume .)

The overall effect will be to reduce economic growth, increase government spending, encouraging people to reduce working thereby creating a need to increase taxes. That will be the effect of accelerating the downward cycle.  If you don’t believe me look at the countries that have gone the furthest down this utopian dream – Venezuela, Cuba, Russia. Who would want to live in those paradises of socialism whether or not you word the words Democratic or Capitalist to Social.