We feel compelled to present opposing views. Admittedly, we are mostly read by this smaller group. But it is not about who constitutes our readers, but about right and wrong, providing clarity by scrutinising both arguments, and what serves the nation over time.
We previously wrote about this in “Better to be equal and poor or unequal but richer” published in this column on Feb 10, 2025. Our proposition is when politics begins to dominate incentives, capitalism stops producing enough to sustain what democracy keeps demanding, however well-intentioned. When a minority consistently funds the subsidies consumed by the majority, can a system of one-person-one-vote sustainably manage a society where one group pays, another group receives? It is not a moral question. It is an incentive question.
Spending your tax dollar – what is justifiable
Let us be clear. There is absolutely nothing unjust about progressive taxation. It is right and every nation does it. Everyone benefits from stability, infrastructure, safety and security — paid for by taxing the rich to pay for roads, schools, medical care and public security.
See also: Brains, beds and balance sheets: Where human capital becomes hard currency
Broadly, the state performs or provides at least three fiscal functions:
1. Public goods: law enforcement, defence, infrastructure and regulatory systems. They are beneficial to all, and all taxpayers support these functions.
2. Social insurance: unemployment protection, healthcare and pensions. These are mechanisms for the pooling of risks. They are economically positive if designed prudently. Almost everyone supports a caring society.
See also: The Experience Economy as Malaysia’s national policy: from factories to footprints
3. Redistribution detached from productivity: cash transfers, broad subsidies and politically targeted benefits that do not expand capacity, only sustain consumption. This weakens growth if it becomes permanent and politically escalated.
Politics talks, money walks
When a small segment of taxpayers contributes the bulk of income tax, and the majority becomes the net recipient of fiscal transfers, the majority naturally vote in favour of expanding transfer. As Bryan Caplan argued in his book The Myth of the Rational Voter that voters are rationally ignorant about long-term economic trade-offs. The average voter does not calculate tax elasticity, or productivity effects. He responds to visible benefits.
The logic is simple. The subsidy is immediate and tangible. The cost is diffused and delayed. The future tax burden and any economic consequences are abstract.
But high-income earners and capital owners respond to incentives. If returns after tax are significantly reduced or are not competitive, entrepreneurs invest less or elsewhere, high-skilled labour migrates, tax planning intensifies and the informal economy grows.
Talent and capital are not captive assets. When redistribution policies ignore this, the tax base narrows over time. This dynamic has appeared repeatedly in history — Latin America in the 20th century, for example. At the other end of the spectrum, we have Singapore. In 2025, its three biggest banks drew in a combined S$77 billion in net new wealth money from Asia’s rich.
And when nations try to “capture capital” (as in capital controls), the long-term costs (rarely visible) last decades, as in the case of Malaysia. The permanent discount to Malaysia as an investment destination — the loss of velocity, of higher financing costs, of valuation discount — is arguably the single most important factor why the nation is still stuck in the middle-income trap and why Bursa Malaysia has underperformed for decades. Capital is not just money — it is trust.
For more stories about where money flows, click here for Capital Section
Competitive popularism
Democracy intensifies the problem. The logic of electoral bidding escalates spending commitments. Each cycle adds a layer of benefits and rolling back is politically toxic. Over time, transfers become entrenched, fiscal deficits widen, debt rises, future tax increases and economic and wage growth slow. How it gets adjusted eventually is through inflation, crisis or austerity. These undermine long-term prosperity and hurt the poor and the working class the most, the very people the policies were aimed to help.
The reason popularism works in politics is because while markets discount the future, voters do not. Immediate visual benefits win elections. The costs of slower productivity growth and weaker currency will materialise years later. This mismatch creates time inconsistency — because voters cannot internalise the costs, majority rule democracy can become the engine of gradual fiscal deterioration.
In his book Against Democracy, Jason Brennan articulated that most voters are politically uninformed, biased or irrational, which leads to poor collective decision-making, where democratic participation often amplifies tribalism rather than wisdom.
To be clear, some redistribution can enhance growth if it is applied to early childhood nutritional programmes that improve lifetime productivity, education, conditional cash tied to school attendance (we used to do this for the Orang Asli children when we owned Sunrise Bhd) and basic healthcare. But not if it is used for fuel subsidies, or politically distributed cash transfers.
The cost of debt illusion and the necessary institutional design
Cash transfers work politically because governments resort to borrowings instead of immediately taxing more. Debt creates the illusion of free benefits. But this over time narrows the fiscal space and increases borrowing costs.
In an open economy, persistent deficits can weaken the currency — raising import costs, increasing inflation and eroding real incomes, especially for low-income households that spend a higher share of their income.
Economics does not disappear simply because politics prefers to postpone it.
It is therefore essential that democracies have sufficient guard rails — a broad tax base where most citizens contribute something (so that most people have skin in the game), statutory fiscal limits, independent central banks, transparent budgeting and targeted subsidies instead of universal ones. When voters also pay meaningful taxes, they internalise fiscal costs. When deficits are constrained, politicians cannot auction the election.
Institutions shape outcomes (read Daron Acemoglu and James A Robinson’s Why Nations Fail or my review of the book — scan QR code).
We are not against redistribution itself. Because that will create extreme inequality that erodes trust and creates instability. Instead, we believe redistribution without regard to incentive risks stagnation. It is necessary to balance compassion with competitiveness. The aim is to create equal opportunities, not aim for equal outcomes. Supporting the poor is right. Creating permanent dependency is not.
Conclusion
Can democracy persuade the majority to support policies that may not give immediate personal benefits but maximise long-term collective prosperity?
Some societies have used democratic legitimacy to build competitive, innovation-driven economies with robust safety nets. Others have slid into debt, inflation and stagnation through unchecked transfer policies — in the name of equality. The difference lies not in whether the rich is taxed — but in how, why and to what end.
The real task of democratic governance is to design institutions where fairness strengthens growth — and where growth sustains fairness. Where compassion does not kill productivity, fairness does not destroy incentives and the majority does not vote itself into stagnation.
And it begins with recognising that the problem is not taxation itself, but the incentives embedded in how democracies decide who pays, who receives and when.
Governments cannot permanently promise more than their economies can produce. Wealth must be created before it can be shared. Incentives must remain intact. Leadership must resist the temptation to turn every election into an auction of benefits. It is a view that sits uneasily with calls for democracy to govern capitalism.
Final remarks
If it’s still unclear, just as democracy should not overwhelm capitalism, capitalism must not dominate democracy.
When democracy governs capitalism, it risks short-term vote buying, subsidy competition and weakened productivity incentives.
But when capitalism consumes democracy, it leads to regulatory capture, loss of social cohesion and public trust.
Society needs independent institutions that constrain both — such as the rule of law, independent judiciary, central banks and the media. In other words, prosperity requires markets, legitimacy requires democracy — both need independent institutions. Every ideology overreaches when institutions are weak and corrupt.
Portfolio commentary
The Malaysian portfolio fell 1.8% for the week ended March 4, less than the decline for the FBM KLCI, which was down 2.8%, due in part to our relatively high cash holdings (some 44% of total portfolio value). This broader market selloff was precipitated by the widening war in the Middle East following the US-Israel attack on Iran over the weekend. United Plantations (+0.1%) was the only gainer for the week, while the biggest losers were Maybank (-5.7%), Hong Leong Industries (-5%) and LPI Capital (-3.1%). Total portfolio returns now stand at 209.8% since inception. This portfolio is outperforming the benchmark index, which is down 7.2% over the same period, by a long, long way.
The Absolute Returns Portfolio declined 3.7%, paring total portfolio returns since inception to 38.8%. All stocks in the portfolio suffered losses. The top losing stocks were ChinaAMC Hang Seng Biotech ETF (-12.6%), Alibaba (-12.4%) and Ping An - H (-9.3%).
The AI portfolio also ended in the red, down 2.4%. Total portfolio loss since inception widened to 6.1%. Alibaba (-12.4%), Robo-
Sense (-10.4%) and Naura (-10%) led the decline. On a more positive note, Unusual Machines (+9.2%), Datadog (+7.3%), Amazon (+2.9%) and Cadence (+1.2%) were higher for the week
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports
