Why I Want More People to Be Rich
I don’t know how much money you make. But whatever it is, I wish you and everyone else would work twice as many hours and earn twice as much income. Why? With one exception (discussed below) your earning more money can’t possibly harm me. In three very important ways it will benefit me. Your higher level of spending on goods and services will almost certainly increase the market for whatever I produce. Your increased saving and investment will lead to more capital and more inventions and almost certainly allow me to produce more within an hour’s worth of work. And (not to be overlooked) with more income you are more likely to buy your own health insurance and pay for other necessities instead of expecting me to pay for them.
And do I need to add? I’m much better off when rich people are spending their money than if the government seizes it and spends it.
httpv://www.youtube.com/watch?v=WCkOmcIl79s
Money Money Money
Although the economic way of thinking does not come naturally to most people, everyone seems to intuitively get this. All over the world people understand that it’s better to live around a lot of rich people than to live around folks who earn no more than what they earn. Isn’t that why we have so much illegal immigration?
I think I can safely say that I have never met a person in an ordinary walk of life who complained about society’s distribution of income. I’ve never heard a normal person say the world would be better off per se if Bill Gates and Warren Buffett earned less money. No waitress. No taxi driver. No deli operator. No one in the business world.
But there are a tiny, tiny number of people who do think that way. In fact, they are obsessed about it. If J.K. Rowling is a welfare mother, they would never think of calling her a leech on society who is not paying her own way. But if she writes Harry Potter books that give people pleasure and enables Hollywood to produce movies people enjoy and becomes one of the richest people in the world,…..well…..let’s just say there is a small cadre of folks who go through the emotional equivalent of the St. Vitus dance. They write as if Rowling (and others like her) have committed some great wrong. As if she has taken more than her share of “society’s income” and is somehow responsible for other people’s poverty.
Bob Reich, Robert Frank, Jacob Hacker and Paul Krugman come to mind. Given how few their numbers are, and how unusual their thinking, how do they find each other? How do other people find them? How do people whose basic frets and worries are six standard deviations away from the population mean manage to get onto the editorial pages of The New York Times and in the New Republic and the Nation?
Just as I have a self-interest in seeing other people make more money, I also have a self-interest in how they are taxed.
Consider Warren Buffett. When he’s consuming, he’s benefiting himself. When he’s saving and investing, he’s benefitting you and me. Every time Buffett forgoes personal consumption (a pricey dinner, a larger house, a huge yacht) and puts his money in the capital market instead, he’s doing an enormous favor for everyone else. A larger capital stock means higher productivity and that means everyone can have more income for the same amount of work.
So it’s in our self-interest to have very low taxes on Buffett’s capital. In fact, capital taxes should be zero. That means no capital gains tax, no tax on dividends and profits — so long as the income is recycled back into the capital market. We should instead tax Buffett’s consumption. Tax him on what he takes out of the system, not what he puts into it. Tax him when he is benefitting himself, not when he is benefitting you and me.
Notice that the thinking here is the exact opposite of Barack Obama’s. He seems obsessed with taxing rich people’s dividends and capital gains, while mightily resisting taxing their health care consumption.
A flat tax, a national sales tax and a value-added tax — at least in their pure forms — would all accomplish the right goal. And contrary to a lot of loose rhetoric, the change over to a consumption tax is actually “progressive.” It would leave after-tax income more equal than it is today!
A related issue is tax rates. To clear up the enormous confusion on this issue, let’s make a distinction:
- The top 1% of income earners are on the wrong side of the Laffer Curve and have almost always been so. When you lower their rates, they pay more in total taxes. When you raise their rates, they pay less.
- The bottom 99% of income earners, by contrast, are on the “right” side of the Laffer Curve. If you raise their rates, their total taxes paid will go up — and vice versa.
The federal government did not lose any money when President Bush and Congress lowered the tax rates on the very rich. It will not gain any money if President Obama succeeds in raising those rates. The rich are today paying a larger share of the total tax burden than at any time in recent history. If you want to collect even more from them, lower their rates some more; don’t raise them!
When candidate Obama was asked about the capital gains tax during the last presidential election, his answer was unfortunate. He said he favors a high tax rate, even if it produces less revenue for government. But this is surely the wrong answer — unless you’re a sadist who enjoys inflicting pain for its own sake.
If a higher capital gains tax produces less revenue for government, that’s bad three times over. It’s bad for the taxpayer, bad for the government, and (because it takes funds out of the capital market) is bad for the economy and every participant in it. If a lower rate produces more revenue for government, then it’s good three times over.
I promised to discuss one way I could be made worse off by other peoples’ increased income and wealth. It relates to “positional goods,” items that are in fixed supply, valued in their own right, but (as the term implies) may confer status on the owner. Examples are vintage wines, fine art and one-of-a-kind pieces of property. If other people become wealthier they may bid out of my reach the price of an Americo Makk painting I would like to have or a California beach house overlooking the Pacific Ocean.
It’s a small price to pay relative to all the benefits of living in a society that has lots of high-income earners.
There is more to be said about this in a future Alert.
Great post. One of your best.
Assuming, of course, that we are ALLOWED to buy our own health insurance.
I agree 100%. The more rich people the merrier. The better off we all will be.
Clear and convincing. Why can’t Obama and the congressional Democrats see this?
I like the ABBA video.
The anecdote about J.K. Rowling makes for a good thought exercise. She produces nothing of tangible value — just her creative thoughts turned into words on a paper that became the basis for books and movies. Strictly speaking, her efforts did not make society any wealthier. She did not devise a better way to feed, shelter or clothe the masses. Yet society has bestowed upon her a fortune probably worth $1 billion dollars. I read an article awhile back saying her wealth had surpassed that of the Queen of England.
One could argue J.K. Rowling has attracted a far disproportionate share of societal wealth considering she has produced nothing of tangible worth. Yet society must be better off since people willingly bought her books, watched her movies and purchased her DVDs. I suppose some struggling, aspiring writers were made worse off when her talents allowed her to dominate the market for fantasy literature. However, looking at her wealth is a clear illustration that society is not worse off just because her talents have amused and entertained so many people that she became rich.
The greatest benefit of individuals working twice as hard and producing twice as much is that the price of the product they produce will be lower and we will all benefit from their unintended largess.
I agree with John on the desirability of shifting from the income tax to a consumption tax. My late colleague David Bradford, one of the nation’s foremost experts on taxation, had worked out a consumption tax system in the US Treasury under President Ford and convinced me that he could make iot as progressive as is the income tax or even more so.
Such a tax system most probably would yield a higher national savings ratio, which would be a good thing.
I am more nuanced, to use a Beltway term, than John on the capital gains tax. If the argument is that venture capitalists who risk their own money on start-ups should not be taxed at all or pay lower than ordinary-income taxes on any gains they earn when the start-up is taken public in an IPO, I would agree to that.
I have more trouble seeing lower taxes applied to gains from trades in already existing assets — e.g., outstanding stock or real estate.
If a haberdasher buys shirts from a wholesaler and then resells them at retail for a net profit, the haberdasher pays ordinary income taxes on the gains from that trade in an already existing shirt.
One the other hand, if I buy some shares of already outstanding GE stock from John and he had bought it from soneone else when the stock was already outstanding, and he then makes a profit on buying and then reselling that stock, why should John pay a lower tax rate than does the haberdasher on shirts?
We have no assurance that John will recycle these gains into creating new economic activity in the US. For all we know, he’ll use it to buy some fine French — French even! — wines, given the bon vivant he is reputed to be, or a Porsche.
Unfortunately, working for the government work seems to be the only reliable way to get rich these days.
An article in today’s Washington Post says that the D.C. region is the most affluent in the country. Populated by federal government workers, two D.C. suburbs (Fairfax and Louden counties) are the only two counties in the United States with median household incomes above $100,000. Seven of the 10 richest counties in America are suburbs of Washington D.C.
I don’t think the Buffet example works here. What you are describing is all consumption. When saving, Buffet is consuming physical dollars (and removing dollars from our economic system reduces cash flow which diminishes income accumulation for others); when investing, he is consuming financial products (stocks and bonds which currently only benefit stock/bond holders, labor is at 10%+ unemployment); When he buys an expensive dinner or car, Buffet contributes dollars directly to the economy (which is spent and circulates throughout the economy creating wealth).
In our current economic state the only way to create jobs and wealth is to print more money for circulation and accumulation as big business is hoarding dollars (QE2). We need that cash to flow in order to generate jobs and wealth.
Rhetoric aside we are a consumer driven economy. We need to produce to increase wealth across the economic spectrum.
The article is accurate, if enough people work harder to earn more money.
People are already working hard.
I guess the next step is to work smarter, whatever that means.
The wealth gap today is larger than it was during the Great Depression.
The top 10% of households control over 72% of all financial assets.
With 70% of our GDP driven by consumption, the top top 10% are going to have to get very obese.
Democracies, Republics, civilized societies are not sustainable at this pace.
Even capitalism is not sustainable.
Remember when consumption was a disease?
Don Levit
To my mind, the VAT is the least bad tax and should replace all others.
It is not, however, a consumption tax. It is an income tax.
Consider this: A company buys equipment, supplies and services from others. It pays a tax on them, which it deducts from the VAT it pays on its sales. The difference between these expenses and the income it receives is equal to the sum of its payroll and its profit. The VAT, therefore, is a flat tax on the company payroll, which is the employees income, and on its profit, which is the owners income.
Am I missing something?
The link below has been circulating quite a bit over the last few days, but is a nice overview of the relationship between societal wealth and health.
http://www.youtube.com/watch?v=jbkSRLYSojo
Brought to you by the BBC, interestingly enough.
To Mr. Reinhardt. I totally agree with with haberdashery example. And it follows that you would agree that in both examples the entity making the “profit” should be paying the same flat tax – that is to say the current 15% capital gains tax. Then we are all happy.
Income is fairly well defined and income taxes are more or less visible to those who pay them.
Imagine the rent seeking and corruption potential in a tax on consumption particularly when one must first define consumption. Ditto the VAT, which is invisible and depends on the definition of intermediate goods. Such taxes also raise the price of engaging in legal, on the books, transactions.
I’m going to play Devil’s advocate here for a minute:
Let’s say that we all turn into Warren Buffett and stop spending on personal consumption in favor of saving and investing. What happens? The same thing that happened in the most recent recession: demand dropped, companies stopped being able to sell goods, and return on investment declined.
It’s interesting because American prosperity has been somewhat recently financed by the expansion of consumer credit. In order for all of the Warren Buffett’s of the world to make such large returns (although not all of his companies are consumer items), consumers had to spend like there was no tomorrow.
The only reason the savings equation works so well for people is because there is always a dope on the other side buying a fancy car that he doesn’t need (and probably can’t afford).
I will admit that at some point, people must spend to meet the basics in life and that perhaps even in this type of economy, an investor has the potential for high returns simply by improving on the basic products and services in life.
But, I’m having trouble wrapping my head around the idea that if everyone invested all their excess income, that I’d be better off.
I tend to follow the Chinese and say, “You guys go ahead and spend. We’ll be here buying up all of your assets and sucking in your currency while you’re out shopping.”
What I want is this: I want my neighbors to live the good life and realize a little too late that they’ve over-extended themselves. Then I want to buy their house, car, and business at rock-bottom prices.
I know that the post above is about tax policy and consumption tax (which I 100% favor), but I’m not so sure that I agree that my neighbor being rich is really what would be best for me.
Dang it! John Goodman had finally lulled me into believing that a person’s wealth in America invariably mirrors a commensurate net social contribution made by that person, when along comes Brian Williams to awaken me from this reverie.
Fully awake again, I now recall telling my students that there is a difference between people who become wealthy from creating net social value — at least the social value added that is rewarded with cash in the mnarket place — and people who get wealthy from merely redistributing existing already social value.
Tax lawyers, often brilliant people who add value to their clients, as a whole mainly redistribute income in a giant zero-sum game and, sadly, many hard working people in finace do too, devoting their life to a gambling casino, sometimes with shady gamblers (like the one’s who bankrup[ted school districts by selling highly risky and toxic assets to untrained and unsophisitcated folks.
On John’s wealth = social value theory, Washington DC must really be adding much net value to the nation — especially the folks on K-Street — or how else could they be so rich?
Thanks for being such a buzz kill, Brian Williams.
Uwe, I hope you don’t lose a lot of sleep at night worring about why people have the income they have. Unless they earn it by stealing from us or taxing us (which is bascially the same thing) I’m willing to give them their due.
Optimal tax policy isn’t conditional on how people got wealthy. It’s conditional on what we want them to do with it.
Taxes, and therefore tax lawyers, are created by government. Therefore, I don’t really think they are part of the function described above. (However, to give them their due, I know quite a few tax lawyers and accountants who would like a much simpler tax code. “We didn’t invent it, we just help you navigate it,” they say. Fair enough.)
Mr. Levit: One reason we consume “too much” (70%) is that the government taxes savings and investment and subsidizes consumption (especially of health care, housing and related goods and services).
I’m a little uncomfortable with the idea that when Mr. Buffett buys a megayacht he’s only benefitting himself and a consumption tax would reduce his incentive to do this. Obviously his buying anything in a free market benefits those who produce it.
However, I know where Dr. Goodman is coming from on this one. Let me attempt another twist on it. There’s a limit to a person’s preferred consumption. If I earn $100 million a year, it is highly unlikely that I can spend it all on things I’d enjoy.
For a Nebraskan like Mr. Buffett, that figure is likely lower than for a Russion oligarch. Nevertheless, any high earner will find at some point that he just can’t consume any more, and he has a pile of money. If the government prevents him from investing it, and devours it instead, he is likely to overconsume to compensate.
The limit to Dr. Goodman’s argument, of course, lies in the second half of this sentence from the first paragraph: “Your higher level of spending on goods and services will almost certainly increase the market for whatever I produce.”
People who do not “produce”, e.g. welfare dependents and government workers, will not find this argument compelling.
An interesting statement: “Tax him on what he takes out of the system, not what he puts into it.” and thus the idea of the consumption tax that a lot of us seem to agree upon.
Thus,
consumption is taxed.
Investing is untaxed.
But, what about money leaving the States?
Investment
Charity
The federal government in an attachment to the Veterans Act of 2008 already decided what to do about the unrealized income of a person giving up his citizenship. Realize the income and tax.
When Buffett buys a yacht, it creates a signal to other people that they can have a yacht if they create value! Taxing consumption is also bad for the economy!
The ultimate problem with taxes on specific activities is that it distorts signals. This comes back to the socialist calculation debates. The government is fundamentally unable to make rational economic calculation whether they are directly allocating resources or they are affecting relative prices. A flat tax greatly reduces this distortion and will result in a stronger economy.
As for the “optimal” tax policy, I think there are incredibly strong arguments against having any tax at all! The state is fundamentally a legitimized monopoly on coercion and there are few areas where having such an organization in control is likely to be better than what would be provided by a free society.
I havenever met anyone who complains about wealthy people who created jobs, innovated and made new businesses. For the last two years I have heard many people complain about finance people who got rich by essentially gambling,creating no new jobs. Then, when they crashed the economy, they did not suffer much of the loss they created. I guess John just hangs out with people who were not affected by the recent subprime crisis.
Steve
Note to ohn Graham:
You write:”People who do not “produce”, e.g. welfare dependents and government workers, will not find this argument compelling.”
Do you sincerely believe that government workers do not produce anything?
I wonder if you would have the guts to go tell that to a bunch of Marines in a San Diego bar. They are fully on the government’s payroll — in a true sense government workers — as are NHI researchers and physicians looking after our wounded in the VA.
You impair your other arguments with dubious statements like that.
Actually steve, we don’t know who john hangs out with. He keeps his donor list a secret. That makes it impossible to evaluate his conflicts of interests.
As part of my medical student teaching duties, I regularly hold a session in which they are given the opportunity to solve the nation’s health care woes. Near all state they want a universal system and very near half want to tax the rich to pay for it. They may not bring up Warren Buffett of Bill Gates, but they sure think that wealth should be redistributed. On further questioning it is easy to reveal that they do not have a clue as to the economic effects of their “policy”.
I simply don’t understand Uwe’s distinction between those who produce new social value and those who redistribute already-existing social value, at least not the way Uwe describes it. As best I can tell, Uwe would put stock brokers in the latter category and would not regard them as producing value. If so, I would disagree. Brokers facilitate the transfer of ownership of assets from those who don’t want them to those who do. That is a useful service. Real estate brokers do the same thing with houses. Arbitrageurs, often the most detested people, similarly perform a social service by moving goods from where they have lower value to where they have higher value, sort of the same thing truckers do with soft drinks, etc. I would appreciate Uwe’s providing a few examples of private redistributionist activities he considers socially wasteful, preferably with some estimate of the magnitude of social loss involved. Then we can get a better idea if we are quibbling over small potatoes or something worth spending time worrying about.
Now, if you want an example of a seriously socially-suboptimal redistributionist, consider your average Congressman or Senator, happy to confiscate wealth and income from those who created it and give it to those who did not create it in order to buy votes and stay in power. (It doesn’t matter which political party he/she belongs to.) Indeed, isn’t government the biggest redistributionist in existence, whose redistributionist activites create no new value and whose results often (usually? almost always?) are actually socially sub-optimal?
It’s easy to see how building houses or factories increases the nation’s stock of wealth. Yet, a hedge fund manager may perform a valuable service by transferring risk from a commodity producer or a factory that uses commodities, but people have less sympathy for the hedge fund manager.
Actually artk, yours are the conflicts of interst that are not public. My compensation is set by the NCPA Board of Directors, is public, and is independent of any gifts from any donors.
Actually, in my business, when I give someone an opinion, I always disclose my book. The donors to NCPA are secret. That’s the conflict of interest.
With respect to Prof. Reinhardt’s example of haberdasher vs. stock trader: Neither should be taxed on the transactions described, as long as both individuals pay a flat-rate income tax or consumption tax.
If the haberdasher is a sole proprietor, it’s ok to tax the value added if he doesn’t pay himself wages which are then taxed again (either when earned or spent).
With respect to the stock trader: He bought the stock with his earings, upon which he already paid tax (if there’s an income tax) or will pay tax with the proceeds of his investing (if there’s a consumption tax), so no tax should be due on the capital gains from trading.
Going back to Dr. Goodman’s original thesis, I suggest that the issue of positional goods which he put forward as a minor exception to his rule is even less of an issue than he describes. Indeed, these positional goods (and related “positional behaviors”) may have socially beneficial effects that outweigh the welfare reduction mooted by Dr. Goodman.
First, the superrich often externalize their positional goods. My wife and I spent two days over Thanksgiving in Los Angeles visiting the Getty Center and the Getty Villa, enjoying art for zero monetary cost.
Second, the lumpenproletariat and their cousins, the lumpenbourgeoisie, vicariously enjoy the lives of the rich through media production. Movie & TV producers and book & magazine publishers do not pay royalties to Warren Buffett or William Gates (or Lady GaGa or Jennifer Aniston or Prince William & Kate Middleton) when they write about them. Society gets this vicarious enjoyment for “free”.
(I’m making a sort of quick and dirty Tyler Cowen vs. Robert H. Frank & Philip J. Cook case here.)
Hey artk, you are giving an opinion here and you are not telling us about all your financial conflicts of interest. For all we know you are a paid consultant to David Axelrod.
Ordinarily, I wouldn’t even bring up the issue, but since you keep bringing it up let’s fess up. What’s good for the goose is good for the gander.
I actually think the distribution of wealth is very important in our current system. The wealthy spend far, far less on basic physical goods as a percentage of their worth. Instead, they spend more on savings products and luxury goods (financial assets,etc). I believe the concentration of wealth has been a key driver behind our low CPI. Inflation on “luxury” goods – not captured by the CPI – has been far higher than on ordinary goods (think college tuition).
If we were to redistribute wealth tomorrow to even things out I believe the CPI would immediately jump by a significant amount thereby increasing interest rates and probably lowering aggregate wealth.
Capitalism has figured out that to increase aggregate wealth it needs to keep it concentrated. It also needs to keep wages low (1/3 of CPI roughly) and that has been accomplished via “free trade” and open borders.
I work in finance so I am on the lucky side of this trade; however, it does concern me that the wealthiest country on Earth has 14% of its population on food stamps. I see no reason why the population has to accept free trade or lower taxes for the rich. Capitalism is blind to the plight of the have-nots – it would willingly give all wealth to one person and let the rest starve if that is what it took to grow the wealth pie.
Well Larry, I’ll tell you. I’m not running a well known alleged policy analysis group like NCPA. Read any medical or physics paper and you’ll see an extensive and detailed list of who funded the research. The NCPA, like many advocacy groups is quite opaque about the financial interests that proved them with funding. As they said in Watergate, follow the money.
Without commenting on the merits of the post, nor any of the replies, I will thank you for the video. It brings back some nice memories of the ’70’s. In return, let me recommend an even older classic: “Gimme Some Money” by Spın̈al Tap (back when they were The Thamesmen).
Uwe may choke a bit, but why can’t a donor remain anonymous and why can’t artk make his own decisions based upon the written word and credibility of the writer using his preferred criteria? This site has a specific political leaning. I am sure the Ezra Klein’s of the world are not donating to the NCPA. If the NCPA policy is not acceptable to enough people it will wither and die.
Of course it makes sense to keep the rich rich. There’s no incentive to make money if it’s all going to be taken by the government. But when they got their big tax breaks in 2001, the working people of this country saw over 2 million jobs go overseas. 92% of the merchandise Wal Mart sells is now made in China. The rich sell their goods for the same prices now as they did when they paid American workers, they just make (and keep) more of their money because they don’t have to pay liveable wages, provide safe work places, etc., like they had to to make things in this country. If they bring back jobs, impose stiff import tariffs, start penalizing employers who hire undocumented workers, and allow health insurance companies to compete nationwide, we probably wouldn’t have the problems we do and the circular, irrational ideas like “Obamacare” to deal with.