Capital gains increases versus corporate innovation

The two major US political parties are in a constant tug-of-war over their political agendas and spending proposals.

The Democratic Party believes in raising taxes on corporations and capital gains to pay for social service programs that benefit poor and middle-class citizens. The Republican Party believes that lowering taxes on corporations and capital gains will allow businesses to become more innovative.

The Republican economic philosophy is that more innovation leads to more organizational growth, jobs, and higher wages. But the counterargument from the other side is that only the rich and powerful have capital gains assets. Because of this, the wealthy can pay higher capital gains taxes to finance the welfare of the working poor.

What is missing in this counter-argument is the possibility of innovation. Wealthy investors and venture capitalists are responsible for helping innovative startups grow into large corporations employing thousands of people.

One of the reasons investors take this type of risk is to enjoy a potentially profitable return. Unfortunately, capital gains tax hikes make investors more reluctant to invest in innovative companies with the potential to change the world. If politicians raise taxes on capital gains, it generally forces investors to move their money into a safer investment, such as bonds or stocks that pay a high dividend.

Friedrich August von Hayek once said, “I don’t think it is an exaggeration to say that history is largely a history of inflation, generally inflations engineered by governments for the benefit of governments.” Capital gains tax increases to fund social welfare programs will lead to higher inflation and less innovation. Hayek understood that all inflation throughout history could be attributed to tax increases and excessive government spending.

A society cannot evolve if a government finances the welfare of its people. It can only evolve through innovation, entrepreneurship and creativity. That is what Hayek believed more than 50 years ago, and his philosophy is still relevant today. However, there is a significant portion of the modern population that identifies as socialist and progressive. His thinking is more in line with famous social economists like Karl Marx.

“Capital is independent and has individuality, while the living person is dependent and has no individuality.” Karl Marx thought that capitalism robbed people of their freedom and individuality for the benefit of the upper class. A society that puts innovation and money above people’s well-being would generate tensions and internal conflicts. That is the Marxist economic philosophy.

In general, a society with more social welfare and less innovation cannot create more jobs and opportunities. If progressive politicians want to keep funding social programs with money that doesn’t exist, it will only reduce innovation and increase inflation. Even if the rich were to pay higher taxes on capital gains, the government does not generate enough revenue to pay for all of the proposed social programs.

Perhaps the government could at least spend money on innovation if it doesn’t let investors do it.