Monday, November 01, 2010

Production v. Manipulation

There are two sources of income: production and manipulation.

When the income of the rich comes from production, we shouldn't tax it heavily for we all benefit from the production.

When the income is from manipulation, our attempts to tax and redistribute the income tend to fail because the people good at manipulation will find ways to game the system.

Every economy includes both production and manipulation.

Attempts to achieve social justice through taxation and redistribution usually results in a society that places onerous taxes on production while increasing the amount of manipulation.

The fact that it is difficult to achieve income redistribution does not mean that we should not worry about income inequality. It means that we have to think about the problem differently.

If we find our society that generates great fortunes without producing wealth for the society at large, then we clearly have a society where the forces of manipulation have taken root.

Correcting this society is not a matter of taxing the wealth but a matter of examining the sources of the wealth.

If we find sources of wealth which are primarily manipulative, then we need to eliminate the source of the manipulation.

Most of the sources of manipulation are intrinsically anti-market. Hedge funds were created to protect the ruling elite from changes in the market (hence the name hedge fund). Short selling is a violation of property rights. Government backed re-insurance is a scheme to protect insiders from changes in the market.

As these tools are inherently anti-market, removing them would be pro-market. N'est-ce-pas?

Sadly, rather than looking at the roots of the matter, our political class has an unfortunate history creating additional manipulative tools to overcome the manipulative tools of the last generation.

The call for onerous new tax policies to redistribute the incomes made from market manipulation is but the latest of such fallacious thinking. The new tax burden will fall heaviest on the productive segment of the market and concentrate even more power in the hands of the manipulators.


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