Born Weird

One of the (many) objections conservatives and libertarians have raised to one of the (many) health care reform proposals presently being bandied about in Congress is the funding mechanism for any sort of public option. One current Democratic proposal on the table would levy taxes on the rich to help foot the bill (“rich” in this case I believe starts at $500,000 annual income for couples). Predictably, this has been decried as a “redistribution of wealth” that should be opposed.

How stupid is this objection? Let me count the ways!

[Caveat: normally I'd try to cite more actual figures when launching into such contentious political territory; I apologize for speaking in generalities here. This is something I wrote rather quickly as I just needed to get it off my chest. At some point in the future I’d love to delve into this with more data. In the meantime, enjoy the rant.]

1. All economic transactions alter the distribution of wealth.

There’s a not-so-subtle implication that any behavior which redistributes wealth is bad, but nothing could be further from the truth. When you buy something from a local store, you’re redistributing wealth you possessed to the retailer, its employees, the distributor, the wholesaler, the manufacturer, the manufacturers’ employees, etc. Many (hopefully most) economic transactions may also create wealth, of course. But all economic transactions change wealth’s distribution.

Thankfully some folks recognize this and at least note that taxation is different because it’s compulsory.

2. All taxation alters the distribution of wealth.

Only an anarchist opposes all taxation prima facie; even extreme libertarians recognize vital functions of the state such as national defense and protection of property rights via legal system, which necessitate the collection of taxes. Taxation, thus, is a necessary evil (though of course the amount of evil necessary depends on who you ask). Because taxation is an economic transaction, it redistributes wealth. It cannot be avoided.

The question then becomes one of which taxation scheme is “fairest,” “most appropriate,” “least re-distributive,” etc. This, of course, is an extremely difficult question to answer.

Taxes like the one prompting this post — collected from a small group of individuals, but used on services for a broader (and possibly entirely separate) group — tend to be the recipients of the most ire, because it appears that money is being “taken” from one set of individuals and “given” to another, making the redistributive nature of the tax more obvious. But so what? After all…

3. The pre-existing distribution isn’t necessarily the “right” one.

The central objection to taxes with blantantly obvious redistributive goals seems to be that whatever the current arrangement of wealth happens to be is necessarily The Way It Should Be, and any attempt to deliberately change where the wealth is by government interference is an unjust act: the government is taking money that is righfully “yours” and giving it to someone else. It assumes that the current economic system produces perfectly efficient, just and right results, or at least, outcomes more “right” than what they would be should the tax be implemented.

But who’s to say that’s the case? Should investment bankers at AIG have made millions of dollars? Are arms dealers selling weapons to dictators contributing thousands of times more value to society than public school teachers? Do executives who line their pockets with money by getting products manufactured in oppressive export processing zones deserve their spoils? Did slaveowners deserve their wealth? Do polluters? People paid by businesses propped up by lobbying operations in Washington?

The fact is, many of the assumptions classical economics make about transactions are false. Consumers aren’t perfectly informed, markets aren’t always competitive, and so forth. Our capitalist system is, no doubt about it, the best mechanism humanity has ever seen for creating wealth and innovation. I’m not arguing that. But to suggest that the outcomes this system generates take into account all behaviors and their consequences, values human rights, and distributes wealth more justly with “lower” taxes than it would with “higher” ones is just ridiculous. The system is loaded with many opportunities for corruption, oppression and other malfeasance by those at the top. Just because you made some money doesn’t necessarily mean you “deserved” the amount you got. Maybe you personally weren’t up to anything unethical when you engaged in the behavior that “earned” you that money, but at some other step along the journey that made it available to you, someone else might have.

4. Reducing the wealth gap may not be an unreasonable goal for a democracy.

I’m not interested in creating equal outcomes; different people do produce different amounts of value for society and deserve to be rewarded differently. I do, however, believe that government has a responsibility to propagate equality of opportunity.This doesn’t simply mean removal of obstacles preventing the ambitious from succeeding; it means providing education, infrastructure, access, et al equitably so that individuals have similar distances they need to travel to succeed.

As pretty much anyone watching our government in action knows, wealth buys influence and power. Because we have, and should never insist upon, equality of outcomes, there will always be some with more power than others. This is generally acceptable provided that those with power do not wield so much that they can distort equality of opportunity in their favor. But the democratic ideal of “the people” generally (rather than some elite ruling class) having power becomes little more than rhetoric when the inequality becomes too great, and the rich and influential start tipping the scales to assure their continued dominance — such as removing the estate tax and making other modifications to tax law that make it easier to pass wealth down from generation to generation, ultimately creating an entrenched aristocracy.

Income inequality can be highly destabilizing — it may be connected to market crashes and in extreme cases lead to more general political upheaval.

5. Higher taxes on the rich don’t remove the incentive to make more money.

Seriously now: would you rather make $500,000 a year and have your highest marginal tax rate be 35%, or make $50,000 and have your marginal tax rate be 25%? Hint: making more money means having more money, even when the tax rate is higher.

Sure, it may be annoying to know that you get to “keep” a smaller percentage of each dollar you make beyond $372,950 than each dollar you made between $171,550 and $372,949. But you still have more money. And really, the marginal utility of a dollar at that level is so much lower than it is at the poverty level that one could argue it hardly matters. What do I mean by diminished marginal utility? In a nutshell: $500 has a much bigger impact on the day-to-day life of someone making $15,000 a year than that “same” $500 would have on a brazillionaire’s life.

The highest marginal tax rate in America and the income level at which it kicks in have varied significantly throughout the 20th century, but there’s no clear causal connection demonstrating that innovation and economic growth are significantly hampered by higher tax rates on the wealthy.

The kind of “redistribution” under consideration isn’t turning the tables on the class system, making the rich poor and the poor rich, or depriving ownership from individuals by forming some sort of communist property collective. It’s simply allocating funds from places with low marginal utility to higher utility, moving funds around in a large, complex system that already produces questionable outcomes to one that has the possibility of perhaps producing slightly better ones.