Eating the Seed Corn; R. Kazmann

THEFREEMAN IDEASON UBERTY Eating the Seed Com by RaphaelG. Kazmann O ne of the most telling and widely used arguments made by politicians seeking office is that, if elected, their policy will create jobs. The implication is that govern mental actions can create jobs in the private taxpaying sector, not tax-eating jobs in the public sector. Bitter experience has taught us that pro duction must come before consumption you can't consume something that has not been produced. Equally painful experience has shown us that nothing can be produced without the expenditure of capital. To pro duce something new, or to increase the production of a commodity already on the market, you must invest capital. That is, you must have enough saved out of current consumption to support you while you build the new facility and enough to support the employees while the commodity goes to the market and is sold in sufficientquantities to make the enterprise viable.

This is the situation that faces the farmer as he puts aside edible seed corn for use > during the next year. It is the situation that faces the miner, as he explores for economic quantities of metallic ore, of the wildcatter, looking for natural gas, and the writer of software as he works on a new, improved computer program. All enterprises require the investment of capital. Without capital investment there can be no new jobs, and evenjobs in existing enterprises may be lost for want of capital for modernization. Mr. Kazmann lives in Baton Rouge, Louisiana. It should be evident that the larger the physical plant and the greater the invest ment of capital, the greater the potential for production and income of the population. More jobs, from a politician's viewpoint, mean a greater tax base and a reservoir of potentially larger taxes. What Actually Happens Yet despite these truths two major con fiscatory policies conspire to consume cap ital (eat the seed corn) before it can be invested (planted): the inheritance tax and the capital gains tax. Mter a relatively small exemption of $600,000for a single person ($1,200,000for a married couple), the inher itance tax climbs to 28 percent and then to 55 percent. At a time when a modest house in the suburbs sells for from $125,000 to $250,000, a $600,000 exemption protects very little investment capital. And the value of the exemption is eroded every year by the inflation.

Proponents of the inheritance tax argue that the rich will gain a stranglehold on the economy unless part of their capital hold ings are taxed away by the federal (and state) government. This is based on the assumption that rich people are organized and wish to dominate the gigantic array of competing interests in the marketplace. Of course, there is no way that this can be done without governmental coercion. In an economy whose gross domestic product is estimated to be $6 trillion, the whole idea is ludicrous. Moreover, since the economy is not static, unless capital is deployed in accordance with market conditions, it is likely to be lost. Where are such industrial giants as Gulf Oil Com pany, Pan American Airways, and U.S. Steel-all dominant companies in the U.S. economy in the 1960s? They have either gotten much smaller or have been incor porated into competing firms because they couldn't meet the test of the market. So the inheritance tax, which tends to cripple the economy by reducing the supply of investment capital, is based more on the politician's desire for more money to hand 451 452 THE FREEMAN • AUGUST 1994 out than on a rational examination of the facts.