Papal Economics 101: President of the Vatican Bank Condemns Raising Taxes (and Explains Why) in L’OR

Vatican Bank President Ettore Gotti Tedeschi

We’re going to be hearing a lot about raising taxes this year and next, and especially about the need to raise taxes on “the rich” in order to force them to pay their “fair share.”

That’s because the American public has woken up to the fact that our government has been outspending itself at a furious pace — and now the debt has come due.

There are two broad solutions to America’s outstanding debt (which already exceeds 14,000,000,000,000 dollars) and America’s annual budget deficits: reduce the size of government or increase how much tax revenue it takes in. Broadly speaking, Republicans favor the former, and Democrats the latter.

Which solution (or combination of solutions) does Catholic social teaching favor? You’ll be hearing plenty about that, too. But the President of the Vatican Bank Ettore Gotti Tedeschi has already pointed us in the right direction, in his brilliant (and mercifully short) editorial for the L’Osseratore Romano (L’OR), the Vatican’s “official” newspaper.

I put “official” in quotation marks because I’ve been careful to point out in the past that the opinions expressed in L’OR do not represent the official position of the Church. Instead, we are to evaluate them by their merits. Nonetheless, I’m very pleased to see that they published this excellent editorial, because this will force liberal Catholics to decide if they actually do feel free to dissent from L’OR when it contradicts their political views. They certainly have spent a good deal of time trying to claim L’OR’s mantle when they perceived it as favoring their political persuasions.

But let’s get to the good stuff: Europe is facing a(n even) worse budget crisis than we are. Europe’s bloated socialist governments have amassed (even) more debt than us, and their over-regulated businesses have (even) less economic output than ours. This means that what’s in store for our near future is already happening there.

I’m going to quote Tedeshchi’s argument in reverse, because after reading his essay carefully I realized he actually writes in reverse – therefore his argument makes more sense “backwards”:

Further forms of taxation would not be synonymous with solidarity but only with greater public spending and, perhaps, a higher debt and more widespread poverty. High taxes penalize saving, generate distrust in the ability to stimulate recovery, hit families and prevent the formation of new ones, as well as creating uncertainty and precariousness in employment. In short, they lay the foundations for another phase of unsustainable development.

First point: increasing taxation by transferring wealth from people, families and businesses to government bureaucracy violates both subsidiarity and solidarity. Economies are built on people who can know with certainty that they will harvest the fruit of their labors — excessive taxation kills this dynamic which focuses creativity and rewards industry. If we want to “stimulate” the economy how can we do so successfully when we constantly deplete it through taxation?

During a prolonged crisis, inheritance taxes, new forms of taxation or similar alternatives reduce or wipe out resources for investments, discouraging the trust of investors, penalizing the cost of the public debt and the possibilities of its renewal at its expiration. In this context, imposing taxes on property and on income is equivalent to a suicidal anti-subsidiarity of the state to the citizen. Those who legally possess assets, on which they have paid the proper taxes, have contributed to creating wealth and, thanks precisely to these assets, continue to produce them with investments and consumption.

Second point: money held in private is not “static” — it is a dynamic force that when spent and invested truly stimulates more production and the creation of new wealth. It is precisely having wealth and “excess” that allows people and businesses to give from that wealth to invest in creating more of it. It is therefore anti-subsidiarity to take what is held by local entities (e.g. individuals, families, businesses) and give it to a centralized authority (the federal government, in this case). This principle does not rule out all taxation, of course, because there are some legitimate roles served by centralized government (see: The Constitution) — but it does rule out over-taxation, especially when taxes go to federal programs and mandates that can frankly be administered better by local, immediate entities (such as private charities, hospitals, etc).

Without a true strategy for growth – which moreover is in contradiction to the tax levy itself – taxation in all its forms only permits further growth in public spending, inevitable if economic interventions are to be permitted in the absence of development. At a time like this, growth is obtained solely by the appropriate use of the available resources in order  to benefit businesses that create wealth and sustainable employment, pay their taxes and thereby make absorption of the debt possible.

Third point: growth is the key concept. Without economic growth there is no government, because there is no economy to sustain its expenses. Governments don’t make money: businesses and people do, the market does. And taxation, raising taxes, and acquiring private property all serve to inhibit growth. Some taxation can be sustained, over-taxation ultimately cannot. And if America and Europe are ever going to climb their way out of the fiscal hole they find themselves in, it will be growth that drags us out, not taxes.

In this, the aim of both Democrats and Republicans should be shared: if Democrats want government to provide social services and the “safety net”, they must allow Republicans to pass (and in cases like Obamacare, repeal) laws that are preventing growth from continuing and increasing, because it is actually economic growth that is keeping the whole engine of government spending running in the first place.

Think about these three core concepts (1. over-taxation violates subsidiarity and solidarity 2. private wealth in fact serves the common good 3. economic growth is the key to recovery) as politicians and parties argue for your vote next November. Ask yourself if it makes sense to tax more the very engine that is fueling government spending, if it wise for government to spend money that private citizens have saved, and if taking money out of the economy can do anything except make it smaller and more anemic.

And while you are at it, read Mr. Tedeschi’s article again. I know I will.

UPDATE — Readers have asked what Mr. Tedeshchi was responding to. I believe he was commenting on a recent Italian proposal to raise taxes on high earners (sound familiar?). Of course, the principles he outlines apply not just to Italy or the European Union. Italy has dropped the proposal, according to the AFP:

Italy dropped Monday a proposal for a levy on high earners approved by the cabinet earlier this month as part of an austerity package aimed at calming the markets by balancing the budget before 2013.

… The temporary tax would have been five percent on revenues of more than 90,000 euros a year and 10 percent on revenues of more than 150,000 euros.

… Italy has one of the highest debt levels in the world and a low growth rate.

3,415 views

Categories:Uncategorized

81 thoughts on “Papal Economics 101: President of the Vatican Bank Condemns Raising Taxes (and Explains Why) in L’OR

  1. Flam says:

    “Therefore, it is necessary to be subject not only because of the wrath but also because of conscience. This is why you also pay taxes, for the authorities are ministers of God, devoting themselves to this very thing. Pay to all their dues, taxes to whom taxes are due, toll to whom toll is due, respect to whom respect is due, honor to whom honor is due.” St. Paul Romans 13:5-7. Show a little respect to the President and to those who advocate that a fair share of taxes be paid by all.

  2. Peter Knickerbocker says:

    The United States needs to remove the power of Congress to impose immoral, job-killing taxes with the PROSPERITY-GROWTH AMENDMENT. After more than 222 years of experience with the original taxing powers granted to Congress in the Constitution, and more than 98 years of experience under the 16th Amendment, and watching Europe’s destructive VAT, it is time to amend the Constitution to eliminate immoral tax schemes that kill jobs and increase the power of central government to run our lives. See http://www.REPEAL16.info.

  3. mjg says:

    I know we’re talking taxes – but clearly there are those here who still have faith in the good, hard-working, honest work ethic of American Corporations – you may want to see the ALEC exposed website to see the types of legislation that is written and sponsored by corporations, to improve their bottom line with little thought to Catholic Social Teaching.

    http://alecexposed.org/wiki/ALEC_Exposed
    “Through the corporate-funded American Legislative Exchange Council, global corporations and state politicians vote behind closed doors to try to rewrite state laws that govern your rights. These so-called “model bills” reach into almost every area of American life and often directly benefit huge corporations. Through ALEC, corporations have “a VOICE and a VOTE” on specific changes to the law that are then proposed in your state. DO YOU?”

  4. Michael Blissenbach says:

    Also, I think what a lot of people don’t end up realizing is that tax increases on the rich end up trickling down to the middle class and poor people in the form of price increases and layoffs, so it isn’t just the rich that shoulder the burden of those tax increases, all of us will end up experiencing negative effects. With families in this country already getting squeezed by high gas prices, taxes, governmental regulations, unemployment, and shrinking wages, why would we want to make things worse by increasing taxes?

  5. Michael Blissenbach says:

    As a fellow young Catholic unaffiliated with any political party, I think Thomas makes some great points and I agree completely with them.
    I think government has gotten way too big and families are taxed so much that it is virtually impossible for one income to support a family, forcing both parents to work and to basically have their kids raised by daycare and schools rather than allowing one parent to stay at home full-time with the children. If we had lower taxes and smaller government, then we could pay off our debt and maybe families could afford to have one parent stay home with the children rather than abdicating their parental responsibilities to schools and daycare centers, which is basically who raises most children these days. It’s shocking and unfortunate, but that’s the reality of the situation.

  6. mitchell says:

    Taxing the rich doesn’t impede economic growth. The savings of the rich ALREADY impedes economic growth. Every dollar that is not spent and hoarded by those who imagine having 1 billion better than having 10 million is money not recycled back into the economy and therefore drags on economic growth.

    1. Michael F says:

      Mitchell, if that were what the rich did with their money (and some do), than you may be right. However, that is no practical way to get rich (or to stay rich for an extended period of time), and anyone on the “Forbes 400″ will tell you that. As the saying goes, “it takes money to make money”. They use some of the money they have to make an investment (property, stocks, precious metals, etc), in anticipation of getting an increase of value from that investment. In effect, how much they move their money around, and how much money they have to move, dictates how much money they can gain. Economies crash when those investors decide to hoard the money (and that is usually because the risk of investing becomes too great). I don’t completely understand how that turns into more money for the rest of us, but one doesn’t need to look back more than 5 years to see that it does. Also, what is to say the government is qualified to deal with the money better than the person they take it from? The ideal government is little more than a business, where it provides services demanded by the people (defense, currencies, diplomacy with other governments, etc), and in exchange, requires the people to pay what is necessary to provide those services. However, the current government seems to be run by politicians and not businessmen.

      1. mitchell says:

        But what exactly qualifies as an “investment” is open to economic interpretation. When the rich make money through arbitrage practices like the buying and selling of stocks and bonds, this can hardly be deemed as an “investment”, i.e. the investment of money into capital goods that enhance production. The buying and selling of assets not rendered unto production is just a form of savings that accounts for differences in liquidity preferences. In good times, cash does not change in value quickly enough but, sentiment about valuations of assets like stocks and bonds does. So portfolios of money managers like hedge funds, investment banks and SVF’s accommodate these changes in sentiment. Rich people don’t get rich by taking home a pay check, they get rich by managing there money in a usurious way. The money is never invested, the money that passes through the trading machines blocks from Wall Street are not investing funds toward some new plant or increase of employment, they are swapping trades in seconds or even microseconds because a statistical model run through their processors projects an appreciation in the next micro-second of a penny and a half. It is the epitome of usurious, morally bankrupt and economically dangerous behavior and should not be apologized for. The government incentivizes this stupendously stupid behavior by cutting taxes on things like capital gains and not regulating financial markets. Because capital gains taxes are less than corporate income taxes, money continues to flow into unproductive avenues such as the super rich tradings bits of borrowed paper, when they should be making investments into America itself.

        The government, in the sense that it “wastes” money on some idiotic pet project like gopher farms or building bridges to nowhere, does more of a service to the American people than the the super rich playing tricks with pieces of paper ever has.

        1. Michael F says:

          I will admit that you probably are more familiar with economics then I am, so I will concede you the point. However, I will ask you this: is the acquisition and manipulation of money, in itself, an evil? Is usury the only way to gain large amounts of money? Or is it possible for a perfectly honest and catholic man to become rich? The Church routinely manages money in the billions, and we know they are not wrong to do so? Where, then, is the line drawn?

          1. Mitchell says:

            Well it depends on how the Vatican bank invests its money (information that I’m not privy to). If it “goes long” on its savings or investments, this is hardly speculative behavior. It’s trying to find a return on its savings, by being an owner of companies, real estate or whatever the case may be. Its just my opinion that speculative financial behavior is both immoral and economically dangerous.

            I suppose if an honest Catholic would want to become rich, the most moral way he could go about it, would be through the creation and sale of some good. The Church sees nothing wrong with that, so long as they are meeting there filial responsibilities to the poor and to their workers. Not paying your workers a just wage is considered a sin that cries to heaven in the Church…along with Murder. Speculative finance, which is unfortunately the backbone of American mega-wealth, can not be considered moral because it is fruitless money acquisition. That’s why Dante humorously included usurers in the same level of hell as sodomites, because it is inherently fruitless action.

          2. Michael F says:

            Thank you for your thoughts (and for keeping the discussion rational, as opposed to emotionally-blinded). I will consider the points you have raised, and I only have one more question: Where, may I ask, does the Church compare unjust wages to murder? I am not asking this in order to promote unjust wages, I merely ask because the comparison appears rather extreme, and it seems to me that there could be occasions (such as when an employer is short on cash) where an employer could choose to lower wages instead of laying off some of his employees. Murder, on the other hand, is wrong in every respect, and all the arguments there involve whether or not the deed was actually murder. However, I suppose one could come back and say the same thing about unjust wages, and then debate whether the circumstances make them just or unjust. Your thoughts?

        2. MikeM says:

          That’s not a fair assessment at all. While the stock markets are secondary exchanges, so the money doesn’t go directly into corporate investment in plants and materials, they’re buying it from someone who did make such an investment. The secondary exchanges allow that person to go and find another new investment, or to use that money towards consumption. The existence of these exchanges, and the liquidity that results from such high trading volume, also boosts companies ability to raise capital. If an investor didn’t know that he could easily sell his stock on the NYSE or the NASDAQ, he would be much more reticent to buy when a company was issuing new shares where the money was being invested.

          Our robust financial system moves money through a lot of people’s hands, but it helps to ensure that the money ultimately ends up in the hands of those who will use it most effectively. The modern economy is possible because of finance.

          1. Mitchell says:

            What you are claiming is true to an extent, clearly our financial markets are large and liquid, and clearly money COULD be taken out to be spent on consumption goods or new investment, but it could also be taken out to shift their portfolio around. In times of financial euphoria, this phenomenon is far more plausible than your own explanation. In boom times, normal investors and especially institutional money managing funds such as hedge funds, Sovereign Wealth funds, investment banks and less nefarious institutions like pension funds and college endowments, move around billions and billions of highly leveraged dollars every second in a completely unregulated environment. You are assuming that financial markets are efficiently distributing funds around to those that are using that money for capital investment, but there is almost no credible evidence that financial markets efficiently do this. In boom times people are filled with irrational exuberance and seek out ever riskier returns, in down times they are irrationally pessimistic about the conditions and move the economy toward a self perpetuating funk. These financial products are inherently fickle and extremely profitable. A normal person can create far higher returns buying and selling assets than MAKING assets. You can make more money swapping houses, or oil futures, or technology stocks, than creating any technology. Finance is perhaps the only industry in the economy, where a person works yet doesn’t PRODUCE a single good. Raising capital doesn’t require speculative finance.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

STAY CONNECTED


DON'T MISS A THING

Receive our updates via email.