Wednesday, July 14, 2010

Capital Consumption, Part I

“Capital that is not invested is consumed one way or another. Keynes wrote that one of the evils of a depreciating currency is that it confuses the distinction between income and capital, making it likely that people will live on the latter while thinking they are living on the former. “The increasing money value of the community’s capital goods obscures temporarily a diminution in the real quantity in the stock.” A family that borrows against the increased equity in a house in order to buy a car is living on capital. A city in which the roads, buildings, and parks are deteriorating is doing the same thing. And so is a business that is not depreciating its machinery sufficiently because accounting procedures and tax laws do not fully recognize the effects of inflation.

Capital that is neither invested nor spent voluntarily is taxed away and consumed away. When capital is taxed by the state, it is diverted from an investment role to a consumption role. The social democracies specialize in this, but it is an ancient practice. The rules of the late Roman Empire, desperate for funds and having already taxed income unbearably, resorted to taxing capital, with disastrous results.” (Herbert Schlossberg, Idols for Destruction, p. 130-131).

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