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More common errors of the Left

Summary:
Many of the errors they perpetrate have already been tried and tested and found wanting. Some of them have been found disastrous, as has been seen in Venezuela. Yet they persist as if in some hypothetical world that bears no relation to what goes on in the world around us.6. State ownership is efficient because it does not need profitsThis has been shown countless times to be untrue. It is the pursuit of profits that leads private corporations to seek to be lean and efficient. They try to cut costs and to keep prices competitive to attract customers. The state has no such incentives to drive it to be efficient. In practice, state industries are subject to producer capture, and are usually directed to serve political rather than economic ends. They tend to be over-manned and costly,

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Many of the errors they perpetrate have already been tried and tested and found wanting. Some of them have been found disastrous, as has been seen in Venezuela. Yet they persist as if in some hypothetical world that bears no relation to what goes on in the world around us.

6. State ownership is efficient because it does not need profits

This has been shown countless times to be untrue. It is the pursuit of profits that leads private corporations to seek to be lean and efficient. They try to cut costs and to keep prices competitive to attract customers. The state has no such incentives to drive it to be efficient. In practice, state industries are subject to producer capture, and are usually directed to serve political rather than economic ends. They tend to be over-manned and costly, compared to their private equivalents.

7. Capital Gains Tax is paid from windfall gains

This is not always untrue, but usually is. Capital gains can be made on property when the price people are prepared for it rises. This can be caused because government will not issue sufficient planning permissions to meet rising demand. Or government's central bank might keep interest rates too low for too long to "steer" the economy, making conventional returns low, and leading people to invest speculatively in property. More commonly, capital gains accrue because investments rise in value, especially in a growing economy. To call them a "windfall" is to suggest they are unearned, simply the result of luck, when they often result from shrewd calculation. Profits are taxed when this is successful, but losses are not refunded when it is not.

8. Rent controls make houses affordable

This is a subset of price caps, with rents as the price of accommodation. When rents are capped, existing tenants might benefit for a time, but not future ones because the availability of rental property will diminish. Maintenance will fall, too, with not enough income coming in from property to justify high standards of care for it. Landlords tend to sell under rent controls, reducing existing rentals as well as deterring new ones. The economist Assar Lindbeck compared rent controls to bombing in their ability to destroy cities.

9. Inheritance Tax hits only the rich who can afford it

Thanks to rising property prices, Inheritance Tax hits many middle class homeowners. People are motivated to work and save to provide for their children after they die. A death tax makes that less worthwhile. It also acts to break up the capital pools that could be funding new businesses for middle-aged people when their parents bequeath them their estate. Those new businesses could create future wealth and jobs, so it indirectly hits less wealthy people. Its fairness is questionable because it nearly always taxes funds that were already taxed as they were acquired.

10. Top salaries and bonuses are best limited by law

If they are limited by law, then top talent will drain away to places where it is more adequately rewarded. Top CEOs make a huge impact on the value of their companies, and constitute a pool, like highly talented footballers, that people will pay for in order to secure the value they bring. In a global economy, talent is mobile and will move if the gap between what they can earn at home or abroad becomes too large.

Dr. Madsen Pirie
Dr Madsen Pirie is President of the Adam Smith Institute, and was one of three Scots graduates working in the US who founded the Institute in 1977. Before that, Madsen worked for the House of Representatives in Washington DC, and was Distinguished Visiting Professor Philosophy at Hillsdale College in Michigan.

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