Posted by
MarcusEverett on Sunday, December 07, 2008 9:47:31 AM
Senator Barack Obama’s rhetoric during the campaign often stressed his plan to tax the rich (the top 5% of incomes) to pay for several giveaways of new spending. Furthermore, the famous response to 'Joe the plumber' of 'sharing the wealth' further implies that he believes it possible for the government to transfer wealth from the 'rich' to the 'poor' with a net gain to the latter. Based on the three facts discussed below, it is hard not to conclude that either the president-elect is lacking in a fundamental understanding of economics, or that he was inclined to demagoguery in his campaign rhetoric. For the sake of the American economy in the next few years, one must hope that he comes to embrace reality.
The first fact is that YOU CAN'T TAX THE RICH. This is not to say that it isn't possible for the government to commandeer some of their wealth. The problem is that the effect of doing so is to reduce the standard of living of the poor much more than that of the 'rich' that have been taxed. To see this, let's consider three levels of income. The lowest level is the amount of income necessary to provide basic needs: food, shelter, energy for heat, minimum transportation, etc. The next level is income available for discretionary spending, which includes anything from a spiffier suit to a luxury car or boat. The third level is income left over from the first two that is invested, whether for a rainy day or for additional income. Now if you tax the middle class or lower, you almost certainly will reduce their discretionary income and therefore will directly reduce their standard of living. Those poor enough to have only income to cover basic needs would be hurt the most. But, unfortunately, any tax on the truly rich short of draconian confiscation of wealth would certainly not affect their basic needs, and furthermore would have little to no impact on their discretionary spending. What it would do is reduce the amount of income that they invest. The question then becomes whether it is better for the individual to invest his own income, or for the government to take his income to spend or invest. Most likely the stolen funds will only be squandered in some entitlement or pork barrel scheme. But even if the government 'invests' the money, and even if the bureaucrats that decide how to invest it are as competent as the individual robbed, the overhead of having a middleman in the process guarantees less efficient use of the funds. The net result is that overall productivity is reduced, reducing the standard of living of all. Jobs are lost and the guy at the bottom feels the impact most. The rich guy's portfolio may not be as fat, but his standard of living is reduced least by the inefficiency.
The second fact that the president-elect needs to ponder is that YOU CAN'T SHARE WEALTH THAT DOESN'T EXIST. Since, by virtue of the first fact, trying to 'share the wealth' by confiscating it from the rich only impoverishes everyone, the result of such an attempt at wealth transfer is completely counterproductive. The wealth transfer recipient may get more money, but since the economic system produces less, increases in prices will more than cancel out any possible increase in standard of living. Meanwhile more of the rich man's income must be used to maintain his standard of living, and therefore even less of his income after taxes is invested. The negative effects of such taxation schemes are magnified. The net effect is a transfer of poverty, not a transfer of wealth.
A third fact that bears on the ones discussed above is that PAPER ASSETS ARE NOT WEALTH. To the extent that they can be liquidated at any particular time for real wealth (goods and services), they may rightly be considered a form of wealth. But not only may the time value of paper assets change drastically, their ability to be liquidated at any particular time may be an illusion. A perfect example of this is Bill Gates' wealth. The portion of his net worth computed by multiplying the current value of Microsoft stock by his huge holdings is illusory. If he tried to liquidate any significant portion at any one time, it would depress the stock price drastically. That is why, that over a period of several years, he dumped only a few million shares at a time. Even now, his ability to liquidate all of his paper assets at one time is probably severely restrained. In a similar vein, the claim that billions of wealth were lost in the most recent stock market crash, or that more billions were lost in the real estate crash, are also erroneous. The problem is that the liquidation value of a single stock or home at any instant may be represented by the current market value, but not all stocks or homes can be liquidated at that price at one time. In this respect not only paper assets (stocks) but also real assets (homes) can have a time value significantly different from current market price. In both cases the real wealth (the home or the company's real assets) are not destroyed, but rather that large wealth transfers occur as a result of such booms and busts, depending on who buys or sells and when.
The fluctuating value of paper assets with time also applies to fiat currency. And, once again, attempts to transfer wealth by creating more currency penalize the poorer members of society much more than the rich. Inflating the money supply, in the final accounting, transfers real wealth from those who have savings in cash, usually the poorer members of the economy, to those who invest in real assets.
The moral of all this is clear. If the soon-to-be President Obama really wants to share the wealth, he must push for more, not less, laissez faire capitalism. This has been proven over and over throughout history to be not only the best but also the only way to increase total wealth. And, as they say, a rising tide lifts all boats.