Tuesday, June 3, 2014


Tim Worstall is a Fellow at the Adam Smith Institute, which exists as a think tank to promote libertarian and free market ideas. Worstall also writes for Forbes.

Today, Forbes published a work of Worstall's in which Worstall rather stupidly claims a consumption tax is not a tax on wealth. Worstall wrote, "This is rather the point of it in fact: it (consumption tax) entirely exempts wealth from taxation." 

Worstall does not know the first thing about wealth. Wealth is the name given to property put to purchase and sale for cash and credit. 

A consumption tax is a tax on spending on goods, whether chattel or services. Said another way, a consumption tax is a tax on wealth. That is all it ever can be.

The word consumption enters into economics from the Physiocrats. Most economic historians consider the Physiocrats as the first modern economists. The Physiocrats were Frenchmen (Quesney, Turgot, Le Trosne, others) who sought to justify taxation on merchants and financiers while justifying no taxation on farmers. 

In their explanation of a trade, which they called exchange, the word the Physiocrats wrote was consommation, which Englishmen translated as consumption. By consumption, the Physiocrats meant the purchase of something after first gaining the means by selling something else.

Le Trosne said, 

"There is this difference between an Exchange and a Sale, that, in an Exchange, everything is consummated, or completed (consommé) for each party. They possess the thing which they desired to procure, and they have only to enjoy it.
"In the Sale on the contrary, it is only the purchaser who has attained his object, because it is only he who is in position to enjoy. But everything is not ended for the seller.
"Exchange arrives directly at its object, which is consommation (consumption, completion). It has only two terms, and is ended in one contract. But a contract in which money intervenes is not consommé (completed, consumption), but it is necessary for the seller should become a buyer, either himself or by the interposition of the person to whom he transfers the money.
"There are, therefore, in order to arrive at consommation (completion, consumption) which is the ultimate object, at least four terms and three contractants, of whom one intervenes twice."

To the Physiocrats, the trading away of wealth in the form of cash or credit for wealth as products after the cost of production, which they called the produit net, is what they meant by consumption. Thus, the Physiocrats knew at least two kinds of wealth — products of the earth and money. 

Wealth is anything that can be bought or sold. Socrates said so in his dialogue known as the Eryxias. The Romans said so. English jurists of courts since the 1700s have said so. So too have American jurists.

Worstall conflates both capital with wealth as well as production and trade. 

Capital is property put to making stuff.  The name for property put to purchase and sale for cash and credit is wealth. 

Though most think of property as things possessed, property always has meant the right of ownership and never the thing owned. Only when property gets created, can trade arise between two persons.

Production is the use of capital to create property in potential wealth, which all know as stock or inventory when in chattel form, or to create property in actual wealth, which all know as work, in services form. 

Trade is the purchase and sale of property as wealth.

Labor is the poor man's capital. Work sold for wages is wealth. Wages acquired in a purchase and sale of work for wages is wealth. 

So too, is the same for the firm. Machinery and labor are the capital of the firm. Product sold for income is wealth. Income acquired in a purchase and sale of product for income is wealth.

Inventory (stock) is property that has potential wealth and derives from capital. Inventory never sold, though still property, is loss. Inventory does not become wealth until traded. 

Production uses capital. Trade requires wealth.

Until trade happens, nothing is wealth. Though someone has property in a beat-up, used bicycle that goes unsold while on offer at a lawn sale, because the bicycle remains unsold, the used bicycle never becomes wealth. 

However, when bought new in a purchase and sale, the bicycle became wealth of the seller and the cash or credit used to buy the bicycle became wealth of the buyer.

If someone has property in say a house, a banker might consider such property an asset — property that has potential to gain a street price in a purchase and sale. And as such, a banker might consider the asset as collateral, which is property pledged against debt owed on credit borrowed. 

Worstall then goes on to further embarrassment when he writes, "What a progressive consumption tax does do is tax the returns to capital that are then consumed." Brushing aside his horrible grammatical expression, "does do," Worstall reveals that he does not understand commerce and business.

When a capitalist invests, a capitalist uses his wealth to buy a right of action to a share of profit, if any, earned by a firm run by an entrepreneur.  The return to capital is profit. And all profit is income.

Credit capitalists use cash and credit as capital to produce income earned from the shares of profits purchased from entrepreneurs. The credit capitalist lends credit at interest because that is the product the credit capitalist sells.  

In trade, wealth trades for wealth. So credit is the wealth the capitalist sells in a purchase and sale to buy a right of action. The right of action is wealth the entrepreneur sells in a purchase and sale to buy credit.

In his tirade against capitalism, silly-minded Thomas Piketty has said, "...the past devours the future," stealing his famous quip from another Frenchman, philosopher Henri Bergson. Yet, as I show in Thomas Piketty, Revivalist Preacher of Born-Again Socialism. The Second Great Awakening of Socialism has Come to America, wealth in the present that becomes capital creates the future.  In short, the present creates the future! And that is what capitalism and credit is all about. 

Income is the name given to property in cash or credit acquired in a purchase and sale for other wealth. An income tax is a tax on profit and thus the return to capital, but it isn't a tax on capital. It's a tax on wealth. All income taxes are taxes on wealth.

All income is the same, whether gained by the purchase and sale of work for cash and credit or gained by the purchase and sale of rights of action to future profit for cash and credit.

As I say in Interest, Capitalists and Futuristic Time Cops, for a theory to be useful and closer to truth, it must apply equally to many things observed. In agreement, de Fontenay said, "Wherever there is a revenue you perceive capital. The theory of revenue must be the same for all classes of human production." 

Income gained from capital gains is not different at all from income gained by labor. As bad and immoral as income taxation is, as long as income taxation is going to exist, then capital gains should be taxed at the same rate as ordinary wages and salaries precisely because all income is the same.

A tax on capital would be a fee paid to license a dump truck that hauls gravel to pave roads since the dump truck is the capital. A tax on capital would be a fee paid to pollute the air during the blasting of pig iron with pure oxygen while producing steel since the blast furnace is the capital. A tax on capital would be a fee paid for a building permit since the labor put to building is capital. 

A tax on capital would be an impact fee to develop one's property in undeveloped land. Undeveloped land goes into making improved land — land with structure on it — to become wealth when sold in a purchase and sale for cash and credit, often obtained through a mortgage.

If only Worstall had read my work, Why is the Economy So Horrible? Because Academia Economics is Fake, he could have disabused himself of many false beliefs. For a guy working for a free-markets, libertarian think tank, Worstall doesn't understand capitalism at all.

For most, obvious confusion rests in that most fail to see property means right of ownership and not what is owned.

  • So anyone has property in chattel, which are things. 
  • So anyone has property in work produced from the mind or the body, such as a surgeon who sells his surgery skills in operation and buys income. 
  • So anyone has property in libability — right of action — against a debtor to whom he has lent credit in a purchase and sale of a share of profit.

The entirety of trade, or commerce, or real economics ties up with two words — property and profit. Without profit from effort, anyone would lack buying power to buy anything else. Without property, no one can trade. 

A society is association of strangers who have come together because of the desire to trade — to trade property for property, and when we talk about such property, we give it a name, wealth.

To trade, someone needs to produce property — the right of ownership — in chattel, in work or in rights of action — at surplus under efficiency (sales must exceed cost) to gain profit so to buy property in what is wanted (lacking) and sell property in what is not wanted (surplus). 

Bare subsistence manual labor isn't going to produce much property in surplus, if at all. So, producers take to using property in other things, or that which we call capital, to produce property in surplus, or that which we call stock, in hopes of sale, transmutting that stock into wealth; or if they are selling completed work, then transmuting property in labor, which is capital, directly into property in work, which is wealth of the laborer.

For most, their obvious confusion further gets exacerbated because the dynamics of trade — property in various states — is too much for their minds to grasp.

Most get lost in thinking about trade in the same way that most fail to grasp relativity. Thoughts of changing frames of reference are too hard for most to handle.

Capital is one thing and one thing only. The name for property put to making stuff is called capital. Capital is property of production. It doesn’t get much simpler.

So credit lent becomes capital of the entrepreneur used to buy fixed capital (buildings, equipment) or floating capital (electricity, diesel). So wealth used to capitalize a bank becomes the capital of the banker.

All of the names mankind uses for property — capital, wealth, asset, collateral, stock — are names of property in various states — production, trade, estimation, deals of credit, potential sales.

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