This article is a little bit on the theoretical side thus we ask for apologies in advance, although we promise to make it as easy as possible to understand. One of the themes we have been grunting about since… well… ever… is that taxes are evil, evil, evil because they are the devil's work! Mwahahahaha... Oh. No. Sorry. That wasn't it. Sometimes we mix-up the appointments of our Libertarian and Austrian Economic devil-worshiping and world domination planning sessions with our writing. Or at least that seems to be the belief of our detractors. But no. We wish devil-worshiping and devil-doing would be it. It would be sooooo simple to fix. Just get a few good exorcisms going and that would be it! But not. Sadly enough, taxation is purely people-doing or, to be precise, politicians-doing. But we digress…
EVERYTHING STARTS SOMEWHERE
In the beginning there were people with needs. These people laboured to satisfy those needs. Typically they would be looking for food, shelter, clothing and security. As they laboured many of these needs were satisfied to one degree or another. But they continued labouring because they realized that they could use the surplus of their labour (i.e. stuff they did not use or did not "consume", in economic terms) to trade with other people for stuff they wanted but they didn't have. Through this trade they realized that they could have more stuff that would satisfy other needs. For example, they could purchase a wife (don't laugh, this is a historical fact) or hire a spiritual guy or gal to bless the crops thus preventing the ire or gods and so forth. Yet, some clever people realize that trading was great, but if you wanted to get the real good stuff (such as a castle or an army and thus becoming a real, professional jerk) you had to produce more. But to produce more you had to expand. But to expand you needed to purchase more land, workers, tools and so forth. But the only way to do so was to use your excess production (the stuff you did not consume) not for trading but for buying all that land, workers, tools etc. Thus the concept of "investing" was born.
It is a simple concept. Really. The idea being you save what you don't consume and then you use those savings to purchase the tools you need to produce more. The more you produce, the higher your profits, the higher your wealth (your capacity to satisfy your needs however exuberant they may be) but also the higher your savings.
CAPITAL AND WELLBEING
All those savings that one has because we are not consuming everything, are called capital. And capital is essential to increase production. We have explained this above. Without capital there cannot be increased production. But the idea that somehow capital will multiply itself is ludicrous. Capital is simply the enabler of productive endeavours. Capital is potential increased production, emphasis on potential. For example, if you decide to buy gold with your savings and stash it in the basement, that gold may be capital but it is not available for expanding production.
Yet, most of the time, people want to increase their savings. They do so by loaning them to people who want to expand their production, for a price. This "price" is the interest.
And so, most of the time there are people with savings interested in earning an "interest" and there are people wishing to expand their productive capacity in search for a loan. Both parties meet and strike a deal. This is how capital is put to good use. Capital did not do anything by itself. People did. Entrepreneurs did and in so doing they increased productive capacity.
However, increasing productive capacity in and by itself means nothing. We could set-up a factory to synthesize water but it is highly dubious we will ever make a profit. The whole point of increasing productive capacity is the idea of increasing sales and with them profits. But to increase sales there must be a product that people want for sale to begin with. In other words, the increase of productivity brought about by capital translates as more products and services people want and thus in more wellbeing for those people (i.e. customers).
In summary:
Through the action of entrepreneurs, increased capacity is transformed into increased wellbeing for customers.
We can see this in the graph below, which represents the "market capitalization" of different countries per capita (per person). Market capitalization is simply the total worth of all shares in a given country (in USD or EUR or whichever currency you prefer to use). This number does not represent the capital available in a country because share value is only part of the whole available capital, but it gives us some idea. Take a look at the picture. You will notice that the highest capitalized countries (in dark green) tend to be the more well-off countries. The opposite is also true. The less capitalized countries (light green) are the ones worse-off. This is not a coincidence but simply a reflection of how markets operate in reality.
ENTER THE STATE
Now we need to introduce the villain. We know that in general terms increased amounts of capital translate as increased wellbeing. But if this is so, then the opposite is also true. Decreased amounts of capital produce decreased amounts of wellbeing.
Any kind of taxation at any and all levels (direct or indirect) takes money from our pockets. Even when governments borrow or print, the net effect is still the same. Printing decreases the value of our money and borrowing increases the debt we owe to other people. Any of the methods of the unholy trinity (tax, borrow and print) has the same net effect; we become poorer in one time frame or another (some effects are delayed).
And what happens with poor people?
They can save less.
And what happens when they save less?
They accumulate less capital.
And what happens when less capital is accumulated?
Our wellbeing decreases.
Simple right? There you have it. Taxes are evil because they decrease our wellbeing through the removal of capital from the markets.
Note: please see the Glossary if you are unfamiliar with certain words.
