Wealth – Why taxes and welfare are bad (part 1)

How many times have you heard that it is good to ‘tax the rich’? I can’t count the number of times I have seen it in discussion boards and posts, from people I talk to, books, and definitely the media. It is often accompanied by the phrase, “They should pay their fair share.” I also frequently hear that we need to decrease the gap between the rich and the poor. Another popular one is, “They can afford it.”  Are all of these ideas sounding familiar to you? It appears to be common knowledge that taxing the rich is good. I certainly know plenty of people who believe it is true. All of those phrases sound good, and they are certainly popular among the poor.

Unfortunately for them, I haven’t been able to find any evidence that shows taxing the rich strengthens the economy. Any, anywhere. I really don’t understand the mentality behind it. No one ever gives any reason, they just angrily say “The rich should pay their fair share!” without following through on the implications. It seems like many people agree just out of spite. They are jealous or angry that someone has so much more, so they say it is ’fair’ to make them pay the majority of the taxes. The government mentality on raising taxes on the rich seems to be simply to please the poor and foster dependence on the government. If you do a little research you will see that the vast majority of economists agree that raising taxes on the rich is bad for the economy; bad for jobs, bad for the market, and bad for the poor. The ones who disagree, and argue that raising taxes on the rich is good, only explain what the garnered money could be used for. They don’t say why it would be good for the economy as a whole; they just say, “We could use the money to do this and this to help the poor.” That is nice, but money simply given to the poor runs out quickly, and then they need more. A healthy economy, on the other hand, helps the poor more than a check or government program.

I think that one of the biggest problems I have with attacking the ‘rich’ is that no one bothers to define the ‘rich’. Is it anyone making more than $1,000,000 a year? Is it anyone who has in their possession more than $1,000,000? It is anyone who owns property or investments worth more than $1,000,000? Is it anyone making more than $500,000 a year? Is someone making more than $100,000 a year rich? How about someone making more than $60,000? Is it anyone who has more money than you? Is someone making $100,000 a year in downtown Washington D.C. wealthier than someone living in rural Indiana making $70,000 a year? Is a young man who just graduated from college, started a job, and inherited $1,000,000 from a deceased uncle rich? How about a 70-year old widow, unable to work, has $1,000,000 in the bank, and chemotherapy treatments twice a week that cost $5,000 a visit? Is the man with a wife and eight kids making $75,000 as rich as the bachelor making $75,000? Is the 35 year old doctor who just finished medical school and makes $250,000, but has $300,000 in student loans and $75,000 in annual malpractice insurance rich? Is the farmer who owns $3,000,000 worth of land, but only makes $60,000 a year working from 4:00 am to 10:00 pm rich?

Should I go on?

Obviously, the point is that it is hard to define ’rich’. So simply ’taxing the rich’ is not actually simple. One often repeated statistic is that 50% of America’s wealth is owned by the top 1% of the people. This sounds horrible, but I’ve never heard any explain it. Wealth is defined by the value of everything a person owns minus their debt. When wealth distribution is separated by the type of asset some of the distributions even out quite a bit.

Table 2: Wealth distribution by type of asset, 2001 Investment Assets

	Top 1%	Next 9%	Bottom 90%
Business Equity	57.3%	32.3%	10.4%
Financial Securities	58%	30.6%	11.3%
Trusts	46.3%	40.4%	13.3%
Stocks and mutual funds	44.1%	40.4%	15.5%
Non-home real estate	34.9%	43.6%	21.5%
Total	47.8%	37.7%	14.5%

Housing, Liquid Assets, Pension Assets, and Debt

	Top 1%	Next 9%	Bottom 90%
Deposits	21,7%	35.5%	42.8%
Pension accounts	13.3%	47%	39.6%
Life Insurance	12.5%	33.5%	54%
Principal residence	8.8%	28%	63%
Debt	5.8%	20.1%	74.1%
Total	11.9%	34%	54.1%

Wolff (2004)17.

The top 1% own 9% of the wealth in personal residences, the lower 99% own 91%. The top 1% have only 13% of pension accounts, the other 99% have the remaining 87%. The greatest disparity comes in business equity; 1% have 57%, the next 9% have the next 32%, and the lowest 90% own only 10% of the business equity in America. The top 1% also own 58% of financial securities, 46% of the trusts and 44% of the wealth in stocks and mutual funds. This makes perfect sense; most Americans don’t own any businesses, financial securities, trusts, stocks or mutual funds. That is because most Americans choose not to invest. They make their money, then they spend it. Wealthy people make money, invest it, and then live off the income from their investments. The greatest disparities in wealth, the fact that the top 1% own the most financial securities, trusts, stocks and mutual funds, are simply a matter of choice. If more Americans choose to invest, then a greater percentage would own part of the wealth contained in those investments. The fact that the top 10% own 90% of the business equity makes sense; a lot of wealth is concentrated into businesses, and since there are many less businesses than there are people, only a small percent of the people own businesses.

Another factor contributing to the top 1% owning 50% of the wealth is that when wealth is measured debt is subtracted out. The bottom 90% have 74.1% of the debt. Consumer debt in America was about $2.6 trillion dollars in 2007 (mortgages for houses are not included in the definition of ’consumer debt’). Naturally the distribution of wealth would be different if this debt didn’t exist, and there would be more wealth in the lowest 90%. Debt is another choice; if people choose not to spend money they don’t have then they would not be in debt. It cannot be argued that debt is necessary. Mastercard was established in 1967; before credit cards if someone couldn’t afford something, they simply didn’t buy it. Payday loans are also a recent development; Check$mart was established in 1987, Check City opened in 1986. Prior to such conveniences, people simply waited for their paychecks, then spent money. Unfortunately, a large amount of the disproportionate distribution of wealth in America comes down to what people are choosing to spend their money on. Wealthy people have invested their money in assets which increase in value. Most people spend their money on consumables and liabilities that decrease in value. Which means that wealth in America can not simply be ’redistributed’. Even if it were, the formerly wealthy would just reinvest their money in money yielding assets, and the formerly less wealthy would respend their money on liabilities. The difference would be that only 1% (maybe a bit more, but nowhere near 50%) of the existing wealth would be reinvested and eventually worth more; the rest would be spent on things that lose value, essentially making the money disappear.

So what is the solution? If it bothers people that 50% of America’s wealth is held by a mere 1% of the population, what should be done about it? You can’t just redistribute money, because most of America’s wealth is not in the form of money. Since most of that wealth is invested in businesses the only way to get at it would be to liquidate the businesses. Which would be only slightly disastrous to America. You could also force people to sell off all their investments. Of course, every time vast amounts of stocks are sold the stock market crashes and billions of dollars just disappear. Stocks represent investments in various businesses, so if all the stocks are sold the business loses all that money, and usually goes bankrupt. So the only option to make sure the top 1% don’t keep 50% of the money is to tax the income of the wealthy. This is an incredibly self-destructive mentality. Let me ask you this; have you ever gotten a job from a poor person? Personally, all the income checks I have received have come from a business, run and owned by successful, wealthy people. So if we were to redistribute all that wealth away from prosperous businesses and their owners what would happen? We would all have the same amount of money. Then what? There wouldn’t be any growth; the entrepreneurs wouldn’t have any money to start businesses,the business owners wouldn’t have any money to invest or grow their current businesses. Prices would go up, employment would stagnate or decrease.  Stifling economic growth is bad for everyone.

So, obviously massive redistribution wouldn’t work. The next option, of course, is small-scale redistribution, in the form of massive taxes for the wealthy; luxury taxes, business taxes, property taxes, capital gains taxes, etc. This is also destructive, simply on a smaller scale. Let’s look at a real example of one ’wealthy’ business owner; he has spent years working and earning, building his own small business, and has finally been able to purchase a fairly well-known plastic extrusions company. He builds a nice house for his large family, he frequently lets friends, family and his children’s friends live there temporarily when they are having trouble. He rents a building to run his business out of, until he saves enough to buy a permanent building in an industrial park. As the business grows he hires new people, and reinvests most of the profit into paying off the business loans and the new building mortgage. Then the government decides to raise property taxes on his home. He used to pay $100 a month, $1,200 a year. Ten years after moving in the property taxes are $600 every single month; more than a lot of people pay in rent. His wife would like to move to a smaller house now that some of her kids have grown up and left, but no one will buy a house with property taxes at $600 a month. “Well, we should be taxing the rich; they can afford it.” I’ve seen and heard exactly what people think.

But where, exactly, do they think the money is going to come from? Along with property taxes, other taxes also increase. And then the economy gets hard; gas prices go up, food prices go up, sales go down, everything is more expensive. Shipping costs more, because of gas prices, which is hard on all businesses that depend on shipping to transport their products. His family’s budget is tight; he is putting two kids through college, four of his kids are still living at home, food prices have increased about 25%, it costs three times as much to drive anywhere. “Now he’s getting a taste of what the poor go through. Suck it up and stop whining.” Yes, budgets are tight everywhere. And many people do live most of their lives on a tight income. But just think for a minute where the extra money is going to come from if you stick it to the ‘wealthy’. He needs to cut costs so he can afford to pay his taxes. He doesn’t have a treasure chest full of money. As his income has increased for the past decade he has put most of it back into the business to help it grow. He has to keep the business running. His products are known for their quality, he isn’t going to cut corners on his machines. His only option for maintaining a profit is to let someone go. The blue collar worker, whom the liberals claim they are working for, is out of a job because taxes went up and the small business owner had to cut costs. What do you think his life is like now? Maybe you don’t cry when a filthy rich business owner has to pay more in taxes, but do you care about the person who is out of a job in the middle of a tough economy? What is he going to tell his family?

In addition to cutting costs at work, things at home are also harder. This business owner has always liked nice cars, and usually buys another one every couple of years. His family had also started eating out once or twice a week; because after 27 years of working he could afford it, his wife doesn’t have to cook every night and they can spend some time as a family. Now they can’t; they’ve implemented a grocery budget, his wife has insisted on no more cars and they don’t go out to eat anymore. “Oh, boo-hoo, the fabulously wealthy can’t keep up their nice lifestyle.” Yes, I know no one feels sorry for the sacrifices of the rich. But people are cutting back all over; if the business owners can’t go out to eat a couple of times a week, then everyone else is cutting back too. So the local restaurants that used to have 8-10 servers on a night have cut back to 6-7. The remaining servers see a drop in their tips. It’s less busy, so they can do with one less cook, busser and hostess each night. The chain restaurants stay in business, but a couple of the locally owned Mexican restaurants and Chinese buffets close down. Of course, all their employees have trouble finding jobs because none of the other restaurants are hiring. The servers working for $2.13 an hour plus tips are not among the wealthy, and loosing one night a week of work, or loosing their jobs altogether, makes life much harder for them. The business owner has also stopped buying nice cars. Not being able to buy another car means car sales are down, too. The car factory doesn’t need as many assembly line workers, so a few of them lose their jobs. Less people buying cars means less commission for the car salesmen. His family has to cut back on their budget, they go out to eat less.

Do you see where this is going?

Who do you think is to blame? Is it the dirty, wealthy, callous business owner, who selfishly fires people and stops going out to eat to avoid defaulting on his taxes? Or is it the government, the kind, generous government, that is only taking what doesn’t belong to them so they can redistribute it to people who deserve it?

The liberals want to raise taxes so they can send checks to people who don’t pay income taxes. The masses of people get their one check, but another one isn’t coming unless the government can get more money. What, exactly, do you think will happen if the government raises taxes again? More people lose jobs; more people need checks from the government. It is a short, slippery slope down. Wouldn’t it be better if companies had more money to hire people, so more people could have jobs, so the government wouldn’t need money to send out checks en masse? I’ve heard people speculate that business owners wouldn’t hire more people if they had more money; they would just keep it. Maybe some would; there are examples of selfish, corrupt business men who make off with an obscene profit and leave the business and all its employees burning in a pile of sewage. (Good imagery, right? It means they leave them with worthless stocks and no jobs.) And we all hold up examples of those men as the reason we need to punish business men everywhere. Enron and Countrywide are two that come to mind. So the appropriate retaliation is to vilify all business owners, and promise to skin them with ever increasing taxes so we can give back to the ever deserving poor?

Guess what; most business owners aren’t like that. Smart business owners don’t stop growing to increase profit margins; they keep growing to increase profits. The wealthiest people in America have investments in the largest, most productive companies. The wealthiest person in America doesn’t own one little shop with 12 employees making billions because he stopped hiring extra people. The bigger the company the bigger the profits. So if a business owner has more money to invest in running their company, they will continue to grow their business. Which means more employees, higher national employment rates, and a higher percentage of America paying income taxes and not needing government handouts.

Wow! Is it really that easy!?

Of course not. The economy is an intensely complicated thing, with literally thousands of factors contributing to how it reacts. Which is why I don’t like looking at statistics of how the economy performed under certain administrations. Ronald Reagan had the longest run of peacetime economic growth of any President. That sounds good, right? He cut income taxes at the highest bracket from 70% to less than 40%. But Clinton raised taxes and also had a fairly good economic period. Bush (43) had a horrible economy at the end of his administration, and he cut taxes. The economy can take a long time to react. You could say Clinton inherited a good economy, and his policies led to a recession at the end of Bush’s administration. You could say that Clinton raising taxes kept the economy good and that Bush cutting taxes made things bad. There are many factors contributing to things like recessions and housing collapses. It is easy to say, It’s the Democrat’s fault because they encouraged loans to the poor, who couldn’t pay them back. It’s easy to say, It’s the Republican’s fault because they opposed government regulations in loan companies. So, instead of majoring in economics and studying history and trying to make sense of opposite opinions on what made things good and what made things bad, I just go with what I see.

When I have more money, I spend more money. When I’m spending more money, other people have more opportunities for jobs. When businesses are growing they can hire more people, create more jobs and there is more wealth in America. It is universally agreed that more wealth in the economy is a good thing for everyone. When taxes go up I have less money. When I have less money, I spend less money. When everyone has less money to spend there are less job opportunities. When businesses have less money they shrink. People lose jobs. There are less jobs available, and less money in the economy. That is why higher taxes are bad.