Saturday, October 05, 2019

The Effect of Taxing Stock Market Gains on the Demand for Means of Production

Concerning my August 20, 2019 post "The Wealth of the Wealthy," a Twitter follower has written: "Much of capitalists’ wealth is in shares of stock purchased in the secondary market. Is such wealth invested in the means of production?" ( Answer Wealth is material goods made by man, including material goods whose wealth character is created by man, such as land, mineral deposits, and domesticated animals. Stocks, bonds, and other financial assets are not wealth but claims to wealth. Nor are they means of production.
However, taxing the capitalists’ financial assets is tantamount to taxing their wealth in means of production in that having to sell these assets to pay taxes takes away funds that otherwise would have been used to purchase means of production. Thus, the effect of the tax payments is reduced spending for means of production.
This is obviously true if the buyers of the stocks or bonds the capitalists are forced to sell were themselves planning either to buy new issues of stock or to lend their funds to business firms. That money goes to the government instead.
It is also true if the buyers were planning simply to buy
other already existing financial assets but whose sellers were planning either to buy new issues of stock or to lend their funds to business firms. The money provided to pay taxes does not reach these sellers.
It is also true no matter how many additional rounds of purchases and sales of existing financial assets we introduce. At some point taxes paid by the sale of financial assets result in correspondingly less spending for means of production.
Thus, the policy of increasing government spending based on taxes on the rich means increased government spending at the expense of reduced spending for the means of production. It’s a policy of “eating the seed corn.”
For elaboration on the consequences of increasing government consumption expenditure at the expense of capitalists’ productive expenditure, see my Capitalism: A Treatise on Economics, pp. 622-642.