Let the Rich Get Richer
For my weekly column at the Hoover Institution's "Defining Ideas" site, I shared my reactions to Obama's recent budget speech. You can find the whole essay here, but I wanted to share in this space an excerpt that speaks to Obama's deeply flawed understanding of taxation as a zero-sum game:
On the matter of taxes, the president said: "As a country that values fairness, wealthier individuals have traditionally born a greater share of this burden than the middle class or those less fortunate." That statement is, of course, as true of a flat tax on income as it is of a progressive tax. But at no point does Obama point out the difference between them or explain why a progressive tax is the better way to handle the inequities that arise as he perceives them.
So now we have a new villain, which is the undeserved tax cuts "that went to every millionaire and billionaire in the country" and which drive the current deficits. On his cramped view of economics, these revenues were well spent on "a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pockets."
It is here that Obama’s argument runs into fatal complications. The first is his untested assertion that his emergency steps and stimulus programs actually kept the economic ship afloat in stormy seas. But the more accurate account is that the high tax levels reduced the type of initiatives that only private investments of capital can yield. The government expenditures on what Obama formerly (and falsely) referred to as "shovel-ready" projects only produce short-term bubbles that do more to block growth than to create it. Unemployment rates remain high, growth rates remain low, and budget deficits double because the president now thinks that income redistribution is the be-all and end-all of all politics.
Here is what he said on this matter:
The top 1% saw their income rise by an average of more than a quarter of a million dollars each. And that’s who needs to pay less taxes? They want to give people like me a two hundred thousand dollar tax cut that’s paid for by asking thirty three seniors to each pay six thousand dollars more in health costs? That’s not right, and it’s not going to happen as long as I’m President.
At this point, the implicit assumption is that all government intervention is a zero-sum game, where the losses in dollars on the one side (taxes) are precisely offset by the gains in dollars on the other (social services). Since—and this is a true assumption—the utility of money is, in general, higher in the hands of the poor than the rich, 30 individuals should have their health care benefits extended and the rich should be denied their tax cuts.
Yet, this is a game that can be played countless times no matter how steep the current tax rate structure is. Indeed, it could be played even if the rich pay a larger fraction of the overall tax bill when taxes fall, which could well happen if their incomes increase in response to any new tax cuts. Under the president’s vision, however, no matter how high the marginal taxes on the rich, they could always be raised. After all, if we squeeze the lemon a bit drier, we can fund health care benefits for even more people. President Obama is incapable of asking candidly whether high taxation can ever reduce the level of output. In his world, the efforts of the rich and of the poor remain constant, regardless of the return guaranteed to labor.
Hence, no matter what the current marginal tax rates, it is perfectly all right to push them higher. There is never a case where productive losses exceed distributive gains. In the end, the president offers no good reason why this nation should not adopt a tax structure that drives it to a policy of equal incomes.
But really, can this be so? The president never bothers to mention that as of today, the top 1 percent earns about 20 percent of the wealth but pays close to 40 percent of the taxes. Does he really believe that there would be no wealth distribution from rich to poor under a flat tax, given that a huge fraction of public revenues goes to a range of transfer programs from which the rich derive little or no benefit? Nor does he ever contemplate the possibility that lower tax rates could generate additional revenues for the entire system.
And why does the president take this view taxation and income policy? Because, at root, the president is an egalitarian, not a marketeer. He has no theory of what a system of optimal taxation would look like. To lawyers and economists in the classical liberal tradition, it is a good thing, not a bad thing, if the richest person in society gets richer—so long as no one else is made poorer. But to the committed egalitarian, that supposed social improvement in fact poses a real threat because it increases the amount of inequality of wealth in society.
So the president blissfully advocates programs that reduce overall social wealth in order to soften these wealth differences. But it’s a mug’s game. In the end, it is growth, and only growth, that can cure the national malaise. And that means letting the rich get richer so that they can bring the rest of us along with them. But just as King Canute could not stop the tides, so it is that President Obama cannot draw blood out of a stone. What the president thinks are zero-sum policies are in fact no such thing. Given how they distort market incentives and increase political strife, Obama’s progressive policies translate into a profoundly negative-sum game, which, when replicated over time, will strip this nation of the entrepreneurial spirit that accounted for its past greatness.
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Comments :
Jul '10
Re: Let the Rich Get Richer
I hate people who are richer than I. I want them to be punished. Isn't that what government is for?
Nov '10
Re: Let the Rich Get Richer
You've got a funny definition of excerpt, Richard.
On a more serious note, this essay sparked an extensive facebook debate with my friends-21 comments and growing. Thank you for that.
Re: Let the Rich Get Richer
I've picked up new talking points from this post:
-shovel-ready" projects only produce short-term bubbles
-President Obama is incapable of asking candidly whether high taxation can ever reduce the level of output.
-Does he really believe that there would be no wealth distribution from rich to poor under a flat tax, given that a huge fraction of public revenues goes to a range of transfer programs from which the rich derive little or no benefit?
-To lawyers and economists in the classical liberal tradition, it is a good thing, not a bad thing, if the richest person in society gets richer—so long as no one else is made poorer. But to the committed egalitarian, that supposed social improvement in fact poses a real threat because it increases the amount of inequality of wealth in society.
Thanks, Richard!
Someone bring me a liberal...I'm ready for a debate now.
Apr '11
Re: Let the Rich Get Richer
Richard Epstein, you are my hero!!! I just wish I could say it nearly as well as you!; P.S. I love your podcast with John Yoo. Thanks.
Edited on Apr 20, 2011 at 5:06pmNov '10
Re: Let the Rich Get Richer
The assumption that people who happen to be poorer derive more utility from the same amount of money than people who happen to be richer is not necessarily true. Would a poor drunkard know how to enjoy £1000 better than a rich businessman?
Moreover, even if a person who happened to be poorer derived more utility from a given quantity of money than a person who happened to be rich, that would not suffice to justify the coercive transfer of that money from the former to the latter. First, considerations of moral desert apply. Perhaps the richer person earned the money by dint of talent or effort, and perhaps the poorer person is an inveterate scrounger. Second, even if the poorer person deserved the money more than the richer person, the practice of coercive transfer may entails costs that outweigh the benefits of equity restoration. The practice might, for example, make both the richer and poorer person work less (the first by inducing resentment, and the second by fostering indolence) thereby retarding the creation of wealth, meaning there is less wealth to spread around even if one wanted to.
Edited on Apr 20, 2011 at 5:10pmJan '11
Re: Let the Rich Get Richer
Amen, but with one comment: the American solution has always been more than just rich or poor. We've always encouraged a thriving middle class, and that's been the catalyst that spurs most growth. A tax policy that tries to equalize society will inevitably screw the middle class.
Re: Let the Rich Get Richer
The ultimate source of Obama's posture is Rousseau's Discourse on Political Economy, which was first published in Diderot's Encyclopedie. The key to understanding the argument is Rousseau's conviction that poverty equally shared is preferable to prosperity unequally shared and his awareness that those of the choices we actually face. Obama cannot fully reveal his preferences, however, because no one in this country wants poverty.
Sep '10
Re: Let the Rich Get Richer
Lots of ammo in this thread. Thanks all.
May '10
Re: Let the Rich Get Richer
I fear this is President Obama's intent with ObamaCare... mediocre limited care for all rather than inequities in health care options due to one's financial means.
Edited on Apr 20, 2011 at 10:25pmAug '10
Re: Let the Rich Get Richer
A really clear metric is the percentage of GDP spent by the Federal government. I don't have the numbers handy, but I understand that the post-WWII level hovered around 19%, but has now grown dramatically. That's clear proof that the problem is excessive spending, not insufficient taxation. It's a message that should be hammered by every Republican presidential candidate.
Liberals seem to think that when the economy shrinks, the government shouldn't shrink proportionally, but indeed ought to increase in absolute size. When the Feds were spending 19% of GDP, apparently the share paid by the "rich" was sufficient to avoid skyrocketing deficits. Their share only seems "unfair" to Obama and his administration because they've convinced themselves that they ought to be spending staggering sums on "stimulating the economy". Given that they've always wanted to spend great gobs of money, it's easy to see why they should be susceptible to the temptation of this sort of philosophy. But will the people share their enthusiasm, or will they understand that "cuts" proposed by Republicans are merely a return to the same level of spending that most people thought reasonable a few years ago?
May '10
Re: Let the Rich Get Richer
There are abundant unintended results as well. Britain recently raised its top rate to 50% and "surprise," many highly paid financial service folks left and business is having a terrible time trying to attract top talent to the country.
Another is capital flight. Money invested in a Canadian, Australian, Swiss or Swedish ETF is money not available for expanding the US economy. Investment in financial and human capital overseas can be significantly more attractive than investment in the US. The risk factor from a stagnant US economy lowers the risk differential for investment in potentially higher return emerging economies.
This all serves to create a vicious cycle that reduces or minimizes the economic pie at home. Welcome to Change with diminished Hope.
However if the objective is increased power, increasing dependency on Govt. through economic destruction can be an ideal way to go. Detroit could well serve as a model.
Feb '11
Re: Let the Rich Get Richer
Picking up on Aodhan, I contend that any justification of progressive taxation based on the relative utility of money must be premised on a utilitarian view of private property. In other words, private property is merely a means of maximizing social welfare, and may be limited if it can be shown that the limitation would increase social welfare. We are then left to the mercy of empirical arguments as to whether progressive taxation is justified.
If, however, we view private property as a logical consequence of self-determination (freedom is illusory if anyone can take the product of my time and effort without compensation), then progressive taxation is wrong regardless of whether it is beneficial. Forced exchanges (e.g., taxes) may be necessary to protect our property or serve other legitimate ends of government, but they should be applied uniformly so that everyone's rights are limited to the same extent.
I think it likely that this second view of taxation will probably also maximize social welfare, and could therefore be supported on utilitarian grounds. But I wouldn't change my views on progressive taxation if someone could prove otherwise.