by Karl Arnold Belser
12 March 2014

The problem with a capitalist economy is exponential growth of capital, i.e. the increase in value by reinvestment for income producing property, The problem is not income inequality as the government and the media claim. The reason is that capital gains are not counted as taxable income until the capital gain is realized. However, the value of capital assets might increase exponentially which increase might in turn produce more income. Hence taxation of income alone cannot stop the increase in wealth of the owner of the capital asset.

Ultimately a very few people might end up owning a majority of the capital assets of the world. For example, today (2014) Oxfam estimates that 85 people are as wealthy as the poorest half of the world. This type of wealth inequality, I think, is a real problem that will have to be addressed sooner or later.

Piketty's book Capital in the Twenty-First Century discusses the wealth inequality issue and is being called the most significant economics book since The Wealth of Nations. See reviews by the 
American Prospect and Vox.

The Rice on a Chessboard Problem illustrates the exponential growth that can cause one winner, the player with the highest rate of growth, to take all.

According to an old legend, vizier Sissa Ben Dahir presented an Indian King Sharim with a beautiful, hand-made chessboard. The king asked what he would like in return for his gift and the courtier surprised the king by asking for one grain of rice on the first square, two grains on the second, four grains on the third etc. The king readily agreed and asked for the rice to be brought. All went well at first, but the requirement for 2 n − 1 grains on the nth square demanded over a million grains on the 21st square, more than a million million (aka trillion) on the 41st and there simply was not enough rice in the whole world for the final squares.

I recall a version of this story in which the king killed the vizier for trying to take advantage.  This illustrates the violent end that might come to the people who end up owning everything. That is, greedy people might be punished when everyone else is suffering.  Today, Tom Perkins, one of the founders of the venture capital firm Kleiner Perkins, asserts that such a hatred of the rich is brewing. The media apparently is labeling Perkins as "a crazy", but is he?

wealth tax has been proposed to try to level wealth inequality.

One problem with a wealth tax is figuring out how much the tax should be, especially if the asset is not income producing.

In a trip I made to Syracuse through upper Pennsylvania I heard an NPR program describing how the 2% property tax to support schools was causing people to have to sell their property because the property could not realize a 2% return. Property tax is a type of wealth tax. Further the school budgets could not be reduced because the teacher's unions mandated the same salaries as paid in expensive New York City. So property was taken and sold to pay for excessively high teachers salaries in an extremely poor part of the country.

The most egregious example I know of is that of  Casa Loma outside of Toronto, Canada which the owner was forced to sell. It turned out that the taxes were more than the sales price of the property.

I suspect that the government, which is largely political, can not be trusted to administer a wealth tax fairly.

Another problem with a wealth tax is that , unless all countries in the world operate in the same manner, money and businesses will likely move to where the tax rate is lowest. Sweden abolished their wealth tax in 2007 because so much capital was fleeing the country that it was inhibiting entrepreneurs from starting new businesses. There are still several countries that have wealth taxes, but the tax does in fact put these countries at a disadvantage relative to other countries.

I mentioned the wealth tax as a funding method in my post on a Minimum Basic income, and I still think that some kind of wealth equalization is critical for a peaceful societal evolution.  

I read David Stockman's book The Great Deformation: The Corruption of Capitalism in America with great interest. Based on this book, the economic system in the US has drifted from first economic principals in to a political mess that is unlikely to change. Stockman does make a concrete proposal of a one-time wealth tax of 30% payable over 10 years that I think might fly when the circumstances get dire enough. The one-time nature of this action would prevent people from fleeing the US.

Like with tom Perkins, the media is treating David stockman as if he were crazy. Surely things will continue the way they have always continued. I suspect that Stockman's thinking is on the right track.

There seem to be several adjacent possibles here.  

One might be civil unrest in which the poor and starving general public go after the rich like what happened in Germany in the 1930s. This is really the Perkins' fear. However, I don't think this will happen as long as the US government keeps borrowing money and subsidizing it citizens so that they would be able to live with a reasonable standard of living.

If the economy recovers future generations will have to pay down this debt. However, if the economy does not grow sufficiently, some proposal like that from David Stockman might have to be implemented.

My intention is to continually assess the "fingers of instability" of national debt and wealth inequality so that I might be aware of any big changes in the economy and government before they happen. After all, LUCK is when opportunity meets the prepared mind.
Last updated August 22, 2016
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