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.
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.