Since 1978, China has been gradually restoring market mechanisms capable of better allocating the nation’s enormous pool of unutilized capital. Its ruling class remains understandably wary of headlong experiments in laissez-faire capitalism or popular democracy, instead moving incrementally on both political and economic fronts. The former Soviet Union, persuaded by the West to throw itself headlong into capitalism via "shock therapy," has quickly produced the rudimentary market mechanisms for assessing ROI. The confiscatory tax and unpredictable monetary systems adopted by Moscow, though, guarantee that almost all private initiatives face a negative after-tax return on invested capital. The nation’s social fabric continues to disintegrate as only an underground Mafia of privileged entrepreneurs amasses great wealth, paying modest bribes instead of murderous taxes. It is in the interest of this privileged class to maintain this corrupt status quo, which is why the masses once again are tempted to turn to the state and the Communist Party for relief. Unhappily, the western economists who advise the democratic government of Boris Yeltsin have little appreciation for the role the market plays in assessing macroeconomic tax and monetary risks to capital investment.

As evidence of this statement, we need only understand that one of the favorite nostrums of economists who advise socialist countries is privatization of state enterprise. The reason that a nation socializes an enterprise or an industry in the first place is that it is unable to produce profitable returns to capital in the private sector. Through much of Latin America during the past several decades, the banks themselves have been socialized and privatized and socialized again. When the tax and monetary authorities are working reasonably, banking can be profitable. When tax rates become confiscatory and currencies become unpredictable, the owners of private banks suddenly see merit in selling their assets (non-performing loans) to the state for prices that appear to be bargains, but which in fact represent taxpayer bailouts of the capitalist class.

In England after World War II, the electorate replaced the Conservative Party and Winston Churchill with the Labor Party and Clement Atlee. Had the Tories pledged to scale back the confiscatory wartime tax rates, which reached 96% at the highest marginal rate, the voters would have had a better choice than socialization of industry. Not until Margaret Thatcher in 1979 did the Tories run on a platform of tax reduction to expand the economy. Prime Minister Thatcher was forced to resign in 1991 when the Tories became unpopular. This followed the Thatcher government’s sharp increase in the tax on capital gains. PM Thatcher made the mistake of following the lead of the United States in the 1986 Tax Act, which lowered the tax rate on ordinary income, but raised the capital gains tax to 28% from 20%. The Canadian Tory government made the same error, following Washington’s lead, and neither the Conservative Party nor Canada has recovered as yet from the mistake.

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