If I can’t have it, no one will!
It is so insidious that it often goes unnoticed until it has festered and poisoned the soul. The undertones of much of the rhetoric have been so negative and divisive and suggests that envy could be driving our domestic economic policy. My concern is not political but rather economic: what are the financial implications to the politics of envy?
For Shame!
Sometimes people encourage envy.
Former Tyco CEO, Dennis Kozlowki, believes envy is what got him convicted of defrauding shareholders. He maintained his innocence throughout the ordeal and says he was sent to prison because the jury weren’t his peers: they couldn’t empathize with someone as highly compensated as he was. “I was a guy sitting in a courtroom making $100 million a year, and I think a juror sitting there just would have to say, ‘All that money? He must have done something wrong.’ I think …it’s as simple as that.” The legal fairness of his trial is certainly debatable, but what his response lacks is an acknowledgment of his own contribution to his unrelatability. For example, he threw a lavish 40th birthday party for his wife with costs exceeding $2 million that was very highly publicized. Perhaps what the jury couldn’t identify with is someone who is filthy rich and shamelessly broadcasts his indulgences.
An even more poignant example are the GM and Chrysler CEOs who famously flew in on corporate jets to beg Congress for bailout money. The outrage rightfully reverberated throughout the country: are you saying that first class flights weren’t good enough, given the reason for your visits? Quite simply, it would be a sign of good faith: we realize we can’t conduct our business affairs in the manner that we have done in past.
In the aforementioned cases, these wealthy men are their own worst enemies, not for being wealthy, but for not being able to appropriately exercise restraint in flaunting their wealth.
Is the Tax System Progressive?
The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent. The richest 1 percent, with an average income of $1,259,700, forks over 31.1 percent of its income to the federal government.
Accordingly, he concludes that it is simply inaccurate to argue that we do not have a progressive tax system and that the “best analysis shows that average federal tax rates rise steeply with income.”
This leaves the higher income earners and upper middle class paying the bulk of income taxes. Those who earn over $500,000 per year pay about 24% of all US taxes and earn about 16-17% of all income. Those who earn over $100,000 per year pay about 70% of all US taxes and earn about 56% of all income.
Does Redistribution Create Wealth?
Here’s a question: can the politics of envy (for example using the tax code to extract money from one group to give to another group) achieve economic growth? If the core goal is to redistribute the existing wealth rather than create incentives to stimulate growth, then what is the ultimate outcome?
Often initiatives designed to strip one segment of the population of their wealth have unexpected implications. Maryland failed to balance its budget in 2007, so it decided to create a special millionaire tax bracket to make up the deficit.
“Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were ‘willing and able to pay their fair share.’ The Baltimore Sun predicted the rich would ‘grin and bear it.’”
However, there were two things that Maryland politicians didn’t count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). “By April 2009, one-third of the millionaires had disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did the previous year — even at higher rates.”
Indeed, the number of residents with net taxable income of $1 million or more fell more than 30% to 4,910 in the 2008 tax year from 7,067 the year before. Of the 2,157 “missing” millionaires, the Comptroller’s office said 542 filed no tax return for 2008. Of course in addition to moving, some of these 542 million dollar earners died, requested extensions, or just didn’t file. Also, don’t forget that some of the 2157 likely lowered their taxable incomes to avoid taxes.
Flawed Logic
Rather than creating wealth, my concern is redistribution removes the incentives for creating wealth. Aside from whether or not you believe it is just for someone to have more wealth than most of society, there are other issues with redistributing wealth. As Maryland case study (and other states have repeatedly proven), the rich tend to control the velocity, the location, the source, and the volume of their income. The projected increased tax revenues often have a way of not materializing. Also, many people reading this are a lot richer than the rest of the world. An income of over $25,000 annually puts you in the top 10% of income earners in the world, so consider how much more of your income should be redistributed in light of that fact. I doubt merely knowing that fact sufficiently motivates you to give away over half of your income, and if someone had the audacity to force you to do so, you would be considerably upset and not motivated to work harder. The point is there has to be a balance between taxation and incentive. Also, to say that one group of people is more moral for wanting to take money via taxation than others for wanting to control how their money is spent, saved, invested, and given away seems like flawed logic.
Reverse Strategy… Again?Rather than trying to make the wealthy less wealthy to tackle our budget deficit, could creating more affluent and wealthy individuals do the job? For example, Maryland, California, and New Jersey and other states that have been hammered with the economy all highlight some of the challenges of depending on relatively few people to finance our government. If we have more people paying taxes (and exercise more fiscal constraint), the deficit will surely diminish. I acknowledge this is a daunting task that doesn’t always yield immediate results, but over the long term, at least this strategy has the possibility to eliminate our budgetary shortfalls. I think this would be a much better use of our energy.
What say you: do we actually need more affluent and wealthy individuals? Are you ready to take your rightful among the affluent and wealthy?
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Bush the younger cut taxes significantly which was supposed to create exceptional economic growth and balance the budget. As he was leaving office we instead were mired in the worst economic downturn since the 1930s and the deficit was at record levels. So, I wouldn't advocate more tax cuts and believe that his were a huge mistake,
Taxes aren't just for redistributing income of course. They go to defending the country, fixing the roads, education etc. An argument could be made that many of the rich benefited more from this than others. They of course don't believe it but as Buffett points out we in the U.S. are the beneficiaries of winning life's lottery. If Kozlowski had been born in Bangladesh he would understand this.
Having said all this I'm all for creating more millionaires through economic growth. Many deserve their wealth and income others don't because they happen to be in the right place at the right time IMHO.
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Well said, I hash this topic in my head, and I agree with you line of thought on it.
Too me, taxing the rich and redistributing the wealth is like punishing those that make the enconomic engine run.
Perhaps the government should consult Clinton more often! At least he tried to keep a more responsible fiscal house!
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I agree 100% that class warfare isn't productive and we need to appreciate the job creating role of the entrepreneur and make sure that entrepreneurs have the incentives, including keeping what they make, to further business.
Regan's tax cuts increased economic activity but we should also remember that he created the biggest peacetime deficit in history up to that point.
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Roads and schools aren't funded through income taxes. Roads are mostly paid through fuel taxes and tolls, and rich and poor are equally burdened. Schools are largely funded through property taxes, and in our state, partly by gambling revenue ( a tax on the stupid …. and freshly poor ). Excise taxes and sales taxes hit both rich and poor. And the defense department in all its ghastly excesses is mostly funded through debt and currency inflation.
I have no issues with wealthy individuals as long as they mind their own business. Trouble is, they don't. With money comes power and the urge to use that power, to cozy up to influential bureaucrats in government (city, county, state, federal), elected, unelected or appointed, to work within the corporatist state to pass legislation and steer more power and money to their own benefit.
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Geithner is right about inflation. The primary determinant of relative FX rates are relative inflation rates. Controlling the currency in the face of rising inflation gets things more out of whack. From our perspective it worsens the trade deficit which requires more borrowing which cheapens the bonds the Chinese hold and could get us into a vicious circle.
But the Chinese don't understand the concept of a free market. They are slowly understanding the value of allowing people to own the means of production and trying (I think) to grasp the idea of property rights.
It is said that newspapers have to sensationalize headlines to sell papers. These headlines affect markets.
Great post!
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It hasn't been discussed as much as it used to be, but the United States does still contain a large number of people who are content to remain "poor" recipients of welfare.
The Welfare Reform Act of 1995 cut back on the old ADC, but many mothers simply find a way to get their children declared disabled so they can draw Supplemental Security Income (SSI), which is a lot more money anyway.
There's very little being done to give kids born into poverty a vision of working hard to become a success — except through sports or entertainment, which can happen only for a tiny few. The vast majority do not understand the amount of education and work required for getting and holding good jobs.
The overwhelming mentality in impoverished communities is that wealth is not created, but something that rich people have gotten unfairly and which is unfairly withheld from the poor people.
Poor people can fight back through crime, or accept a life of low paying jobs, or collect a government check. That's the thinking.
Somehow society needs to do a better job of articulating the American Dream, but the government and the media are doing the opposite. They encourage poor people to continue to see the system as unfair, yet to depend on it.
American Land Lease
Agreed. Interesting point!
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Great analogy Don.
Are you saying Bill Clinton for a third term? You are right was was definitely fiscally responsible. If you are going to raise taxes, at least balance the budget buy cutting expenses.
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Great clarification!
Meddling in political matters certainly occurs.
LIke you, I just wish everyone would mind their own business. I think the problem is we are so focused on other people's lives (but not to help them if you catch my drift). Ulterior motives abound.
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I'm not sure if this comment was for this post or another one: The Fall of the America Democracy. Nonetheless, thanks for sharing your thoughts.
No,
I definitely understand your point. It can be summed up to "where's the justice?" I am shocked that you are not going to pay for the insurance, as that's sure to be a big battle.
I'm right with you – it's unfair that you have to indirectly subsidize others' stupidity. It's not how life is "suppose to be." I am convinced though that people who repeatedly abuse the system will get "theirs:" whether it's low self-esteem because they are leeches, bad mental or physical health because they are unproductive, or a myriad of other things that happen to people who put out negativity
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Very interesting observations. I agree with you about the shift in media coverage. It’s easy to buy into the victim mentality, when that’s what is promoted via media.
I often have to fight against this attitude. It’s all quite tragic that we give into such hopelessness and despair. Because without hope, you are unlikely to seize the opportunities to build any wealth for your family. It’s self-defeating!
My recent post Politics of Envy
Does Redistribution Create Wealth? I think history has proven the answer is clearly no. I believe it actually encourages the creation of an underclass (i.e., that which you subsidize you get more of), the destruction of the family unit, and the lack of positive role models in children's live. Heaven help us all if the cooks MTV are the role models for the next generation. That is not how normal people live. The good news is that you still hear of many people who rose from nothing to become great successes. Instead of the media and politicians sending the continuous message that life is unfair and only the big hand of government can help, they should be talking about the success stories and how to rise above life's circumstances.
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ET&T, your comment made plenty of sense. Definition of the word "fair" is a moving target, always in the eye of the beholder.
By the way, we have toll roads in Oklahoma, and they suck mightily.
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No tolls in most of NC… One nearby town is discussing it, but I think it will be an uphill battle, as we’re not used to paying them
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Great point! The Soviets also tried wealth redistribution but to no avail. I do think it crushes to human soul when your prosperity is completely dictated by someone or something else. Why take initiative when it may not matter.
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I'm not going to get into an argument about this because I'm at the point where I feel like I ought to be paid to pontificate on this (and nobody ever listens to economists or facts on these issues anyway… maybe if I were Rush Limbaugh) but… 1. I completely disagree with The Biz of Life especially in terms of what history has proven, 2. I seriously do not think we're on the wrong side of the Laffer curve, 3. Marginal benefit means that I value a dollar more than my students and less than Bill Gates. Bill Gates gets less pain from paying a larger portion of his income than I do and I get less pain from a larger portion of my income than my students, which is why marginal tax rates work 4. The wealthy are very good at paying people to shelter their money so that they don't pay the amounts of taxes that many folks think they do. 5. There's also income vs. substitution effects that complicate the straight higher wage = less work idea… if folks have a target income, they'll work more, not less, when their effective wage rate drops.
And that is all I'm going to say on the subject. I expect to be drowned out by people who don't understand marginal tax rates complaining about the government stealing the money they hope to make some day in the future when they think they will be rich. I'm jaded that way.
I don’t know whether Biz subscribed to all comments or just replies, but I found your comment interesting.
History – I’m curious if Biz is referring to the Soviets as his example of government-mediated redistribution of wealth.
Laffer curve – Dr. Laffer himself thinks the optimal tax rate is where we are at right now, but you raise a very interesting point. Could he be wrong about the interpretation of his own theory? I’m intrigued!
Marginal tax rate – There is clearly widespread misunderstanding of marginal tax rates.
Sheltering money – Agreed! This is why I wish there was simplification of the tax code and removal of all of these loopholes.
Substitution effects – I’m adding this to my library!
Last part of your comment “jaded portion” ROTFL 🙂
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"Rather than creating wealth, my concern is redistribution removes the incentives for creating wealth."
That about sums it up in a nutshell, Roshawn. The evidence is all around us for those willing to look for it.
All the best,
Len
Len Penzo dot Com
Thanks!
I can understand your position. Although I don’t consider tax credits free money, it is clearly an incentive. For example, one area where I supported tax credits was when a company hired U.S. workers during this recent recession.
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Thanks Len. You are right that the evidence is all around us. Although redistribution removes the economic incentives to become wealthy, some people are okay with it as long as they are not (or minimally) affected. It's duplicitous and pervasive. It's really quite sad that people allow their political agendas to obscure common sense.
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Agreed Roshawn. But how many do? The percentage is minuscule. And to be fair, what is the incentive to hire a worker here with say $8/h when they can get the same labor for $2/h in China?
To speak for the other side, Corporations are not charities either. They simply play by the rules the State sets. If the rules are flawed, the system is gamed.
Unfortunately the politicians prefer the lax rules since the corporations fund their excesses. It's a vicious cycle. Anyone remember that douche that apologized to BP?
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Thanks. I guess I'm from the perspective that since most businesses are small businesses, many are not sufficiently sophisticated to game the system as your suggesting. That said, I do realize that many of the taxation laws are made in ways to encourage entrepreneurs to take the risks to start businesses and real estate investors to provide housing anyway. Consequently, they can benefit without gaming the system…just by virtue of how they earn their income.
I sincerely hope you are right Roshawn! Very interesting topic I have to admit! 🙂
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I hope so too. I do believe in the integrity of business; otherwise, I wouldn't be in business myself part-time nor would I support people going into business as a profession.
Interesting and controversial topic. I got hate mail over this post!
Cheers!
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I hope you don't consider this hate mail! 🙂 I usually avoid controversial topics, but you got me to post! I'll give it to you!
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Not at all. I appreciate all comments and opinions. I'm talking about people questioning the morality of my position in a "barely civil" tone, not your email.
It's okay. I deal with people all the time, so I'm used to being criticized. I have just been focusing on the positive lately, so this post is the first controversial commentary of the year. Alas, the backlash and the onslaught begins.
I always love discourse… maybe a little too much. I deliberately try not to take any of it personally. Thanks for the great discussion!
Cheers!
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I enjoyed this article and the comments. My opinion is much like Everyday Tips. From people I know, the ones that are getting bailed out with incentives are the individuals and corporations that have historically been the worst and most irresponsible with their spending. I don't like the idea of my money subsidizing other people's stupidity or risk taking actions.
Hate mail over this post?
That remains a source of amusement to me. One would think that people have better things to do with their time, rather than sending out vitriolic emails.
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Absolutely. It's quite sad that this repeatedly occurs because it's demoralizing to people who do the right thing.
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One would think, but that's how it works when you put your ideas out there unfortunately.
It's all good though!
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Our tax strategy needs to be re-evaluated. Incentives should be clearly addressed. Should local property tax pay for local schools? Should gasoline tax be raised/lower? Sales tax vs income tax. Estate tax, etc.
Unfortunately there's too many conflicting interest for us to expect any significant changes.
Just look at our high corporate tax. Yet, most large corporations don't pay anywhere near the corporate tax on the books.
Or taxing foreign earnings… the list goes on.
Charles, you have a great point. There's so much ambiguity in the tax code that it certainly needs to be readdressed. However, to get the right group with enough political courage and finesse to take on this task is a different story altogether!
The list really does go on, and I think you hit the nail on the head when you suggest that the problem is conflicting interests.
Redistribution actually destroys wealth as well as the motivation to create. I never liked the term for "Progressive" taxation, as the word makes it sound like it's a good thing, and that a "progressive" society should tax "progressively". In reality, it progressively makes things worse and creates disincentives to work hard and contribute back to society through the creation of wealth.
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