I recently spoke with a retired investment banker who was disillusioned with his past profession. He said that he had seen so much what he considered unethical behavior, such as investment bankers helping clients avoid or minimize taxes (by transferring funds between jurisdictions) that he was questioning whether investment banking “contributes to humanity” at all. He of course acknowledged that investment banking plays a useful function by helping connect investors and businesses needing capital but considered what he saw as unethical conduct completely overshadowing investment banks’ useful purpose.
However, the former banker’s basic assumption was that the government’s redistribution of some people’s wealth through taxes to those who in its estimation are in need of it is a more valuable “contribution to humanity” than enabling business to create economic wealth. But is his assumption valid? I argue it is not.
Government could not be taxing the investment bankers’ corporate clients unless they were creating wealth (by creating value for their customers and therefore, profits) in the first place—there would not be anything to tax. But that is not the fundamental argument against the government’s redistribution of income and wealth as being “a contribution to humanity.”
Governments’ redistribution of some people’s income and wealth through taxation for the benefit to those who have less, for the sake of greater equality, does not contribute to humanity (whatever such a contribution means). In fact, government redistribution detracts from humanity by harming both those who are being taxed and those who receive government handouts and benefit from its programs. More equally redistributed income and wealth do not benefit anyone.
Those who are being taxed more, such as corporations and wealthy individuals, will have less money to invest in further production and wealth creation, which means less production of goods and services, and therefore fewer jobs and income generation opportunities—and a lower standard of living—for others. And the recipients of government money and programs would be just that, instead of supporting themselves through productive work and improving their lives.
Governments do not create wealth and prosperity for their citizens—they destroy it.
As an example, consider what is happening in the province of Ontario. Industry, and jobs, are fleeing government-caused sky-rocketing electricity costs under Premier Wynne’s climate action plan that has banned the affordable and reliable coal-powered electricity and intends to phase out gas-powered vehicles.
Only businesses of any size, from one-person operations to large multi-national corporations, can create wealth and prosperity (and employ workers to get the work done). To perform the wealth creation function, companies require capital—as well as investment bankers to connect them to those who can provide it.
There is nothing wrong in legally minimizing or avoiding taxes, as I recently argued in a post defending Apple’s tax strategy. In fact, it is imperative that companies follow such a tax strategy, so as to maximize wealth creation (and to minimize government destruction of it) and thereby, overall human flourishing.
It is of course possible for investment bankers, or for anyone else, to act unethically. But the only way to act unethically towards others is to violate their freedom, their individual rights, by initiating physical force or fraud against them. Punishing such conduct is the role of government—its only role. But government has failed to carry out its proper role in the financial services industry, and elsewhere. Instead, it has been expanding its interference in the economy through taxation and regulation, thus encouraging companies to adopt tax strategies to legally minimize and avoid taxes. A much better use of companies’ and their investment bankers’ time would be to engage in production of material values, including arranging financing for such productive activity.
Productive companies and investment bankers who help them obtain capital are making an important contribution to human flourishing for which they should be proud (even in retirement). The only impediment is the government for not getting out of their way and not performing its proper role of protecting individual rights.