Why the prescription for income inequality would make us sicker

From the president

The latest political wedge issue is “income inequality.” I spoke briefly about this matter at our CreativeOne convention in June. A number of politicians have adopted this as a winning issue, anticipating that pitting “class” against “class” may influence the 2014 midterm elections.

The new golden boy for this theory is French economist Thomas Piketty. His thesis is that rate of return to capital “r” (as opposed to labor) historically has been, and will continue to be in the future, growing more rapidly than “g” (GDP). This will always lead to increasing concentration of wealth and increasing wealth and income inequality. His prescription: an 80-90 percent top federal income tax bracket starting at $500,000, perhaps implying a 70 percent rate at over $250,000 and 50 percent for over $100,000. He proposes a 2 percent annual global wealth tax, or 10 percent U.S. wealth tax.

This would be a very intentional transfer of wealth to achieve the supposed economic good of an ideal level of income equality. It would also prohibit accumulation of wealth through generations. Piketty believes, along with many other statists and socialists, that the best way to make richer the “richest poor in the world,” the U.S. poor, is to bring richer people down.

There are some concerns about his diagnosis and proposed solution.

Scrutinizing the data, the conclusions and the meaning

Is the data good? His data seems selected to serve his philosophical purposes. Some is misused, inappropriately aggregated, and ignores effects of government transfer programs. That being said, there has definitely been some long-term widening of income worldwide since World War II. This disparity has accelerated since the 2008 recession, though some resulted from a Fed-fueled stock market bubble that disproportionally advantaged those with much money to invest in stocks.

Even if Piketty’s data is good, do his conclusions necessarily follow from his data: If r > g now, has it always been? Clearly not, as inequality has not inexorably increased since the dawn of time, or even in U.S. history. Must we end up like some African nations or Latin America? Herb Stein, who was chairman of the Council of Economic Advisers under Presidents Nixon and Ford, said, “Things that cannot continue, won’t.” Wouldn’t it be possible that as capital accumulates, supply and demand will force declining returns on investment? This would result in a lower r, which would narrow the gap with g.

Even if his data is predictive and his conclusions are reasonable, is income inequality bad or good or neutral? Who determines what is ideal? The Occupy Movement? The 99 percent? Our politicians? After all, we are not Mexico, Central or South America where the disparity is stark and possibly society-damaging. Should a majority vote determine that we take “everything,” all property, from some of our citizens after a certain point? Don’t get me wrong; I am against unholy alliances between big banking, big industry and government (I heard it called “crapitalism” the other day), which inevitably damage the rest of us. That is nothing more than rent seeking in collaboration with powerful people in government.

Constitution declared equality, not equality of result

Even if inequality levels are unacceptable to the “majority” or our political elite, is dabbling directly in attempts to change it by confiscation consistent with our foundational documents and philosophy? To adopt a Piketty solution would be to change the bedrock principles upon which the U.S.A. was founded. This can be done of course, but supposedly only by amendment, not executive fiat, legislatively or judicially. The foundations of the U.S. Constitution are in the Declaration. We severed from England based on the primacy of liberty. Liberty includes property, or it is not liberty. What our Constitution declared was equality, but not equality of result. Rather it was equality in liberty, in freedom, and before the Law. I believe it is clear that America, the idea, and the principles created a seedbed of cooperative entrepreneurship and innovation which compounded wealth to the benefit of all citizens and the world today (see Dinesh D’Souza’s new movie “America: Imagine the World Without Her”).

Is income inequality bad or good or neutral? Who determines what is ideal? Should a majority vote determine that we take “everything,” all property, from some of our citizens after a certain point?

Even if we change the American principle, can we really get desired equality results from such proposals without huge “unanticipated” negatives? How many of us, from Bill Gates to Jeff Bezos to many of you Top Producers, have built your wealth on big infusions of capital? Much of entrepreneurship in our history started small; it was not Big Steel, Big Tech, Big Auto, or Big Pharma. It is ingenuity and human capital that can ultimately result in outsized returns, as it is in your own businesses. Would those have occurred, with the resulting jobs, if we had 80 percent marginal federal tax rates and 10 percent wealth taxes? (Ignore the 95 percent marginal tax rate from Roosevelt to Nixon. Those results were accompanied by depression, war, stagnant economy, and, during the post war-boom, tax shelters and loopholes galore that made sure nobody paid at 95 percent). Would this society be as successful overall as everyone from Mark Zuckerberg to Bill Gates to Hillary Clinton to Peyton Manning to you and me are effectively capped out at $500,000 due to taxation in any given year and having a percent of our earned wealth confiscated?

Where would new taxes be “invested?”

And where would that tax money go as we skyrocketed to unprecedented (outside of world war) levels of government-owned GDP? We realize that government creates, innovates and manufactures nothing. It will certainly be “invested” in the next Post Office, the next VA, the “improved invasive IRS,” the NSA, the next unaffordable promise of Medicare or Social Security benefits, the next foreign aid program, or rewarding the Department of Education. The latter has been the recent conduit for hundreds of billions of dollars in “helping” (read experimenting on) local school systems as they have delivered declining performance in world rankings.

What is the worst “unanticipated/unintended” result possible? What if the overall economic pie is reduced, most of us are poorer as incentive past a certain point evaporates, and the bottom 25 percent stay the same because our reduced societal output offsets the wealth transfer they get? Is that a good thing, or the desired result? Keynesian economics, which Piketty’s solutions are loosely based upon, have significant theoretical and practical difficulties. They certainly haven’t worked in the U.S. in our most recent tepid recovery. Am I saying that Piketty’s solutions would ever be implemented in the U.S.? Almost impossible, yet the philosophy and direction are spreading rapidly in debate and media.

Most of you are small business people, working to build a future for your families and your progeny for generations to come. You have made tough decisions and accepted significant risks to pursue your happiness. We have too, and are happy to partner with you. You also are more conversant with the economics of business and life, able to consult your clients and guide them to outcomes that achieve their financial and peace-of-mind objectives. You are a professional financial educator. Expand that role to all you converse with emphasizing not just insurance, but the liberty philosophy, government’s inherent limitations, and real-world economics that undergird what has been the most successful system in the history of the world. Your business and your future depend on it.


Related terms: Industry News, Taxation

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