(Don't) Eat the Rich

Dr. John Hiemstra (Professor of Political Studies at The King's University-College) once commented to my intro politics class to the effect that “one of the most effective ways for government to stimulate the economy is to give money to the poor.” That is, since government stimulus is intended (among other things) to increase consumer spending, the poor are ideal candidates to receive the “stimulus dollars”, since their need for basic necessities forces them to spend whatever money they receive – 100% of every stimulus dollar therefore is put right back into the economy through spending. 

This article, however, is not about solutions to poverty. If I may be so bold as to amend the original quotation, this article will argue that the most effective for government to stimulate the economy is to stop taking money from the rich. 

Now, as that statement is liable to misunderstanding, let me state plainly what I am not saying:

First, I am not saying that the poor should be ignored. It is only proper that ordinary people be concerned about how to help the poor. While I am also firmly of the opinion that government social programs and wealth redistribution are terribly ineffective and unjust ways to deal with poverty, that is a topic for another article altogether. For now, suffice to say that “stop taking money from the rich” is not the same as “do not give any money to the poor.” 

Second, I am not saying that the rich should not be taxed at all. It behooves every citizen to pay taxes, and an above-average income does not form an exception to that rule (although an income significantly lower than the average might). I am not arguing for special privilege for the rich.

However, what I am saying is that there is deeply ingrained bias against the rich in today’s society. What is often cheerfully referred to as the rich “paying their fair share” is usually the rich being forced to pay more than anyone else – for no other reason that their income exceeds that of the average adult. The basic portrait of a rich person in North America generally resembles the mythological dragon, sitting on piles and piles of stolen treasure, which it hoards greedily, despite having no use for it. 

This, however, is a dual fallacy. In the first place, the wealth of the vast majority of the rich people in the world (particularly the Western world) is not “stolen” in any sense of the term – it is earned, through provision of goods and services which other people are willing to pay for. This means that the rich have no moral obligation to pay a great amount of their wealth in taxes. There is no social debt owing, since they have earned in exactly the same way as every other person.  The second part of the fallacy is that the wealth the rich earn is hoarded. Far from being withheld from the rest of the world, it is used, speaking broadly, in two ways: it is reinvested into the original good or service which earned it, or else into new goods or services; it is also spent on goods and services which the rich person purchases for themselves. 

At first glance, this second use for the rich person’s wealth is what causes the societal envy (the true motivation of progressive tax systems). For the rich person spends their money on extravagances and luxury beyond the reach of the ordinary worker. Yet this kind of spending functions exactly the same as a poor person spending money on the bare necessities, only to a much higher degree. While the rich person’s sole motivation may be their own gratification, the money they spent employs other people less wealthy than themselves. Behind every luxury car are those who design, manufacture and repair automobiles ; behind every private jet are mechanics, engineers and pilots; behind every giant mansion are interior designers, architects, framers, painters, stonemasons, landscapers, service staff, etc. 

This reevaluation of how a rich person gains and uses wealth is particularly important as the world economy tries to climb from a recession. With the United States unemployment rate at 9.1%[i] as of August, much of the talk in Washington D.C revolves around how the government can create more jobs. The most common words to hear from an American politician, from President Barack Obama to the Republican nominees vying to replace him, are “the private sector is the engine of our economy.”

And that’s true, as far as it goes. Washington is at least giving lip service to a fundamental truth about the economy: the engine for job creation is private industry. All of that talk will be for naught, however, if policy makers do not embrace the truth that follows closely on its heels: the engine of private industry is the rich.

What does it take to create a job? As American businessman Peter Schiff says, it takes two things: profit and capital[ii]. Obviously, an employee has to bring profit to an employer by creating value exceeding the cost of their employment. Capital, on the other hand, comes from, as Schiff says, “under-consumption”. That is, it comes from wealth that is not spent but reinvested into profitable industry, as noted above - wealth that would otherwise be idle and useless. If a business owner does not have this excess wealth, he or she must borrow it from one who does. That is why if you use the word “rich” and aren’t talking about an actor or an athlete, you are probably talking about a businessman or an investor. It is the rich – those with excess wealth – who finance production and create jobs. 

At least, that is the way it should work. Currently, though, under a progressive system of taxation, that segment of wealth that would otherwise be put to work creating jobs is plundered by the government in the form of taxes. 

This generally goes unnoticed, or at least without dissent, by the average worker earning an average salary during times of prosperity. Once a recession hits and unemployment numbers rise, however, many average workers are forced out of work. Suddenly the job-creating funds the government taxed away from the rich are needed to do the very thing the rich would have used them for in the first place.

The government then fills this void by trying to invest the money itself. But as Henry Hazlitt wrote in Economics in One Lesson, “it is not a simple question, as so often supposed, of taking something out of the nation’s right-hand pocket to put into its left-hand pocket.” When judging what industry would be best served by stimulus dollars, government uses the opposite criteria than the rich use: the criteria of need rather than of profit. This means that the more profitable an industry currently is (i.e. the more capable it is of creating jobs) the less likely it is to receive government aid (and the more it will be taxed). The less profitable, the more aid it will receive (and the less it will be taxed). Thus, the practical definition of government stimulus is money taken from businesses which are creating jobs and being used to fund businesses which are not creating jobs. Productive activity is used to subsidize unproductive activity. The net result can only be the loss, rather than the creation of jobs.

Here are two suggestions for any government which wants to create, and not destroy jobs:

First, switch to a flat personal income tax rate. This is a fancy way of saying that you will be taxed the same percentage, whether you earn $40,000 per year, or $1 Million. Whether or not there should be a basic personal exemption for low-income earners is open to debate.

Second, abolish corporate income taxes. If the corporate tax rate exceeds 0%, it is too high. Corporate taxes are a way for government to “double-dip” – to tax profits when they are first earned by a business, then tax a portion of them again when they are distributed to investors, owners and employees as personal income. All this does is further deplete the job-creating wealth in order to fund job-destroying government stimulus.

Of course, such deep tax cuts would be impossible without deep spending cuts, which is the other half of the job-creation equation. That’s for another time. Until then, here’s to the rich, who keep our economy strong and put money in our pockets.

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[i] http://www.bls.gov/news.release/empsit.nr0.htm, accessed Oct 2, 2011

[ii] http://www.youtube.com/watch?v=Q6DRXk9Ufv4, accessed Oct 2, 2011.