I was just reading through Hoppe’s great book Economics and Ethics of Private Property and in particular his chapter on the Economics of Taxation, see also the whole part here http://mises.org/daily/2061, and I was wondering if one of you bright minds could clarify this point of his:
“By lowering the present value associated with future-directed, value-productive efforts, taxation raises the effective rate of time preference, i.e., the rate of originary interest and, accordingly, leads to a shortening of the period of production and provision and so exerts an inexorable influence of pushing mankind into the direction of an existence of living from hand to mouth. Just increase taxation enough, and you will have mankind reduced to the level of barbaric animal beasts.” (p. 36) (emphasis added)
I am particularly interested in an elaboration of the part on the “shortening of the period of production”? What is exactly ment by this? Is it just that people will not any more initiate longer-oriented/more future oriented production projects due to the rise in the time prefernece?
Here’s my take: In other words, if capital gains taxes makes investing less profitable you’re not going to borrow long-term or invest long-term, and thus any productive project which takes a long time to produce is effectively destroyed or no longer possible. People will tend to prefer shorter-return projects. Raise taxes enough and even projects that take only 6 months or a year could be prevented.
As a small example, if the farmer cannot afford to buy new farming equipment on credit and turn a profit on it with the summer harvest, then he’s reduced to a greatly less productive farming method, possibly even to the point of subsistence farming or even hunting/gathering. Thus:
Suppose capital gains tax were 90%, the rational thing to do is stop investing. You’d rather have your money now than invest it and lose 90% of it. Thus, long-term investing of any sort disappears. Similarly, if you had an income tax of 90%, you’d probably choose not to work (for a wage) rather than work legally and lose 90% of the product produced by your effort, which wouldn’t be enough to eve feed yourself on.
Now reduced to wandering and unable to do productive work, you can scratch out a living hunting and foraging for food perhaps.