Greed is Good - Why Punitive Taxes don't Work

01/15/2010 12:29 pm ET | Updated May 25, 2011

As much as greed is vilified by the press and politicians, it is far too easy to underestimate its importance in any market driven economy. Greed is what drives demand and new participants into a market. How many people invested in real estate after seeing their friends or coworkers make fortunes overnight by flipping houses in 2005? It is this inherent desire to constantly do better, to see someone else who is successful and try to emulate or better them, that causes huge sums of money to rush into a specific market. From Dutch tulip bulbs, to Florida vacation homes to dot-com stocks, the story is always the same - a rising market unleashes a flood of cheap capital that funds numerous competitors and leading to tremendous growth. New dot-coms are funded, houses are built, tulips are planted - the result being a tremendous increase in the number of competitors and size of the market - all driven by greed.

Unfortunately these scenarios of heady growth never continue forever, sometimes the market slows naturally on its own and other times the market becomes a giant game of musical chairs and comes crashing down. Irrespective of the speed and force of the eventual slowdown, the net result is that there often emerges significant value as it is during lean times when industry consolidation takes place and competitors are forced to find way to be more efficient. Akin to pruning a garden for winter, the post growth spurt reduces the number of competitors but leads to stronger and more efficient ones in the spring as they are no longer competing for limited resources with newly funded competitors.

As emotionally and financially traumatic as the vacillations of greed driven markets can be for the participants, they have been proven time and time again to be ruthlessly efficient. No other system devised by man has ever succeeded in allocating tremendous amounts of capital to create or expand an industry and then by cutting off the flow of capital, quickly winnow the competitors down to the most efficient and profitable. Not only has this process created the majority of great American companies, it was one our primary advantages over the planned economy of the Soviet Union during the Cold War. After all, what government in their right mind would have poured the hundreds of billion of dollars into internet companies in the late 90's only to have most of it be lost during the collapse a few years later? Yet what country does not wish that their economy had created Amazon, eBay and Google?

America, more than any other country has reaped the benefits of a free market economy driven by greed. In the ten year period ending in 2008, a time when the stock market declined per capita personal income increased by nearly 50%. As devastating as the current recession has been, it pales in comparison to the Great Depression and the multiple panics of the late 1800's, all of which now look like mere blips on a line of ever increasing growth and prosperity the United States has enjoyed.

The current political movement to punitively tax any profit or salary deemed as "unfair" is nothing more than the age old exploitation of class warfare mixed with some socialist ideals. As was proven in every communist or socialist economy, attempting to redistribute wealth being created from one class to another only leads to the destruction of that wealth and then some, not to its distribution. It is akin to Heisenberg's uncertainty principle, you can see the wealth being generated, but attempts to redirect causes its disappearance.

For example, Great Britain recently enacted a punitive 50% bonus tax aimed at Investment Bankers in London, rather than pay the tax, many banks are looking to relocate their bankers out of London. This will cause the British government to not only not collect the new 50% bonus tax but they will forfeit every dollar in taxes each of these individuals pays every year under the previous tax plan. In addition, the relocation of these relatively few high paying jobs will likely result in a reduction of support jobs in London as well. The only winners will be the countries that these jobs are exported to.

The events of the previous few years have put tremendous strain on our economic, social and political infrastructures and made it extremely tempting to view each policy decision in the prism of a zero sum game where taxes are a way of equalizing the playing field. However history tells us that not only will this type of policy not deliver on its primary goal, it runs counter to what all the great periods of growth in America from the California Gold Rush to the 1990's have been precipitated on - greed.