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Phil-osophically Speaking: October 16, 2012

It’s Only Fair

It’s been said that the American people want things to be fair. I believe that’s true, which is why fairness has been such a hot topic of debate throughout this presidential campaign. It’s axiomatic that a system of economic incentives inevitably leads to differences among individuals. But they are differences that should be welcomed since the worst form of inequality, as Aristotle noted long ago, is to make that which is inherently unequal, equal.

An aptitude for business and finance is no different than those talents exhibited in music and athletics. The best or most popular will earn great sums of money. The titans of finance are no exception. Starting around the mid-19th century, modernization and industrial growth made products such as oil, steel and later the telephone and the automobile indispensable. Capitalists such as John D. Rockefeller, Andrew Carnegie and Henry Ford became fabulously wealthy supplying these products more efficiently and cheaply. This concentration of wealth caused many to fear that the U.S. was developing into a Plutocracy. That these products and inventions immeasurably improved the lives of the ordinary man was little noticed or remarked upon; instead it was the widening gulf between the so-called haves and have-nots that became most conspicuous and decried during the Gilded and Progressive eras.

The upshot was the growth of the Socialist Party, which waged war on inequality by calling for a greater redistribution of society’s goods and resources. In the 1912 Presidential election, Eugene Debs, running under the Socialist banner, garnered nearly a million votes. Considering this was a four-way race, the U.S. population was just 92 million and women and those under 21 could not vote. Debs’ candidacy was bound to resonate despite losing the election. By the next year the first national income tax was passed and even though its architects never envisioned it rising above a top rate of 10 percent, it was a sincere effort to make the rich more accountable to the needs of society.

Of course the income tax would soar far higher than 10 percent, spiraling to well over 70 percent. Adjustments were made to lower these rates, often pursuant to a supply side ideology, as a way to encourage rather than suppress investment. While a 10 percent flat rate would still require the wealthy to pay far more than those in lower income brackets (10 percent on a million dollar income computes to a far greater sum than one on a $50,000 income, especially when factored in over a period of years) many still argued for steeper rates on the wealthy. Within reasonable bounds, I think progressivity is a workable and equitable proposition.

Unfortunately, contemporary ideas about taxing the wealthy are neither sound nor reasonable. A year ago, President Obama called for $1.5 trillion in tax hikes over a 10-year period, targeting almost entirely America’s wealthy. This plan included $800 billion from rolling back Bush’s 2003 tax cuts and another $470 billion to reduce itemized deductions for upper bracket incomes. While the tax burdens shouldered by the rich are not likely to break any hearts, it’s important to realize that the vast majority of millionaires pay 35 percent of their personal income and the top 1 percent of all income taxpayers pays 40 percent of all income tax. When contrasted to the nearly 50 percent who pay no taxes at all the system hardly seems to favor the rich. Moreover, even if you double the top tax rate of the top 1 percent it will only translate to $20 billion a year at the most. We will then be taxing a class of people that will most likely use that surplus to invest, take risks, start new businesses and create jobs.

Fair can be a subjective and arbitrary concept; the important question is what will work in growing the economy? Wresting $20 billion more a year from the top 1 percent won’t reduce unemployment and spur production. Only the private economy can do that. Ever since the Mellon tax cuts in the early 1920s, there is copious evidence that Laffer curve tax effects, meaning reducing top rates, favorably impact economic performance and growth. I could make a similar argument on why capital gains should not be taxed the same as income. But that’s another subject; suffice it to say that the procrusteanization of disposable income via taxes has a depressing effect on investment, the grease that turns the wheels of our economy.

So why has imposing further taxes on the rich, especially for the ideologically committed become such an idée fixe? Is it merely an affectation of envy? No doubt part of it is rooted in what Jay Cost calls client politics. The more client groups a political party creates via subsidization (teachers and public unions, green groups, Black Congressional Caucus and Healthcare) the more these factions of voters become chattel. It’s what the journalist Mark Steyn called looting the future to bribe the present.

There is, to be fair, a school of thought, however tenuous, that believes tax increases on millionaires and billionaires will actually encourage growth. These proponents, including the Obama Administration, point to the Clinton economy of the 1990s, which stayed vigorous either despite tax increases or because of them. A closer examination, however, brings into question the inextricability of this correlation: First, the Clinton tax hikes were far more modest than the present imposition and the U.S. was coming out of recession even before Clinton took the oath of office. Sharp recoveries after recession, save for the last one, was the norm. Second, the Cold War had just ended and the war on terror had not begun. Huge amounts of capital were no longer being earmarked to the military industrial complex and much of it was being diverted into the private economy. Third, Hillarycare, unlike Obamacare, failed to become law. If it had, the economy, instead of humming through the ’90s, would have been stalling and hiccoughing. Fourth, the invention of the Internet, economists of all stripes agree, enormously boosted the economy by creating countless new opportunities.

Whoever wins this November, they better be serious about growing our sclerotic economy. The arithmetic is daunting: Fifty-five million Americans presently receive Social Security benefits and 50 million are on Medicare. There are 80 million baby boomers, the oldest of which reached 65 in 2011. At least 3 million of these boomers will be added to the Social Security and Medicare rolls every year. Presently there are 143 million Americans who have jobs, but only 116 million are full time. Even worse, a declining birth rate over the last 45 years translates into a workforce growing ever more slowly in the face of these exorbitant obligations and debts. Tax policies aimed at redistribution have not worked in either Europe or Japan. In fact, these policies have saddled the former with bankrupt countries and endless bailouts and the latter, once an economic dynamo the world marveled at, with a series of lost decades.

As much as I favor tax cuts as a general proposition, I do not believe that in today’s economy it will work its magic without a commensurate decrease in spending, a relaxing of the new layer of regulations acting as a veritable straitjacket on the marketplace’s animal spirits and a concerted effort by both parties to close loopholes in our antiquated and beguiling tax code. A good start would be to reinvigorate Simpson-Bowles and then move on to tax and regulation policy. One thing is for sure, increasing spending and then taxes to finance it is a self-defeating proposition and one which America can ill afford.