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Friday, November 17, 2017 Leer en Español

Rich People Don’t Actually “Hide” Their Money

The super-rich don't sit on piles of cash like a dragon hording gold. They spend and invest it.

Why are Cubans so poor? They’ve done very well in the U.S., where emigrés from the perpetually recessed country have risen to the top in sports, business, and politics. Yet in their own country, Cubans are desperately impoverished.

The above question is obviously rhetorical. We know why Cubans in Cuba are poor. They are because the government there has near-total control over the economy. The state owns just about all production, along with income that springs from production. Of course Cubans are poor. That’s a given when the income tax rate is basically 100%.

Freedom Works

Interesting about all this is that while there are surely some congenital socialist holdouts in our midst, most in the U.S. now acknowledge that socialism and communism don’t work. The economic results of state control are much worse than awful. The 20th century revealed in bloody fashion (and continues to reveal in countries like Cuba today) what happens when governments become too powerful, such that economic and personal freedom are suffocated. Freedom works, and it works very well. End of story.

Except that it’s not. Despite the near-perfect batting average of freedom when it comes to boosting individual wellbeing and economic growth, there are always those eager to achieve some kind of balance between freedom and state control.  Even though the state fails murderously when it has total control over us, some are oddly willing to accept a little or a lot of what starves and kills us when its power is absolute.

And while Cuba is an extreme example, it’s not as though the laws of economics are suspended when governments only control a part of the economy. The above is how taxation and government spending will ideally be considered. Governments are just people, and when they tax or borrow our dollars they’re arrogating to themselves control over what we’ve already produced. The state isn’t some kind of “alternative investment” category that competes for the right to direct precious resources to their highest use; rather, the state harmfully adds to its role in and control over the economy when it taxes or borrows “dollars,” “euros,” “yen,” “yuan,” etc.

Governments don’t want dollars as much they want what dollars and other currencies can be exchanged for; think market goods like office space, WiFi access, computers, delivery trucks, and most crucial of all, people. People are always and everywhere the driver of economic progress, but as government control over the economy increases so does its control over the people who carry us forward. For clues as to what’s the end result of total control, see Cuba once again.

And while Cuba is an extreme example, it’s not as though the laws of economics are suspended when governments only control a part of the economy. The misallocations of precious resources are every bit as great, they’re every bit as economy-suffocating, but they’re not as visible since state control isn’t absolute.  Still, the damage is real.

We know this because we know that every single day companies large and small compete vigorously for access to resources. Their feverish search for dollars is just a frenzied search for resources; once again office space, WiFi access, computers, delivery trucks, people. The more that governments tax and spend, the fewer resources available to businesses looking to profit from serving our needs.

“Hiding” Money

All of which brings us to a recent New York Times exposé (?) by Scott Shane, Spencer Woodman, and Michael Forsythe. Their reporting was on the “offshore financial dealings of some of the world’s biggest corporations and wealthiest people.” Readers can imagine the slanted nature of the reporting. Indeed, the proper desire of the rich to shield wealth from the grasping hands of politicians was written about in cloak & dagger fashion. “How Business Titans, Celebrities, and Royals Hide Their Wealth” was the inside-the-fold headline. In the same newspaper a few days later, Gabriel Zucman, a professor at Cal-Berkeley, told readers in downcast fashion that the United States “loses” close “to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens.”

Except that the wealth is in no way being hidden, or being lost. The joke is on the reporters and the professor. In their focus on Appleby, a prominent Bermudian law firm with a business focused on helping rich clients shield wealth from the grasping hands of politicians, the Times’ reporters and Zucman unwittingly reveal why efforts to move money “offshore” amount to efforts to do the opposite of “hiding” wealth.

Thank goodness for those who “hide” their wealth such that governments “lose” what was never their money to begin with. Indeed, clients of Appleby pay high fees for the services provided by the firm. Rest assured that they don’t pay Appleby or those associated with the law firm that kind of money to simply warehouse their wealth. Money that flows offshore almost instantaneously flows back onshore in the form of investment. Stating what’s obvious, but what’s seemingly lost on Shane, Woodman, Forsythe, and Zucman, when the superrich go to great lengths to avoid taxation, it’s not just the superrich who benefit.

More realistically we all benefit, and for obvious reasons. We know this because we know what entrepreneurs and businesses are aggressively competing for on a daily basis: dollars that are exchangeable for real resources. When the rich “hide” their wealth from politicians that means they’re revealing their wealth to a private sector that’s desperately in search of resources to grow. The left love to talk about jobs and opportunity (as does a frequently confused right), but none connect what are simple dots: companies and jobs are always and everywhere an effect of investment. Always. What the federal government “loses” (Zucman’s obnoxious descriptor) is gained by private actors eager to turn ideas into businesses, and existing businesses into ones that are much more prosperous. Thank goodness for those who “hide” their wealth such that governments “lose” what was never their money to begin with.

Furthermore, a dollar spent by politicians can’t ever be looked at as a dollar. More realistically, government spending has multiplicative qualities. When politicians have more money to spend, their imaginations run wild. They dream up new programs that, once in operation, gain constituencies. What starts out as a $3 billion (Medicaid) program soon enough becomes a trillion dollar (annually) program in 2020 (Medicaid).

The seen is that Medicaid still can’t fulfill its fifty-year goal of medical coverage for the poor, but the unseen concerns all the great advances (including private markets meant to meet the medical needs of seniors) that never reached lift-off point thanks to endless amounts of government waste. To be clear, the money doesn’t come from Pluto; rather those dollars reach the federal government at the same time that we all have less wealth, reduced income prospects, and reduced odds of modern versions of Amazon, Apple, and Wal-Mart working feverishly to serve our needs.

Of course, that’s what Shane, Woodman, Forsythe, and Zucman chose to gloss over in total. Always concerned that politicians will have less money to waste on failed programs, cronies and wars, they forgot to report on where money goes when politicians have less of our wealth to spend such that the creators of it have more.

Reprinted from Forbes

  • John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.