The two major American political parties are in a constant tug-of-war over their policy agendas and spending proposals.
The Democratic Party believes in increasing taxes on corporations and capital gains to pay for social service programs that benefit the poor and middle-class citizens. The Republican Party believes lowering taxes on corporations and capital gains will allow businesses to become more innovative.
The Republican economic philosophy is more innovation leads to more organizational growth, jobs, and higher wages. But the counterargument from the other side is only the wealthy and powerful have assets with capital gains. Because of this, the wealthy can afford to pay higher capital gains taxes to fund the welfare of the working poor.
What is missing from this counterargument is the possibility of innovation. Wealthy venture capitalists and investors are responsible for helping new and innovative companies grow into large corporations employing thousands of people.
One of the reasons why investors take these kinds of risks is to enjoy a potential profitable return. Unfortunately, capital gains tax hikes make investors more reluctant to invest in innovative companies with the potential to change the world. If politicians increase capital gains taxes, it usually forces investors to move their money toward a safer investment, such as bonds or stocks that pay a high dividend.
Friedrich August von Hayek once said, “I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.” Capital gains tax increases to fund social welfare programs will lead to higher inflation and less innovation. Hayek understood that all inflation throughout history could be attributed to tax increases and government overspending.
A society cannot evolve if a government funds the welfare of its people. It can only evolve through innovation, entrepreneurship, and creativity. That is what Hayek believed over 50 years ago, and his philosophy is still relevant today. However, there is a significant portion of the modern population that identifies as socialist and progressive. Their thinking is more in line with famous social economists like Karl Marx.
“Capital is independent and has individuality, while the living person is dependent and has no individuality.” Karl Marx thought capitalism robbed people of their freedom and individuality for the benefit of the upper class. A society that puts innovation and money above the welfare of people would lead to internal tensions and conflict. That is the Marxist economic philosophy.
Overall, a society with more social welfare and less innovation cannot create more jobs and opportunities. If progressive politicians want to keep funding social programs with money that does not exist, it will only reduce innovation and increase inflation. Even if the rich did pay higher capital gains taxes, the government does not generate enough income to pay for all its proposed social programs.