ECONOMY

High tax rates don’t yield income equality

 

elblogdemontaner.com

Chilean president Michelle Bachelet wants to reduce inequality. I suspect that she refers to the inequality of results, which is measured by the Gini coefficient. But it is possible that, in her eagerness to level, she ends up plucking the goose with the golden eggs.

In that mathematical formula, zero corresponds to a society where everyone receives the same income, and 100 to a society where one person monopolized the totality of the revenues. From the index, you could deduce that the fairest societies are those closest to zero and the least fair are those near 100.

. This makes little sense. Chile, according to the World Bank has an inequality rating of 52.1 (better than Brazil, Colombia and Panama, to be sure), while Ethiopia, India and Mali have a rating of about 33. It is difficult to believe that these three countries are fairer than Chile.

It is true that the Scandinavian countries, the world's best organized and wealthiest, move on a track between 20 and 30, but Kenya displays an honorable 29, which only demonstrates that the little wealth it produces is less badly distributed than in South Africa, whose 63.1 rating is among the world's worst.

It is a pity that, despite her experience as a head of government, President Bachelet has not realized that her country managed to lead the pack in Latin America and reduced poverty from 45 percent to 13 percent, not by distributing wealth, but creating it.

When she examines the Scandinavian societies, she notices that they have a high level of wealth and equality along with a tax burden close to 50 percent of the GDP and assumes, incorrectly, that the three data are linked. This is a non sequitur.

That assumption is simply not right. The Scandinavians’ wealth, like any other society's wealth, is because of the work ethic and creativity of all the workers in every business, from the CEO to the janitor and all the executives in between.

I suppose she understands that the only activities that create wealth are those that generate profit, save, innovate and invest. In other words, business enterprises, regardless of their size.

And why is wealth better distributed in Scandinavia than in Chile?

Socialists usually think that it is the result of the high tax rates, but that's not true. A fallacious logic believes that consequences are derived from the premises, which is not the case. It happens the other way: High public spending is possible (even if it’s not convenient) because society produces a large amount of surplus.

What generates equity in prosperous and open societies is the quality of their productive apparatus. If a society manufactures machines that are appreciated, objects with a high technological content, valuable and original medicines, or if it supplies sophisticated services through its entrepreneurial fabric, it will be rewarded by the market and will be able to — will have to — offer the workers a substantial salary in line with their qualifications, so it may recruit them and compete.

If Bachelet wishes to reduce Chile's poverty and build a more equitable society, she should not generate an atmosphere of class struggle and hinder the work of businesses but do just the opposite — she must facilitate it.

How? By propitiating national and foreign investment with a hospitable economic and legal climate; by expediting and simplifying bureaucratic proceedings, including the solution of the inevitable conflicts; by facilitating entrepreneurs’ access to the market; by stimulating research; by creating infrastructures (sea and air ports, highways, telephony, power generation, the Internet) that will speed up transactions; by multiplying the human capital and cultivating institutional stability, transparency and administrative honesty.

It is true that that type of government earns no newspaper headlines or the applause of the devastating revolutionary left, but it does multiply wealth, reduce poverty and increase the percentage of income earned by the working class.

Why imitate Venezuela when you can emulate Switzerland? Very few know the name of the president of Switzerland, but that's the country into which money flows in times of crisis. There must be a reason.

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