Sunday, July 01, 2007

Stelzer: Private Equity(Excess) Backlash

"But the dealmak-ers forgot to consult their undoubtedly dog-eared copies of Adam Smith, the man they cite for the proposition that they are being led as if by an invisible hand to do the public good. First, as James Buchan points out in his Adam Smith and the Pursuit of Perfect Liberty, that phrase occurs only three times in the million-word output of Smith, “and on not one of those occasions does it have anything to do with free-market capitalism . . .” More importantly, Smith argued that: “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.”

It is reasonable to guess that Smith would not have approved of a tax system that allowed a British bil-lionaire to pay taxes at a lower rate than the woman who cleans his office, or an American multi-billion-aire to enjoy a tax rate far below that inflicted on his butler. Never mind that such a lower rate provides private-equity entrepreneurs with an incentive to risk the “sweat equity” – noncash contribution – they invest in these ventures. At times, a sense of fairness trumps such economic considerations, and this is one of those times."

Adam Smith is rolling over in his grave....

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