Wednesday, April 13, 2011

Rich people are not the creators of wealth

I was a signatory to the original Patriotic Millionaires campaign back in November, and I recently signed on for round two. It's looking more promising this time. Obama finally seems to have found his spine:

In December, I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans. But we cannot afford $1 trillion worth of tax cuts for every millionaire and billionaire in our society. And I refuse to renew them again.

Actually, it's a pretty good speech. Worth reading the whole thing. (I don't think I've ever said that about a political speech before, and it will probably be a long time before I say it again. Sorry about the NYT link. I tried to find the text on the site and failed. If anyone from the White House PIO is reading this, if someone like me can't find the text of the president's most recent speech on your site, you have a serious problem.)

Of course, the Republicans were attacking the speech, particularly the part about raising taxes on the rich, before it was even delivered, lending credence to the theory that Republicans don't actually think about what they are saying but just mechanically object to anything the president says or does, even if it's their own idea.

But there's one very dangerous notion that really needs to be squashed: "now it’s time to tax the people who create the wealth.” (That was Michele Bachman, but you can count on hearing this line from the chorus on Fox News for the next few weeks.) The implication being that 1) rich people create wealth and 2) if you tax them, they'll stop. Both of these ideas are wrong.

Making money and creating wealth are two very different things. You can make money without creating wealth, and you can create wealth without making money. Salman Khan has created vastly more wealth than, say, Angelo Mozilo, but Mozilo made vastly more money. (Mozilo actually made his money by destroying wealth.)

Money and wealth are not completely unrelated, of course, but even when they go together the causality is often backwards from what Republicans tacitly assume. Money is usually the result of creating wealth, not the cause.

"But," you might object, "you need money to create wealth." That's not true. You need capital, but just as money isn't wealth, it isn't capital either. Money can be exchanged for capital (tools, factories, computers) just as it can be exchanged for wealth (food, clothing, shelter, entertainment). But money is distinct from both wealth and capital, and just because someone has money doesn't mean they got it by creating wealth, or will use it to create more. Furthermore, the government has been a very effective creator of capital: Interstate highways. The military-industrial complex (whether you like it or not, it's capital). Much of our medical and aerospace research and higher-education system. The Internet. All created by or with significant help from the government.

The proposition that the rich are the (sole) creators of wealth, and that taxing the rich destroys wealth, is sheer nonsense.


Mike said...

"Making money and creating wealth are two very different things." - exactly. I usually think of it as creating wealth versus capturing wealth.

Unknown said...

I couldn't agree more. Too many of the wealthiest are no longer involved in the creation of wealth. In these cases, their predecessors created it; the current generation simply maintains its status. Often without any contribution whatsoever to ongoing economic or cultural growth.

From a different point of view, one of the problems the US faces is a GROWING economic divide that does actual harm (fiscal, physical, and cultural) to our society. One way to narrow that divide is through reasonable and graduated taxation of the wealthiest. And I believe that many of the wealthy would agree.

-- Frank

Anonymous said...

I must point out that the "rich" may not be defined correctly. Many small business owners, like me, "appear" to be rich by tax standards because our business income appears to be our own income when in fact the business retains the bulk of it. (I'm a shareholder in an S corporation, but the same goes for partnerships and LLCs.)
My share of the company's profits show up on my income, yet I actually receive just enough of these profits to pay my tax liability. I am *not* rich.
I support higher taxes for those making perhaps 1,000,000 a year, not those "earning" a mere 300K of which half is S corp money we don't actually receive.

Anonymous said...

Following up to my own post to clarify. It's not unfair to tax my S corp income at a rate no greater than it would be taxed if it were a C corp (plus perhaps extra for what would be C corp taxable dividends, if any). But the loss of eligibility for deductions, such as phasing out mortgage interest and charitable contribution deductions for the so-called rich has a less fair impact on the middle class that appear to be rich due to S corp or partnership pass-through income.

(BTW, strangely, C corporation tax rates are higher for incomes between 100k and 335k than for earnings over 335k. What's up with that?)

Anonymous said...

The profit-lost test is not some objective measure of goodness. If you want to allocate your means (time, energy, money, whatever) to some non-profit goal, then great.

But why should you take someone else's property and allocate it to projects that you deem worthy? It's not your money to spend.

Ron said...

> But why should you take someone else's property and allocate it to projects that you deem worthy? It's not your money to spend.

Because that's the cost of living in a civilized society. Part of the deal of living in a democracy is that you don't get to opt out, you just get to influence the decision-making process through your vote. The motto was, if you recall, "No taxation WITHOUT REPRESENTATION", not "No taxation, period, end of story."

The government, which is to say our duly elected representatives, undertook these obligations in our name, and it is our civic duty as citizens to insist that the government tax us in order to fulfill those obligations. The alternative is national bankruptcy.

Ron said...

That's why the official position of the Patriotic Millionaires for Fiscal Strength is raising taxes on incomes over $1M per year, which ought to be considered "rich" by any reasonable measure. But the details don't matter nearly as much as the general principle: do we tax the rich on the theory that they have a civic duty to shoulder more of the responsibility for our collective obligations than the non-rich, or do we not tax the rich on the theory that it's "their" money (in which case, how do we pay for our obligations? Or do we just punt and go bankrupt?)