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Globe and Mail columnist Doug Saunders. RANDY QUAN FOR THE GlOBE AND MAIL (Randy Quan/Randy Quan/THE GLOBE AND MAIL)
Globe and Mail columnist Doug Saunders. RANDY QUAN FOR THE GlOBE AND MAIL (Randy Quan/Randy Quan/THE GLOBE AND MAIL)

DOUG SAUNDERS

Would capitalism work better with ultra-high taxes? Add to ...

There aren’t many James Bond fans who would list Moonraker as their favourite movie, but the 1979 Roger Moore epic does offer a most vivid illustration of the perils of tax policy.

Based on an Ian Fleming novel whose action takes place entirely in England, the Moonraker script was rewritten to place its characters in Brazilian hideouts, Venetian palazzos and space stations – and not at all in England. Filming took place in continental Europe and Latin America so that none of its cast or producers would set foot in Britain at any point. This was because Britain’s top income-tax rate had risen to 83 per cent on earned income and 98 per cent on investment income. This very British story was taxed right out of Blighty.

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Since 1980 or thereabouts, most governments have tried to avoid Moonraker-type problems. The idea of confiscatory taxation was invented in the United States, where top-bracket income and estate taxes hovered around 80 per cent for most of the 20th century and peaked at 90 per cent in the 1960s. Canada’s stayed around 80 per cent until the mid-1970s. Similar rates were the norm throughout the century in the English-speaking world.

Those tax rates may have been designed to bring in revenue and keep the economy moving, but by the time of Moonraker, they appeared to be doing the opposite: Western economies were tanking; Britain required a bailout from the International Monetary Fund. So top rates in Western countries were generally lowered to around 50 per cent, where they’ve remained.

Recently, though, the idea of prohibitively high taxes, in a somewhat different form, has been enjoying a renaissance – not among big-government advocates who want the state to get richer, or among anti-capitalist zealots who want the rich to pay, but among economists who see them as a way to fix dangerous inefficiencies in the capitalist system – precisely because they have such a deterrent effect.

Much of this new thinking is rooted in the works of Thomas Piketty, the French economist whose research into historic income trends has done much to put economic inequality at the centre of today’s policy debates.

His book Capital in the Twenty-First Century has become the most discussed economic work of the year because it very clearly and almost indisputably outlines his key discovery: that normal market economies, if left to themselves, will always enter a dangerous spiral in which previously existing wealth will grow in value much faster than either wages or sales. (In economic terms, the rate of return on capital will increase much faster than the rate of growth on income and output.) This causes the living standards of non-wealthy people to stagnate and decline – or, in his famous phrase, “The past devours the future.”

Less attention has been devoted to the book’s second half, where he describes the way out of this problem. Yet this is, in many ways, more important – in good part because Mr. Piketty, despite the Marxist resonance in his book’s title, is not an anti-capitalist by any means. In fact, he argues strongly that it would be unwise to increase the size of government or the wealth of the state dramatically. His prescriptions are designed to fix capitalism’s biggest problem, and cause it to enrich everyone – as it did, for a while, during the 20th century.

One reason why it did, why wealth didn’t pool up in ways that priced ordinary people out of the economy, was that various wars and crises caused governments to tax capital, either directly or indirectly. People didn’t simply sit on wealth, because it was more profitable to put it to work.

How do we cause that to happen again, without discouraging people with money from participating in the economy? Not by a return to 1960s income taxes (though he notes that those rates actually produced much higher productivity than the lower rates of the past 30 years). Rather, he argues, it can be accomplished by targeting those areas where piles of dead wealth work against the interests of the larger economy with tax incentives that shift the economy away from its worst instincts.

Specifically, by targeting inheritance (which by its nature contradicts the basic principles of capitalism) and extremely high salaries (he would target those above $7-million) with deterrent taxes, and by taxing static forms of wealth at 1 to 2 per cent. This is not to create tax revenues (it wouldn’t) but to encourage people to move their earnings into higher-risk, higher-return areas that would create economic activity.

By today’s standards, those measures sound extreme. But by Mr. Piketty’s reasoning, they are bound to become mainstream policy sooner or later, because we’ll either be forced into them by the next big crisis, or because we’ll implement them in order to avoid it.

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