Tags: Gross | capital | velocity | income

Financial Luminaries Agree – Raise Taxes on Capital to Grow the Economy

By    |   Friday, 01 November 2013 08:19 AM

Disparities in the distribution of wealth and income have exacerbated the downward economic spiral over the past few decades.

During this time, too much income was generated by the turnover of huge quantities of financial assets, such as stocks and bonds. Too little income resulted from long-term investment in sustainable business activities involving real products and services.

More direct investment would have created more employment opportunities and greater income with a more sustainable distribution.

The extraordinary return on capital during the preceding three decades was granted highly favored tax treatment without generating sufficient employment growth and corresponding income for the masses. This suggests capital does not warrant this preferential tax treatment.

Bill Gross, the founder, managing director and co-CIO of Pimco, recently stated, "Developed economies work best when inequality of incomes are at a minimum" and believes "the era of taxing capital at lower rates than labor should now end."

Gross believes the economy would be more productive if corporations invested their retained earnings in plants and equipment rather purchasing its own stock. This would put people back to work and grow the economy.

Stanley Druckenmiller, a former money manager for George Soros' Quantum Fund and former chairman and president of Duquesne Capital, along with Warren Buffet, also believe the tax on capital is too low, Gross added.

When income and wealth are concentrated in too few hands, money turnover (velocity) declines. Since 1980, this turnover fell approximately 60 percent, according to the Federal Reserve Bank. This has resulted in stagnant employment and incomes.

With lower monetary velocity, the quantity of cost-effective goods falls, leading to shortages and inflation. In time, most people are unable to afford the products being produced by the wealthy and the system devolves further.

Treating capital more like ordinary income will help balance our finances and the economy.

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Disparities in the distribution of wealth and income have exacerbated the downward economic spiral over the past few decades.
Friday, 01 November 2013 08:19 AM
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