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The Income Gap and the Rich

February 25, 2008 Leave a comment

One of the main themes during this campaign has been an attack from the left on “income inequality.” Often left out of this populist rhetoric about the decline of the middle class, and the reprehensible greed of the wealthy is the fact that “People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005,” according to economist and Hoover fellow Thomas Sowell. Even more surprisingly, the income of the wealthy during this time has dipped by 26%, while the income of the average taxpayer increased by 24%.

The mainstream media would never let these numbers reach the general populace, but thankfully due to sources such as the National Review, there is a voice for at least some constructive opposing discourse when it comes to issues such as these. While we can expect politicians to rag on the successful, and point to the need for the government to help the poor, the opposite often occurs. By handing out welfare and unemployment checks, the government discourages productivity, and disincentivizes those in lower income brackets to acquire new skills and enter or re-enter the workforce. On the other end of the spectrum, the wealthy are taxed at the highest level, meaning they are punished for their productivity. One of the reasons Ronald Reagan became a Republican in the first place was because he realized that if he earned a lower level of income, after taxes he would actually end up with more money than if he was working harder to earn a bigger salary. This is an inherently flawed system.

Lost in all of this is the fact that when the government pays to subsidize a lower income class, this is simply a redistribution of wealth. The top 1% of earners pay more than the bottom 90% of earners in taxes every year. In an equitable government system, the tax burden would be significantly lower for all, and proportionally equal, but that is for another post. Backing up, when did it become the prerogative of the government to redistribute wealth and make sure there was no disparity in wealth in the first place?

What prompted me to write this post in the first place is an article I saw last week about how Hillary ripped hedge funds, even though as it turns out her daughter Chelsea works for one. Besides the irony in this statement, and the fact that Hillary Clinton I’m sure has received handsome donations to her campaign from hundreds if not thousands of wealthy people working in finance and specifically the hedge fund industry, is the fact that a clear message campaign from Hillary is that she hates the rich (even though of course, based on last years tax returns she happens to be rich). It is easy to be socialistic when you are rich however, either out of guilt or because one can — see George Soros.

Hillary once said in a speech to wealthy campaign supporters in San Francisco that “We’re going to take things away from you on behalf of the common good.” Even if Hillary may be done in this election, and perhaps Barack Obama does not have exactly the same policies when it comes to dealing with the supposed “income gap” in the country (though based on his plan to universalize health care it wouldn’t surprise me if he does), this dangerously socialistic rhetoric is reflective of ignorance when it comes to prudent economic policy.

When hedge fund managers and other wealthy finance professionals and the wealthy in all professions in general are taxed at a high rate, where does most of their money go? The vast majority of it goes into entitlement programs such as Social Security and Medicare (programs which they may in fact pay into and never receive the benefit of as these welfare-state programs go bankrupt). Meanwhile, if we did not use this taxpayer money to fund broken government programs, our economy might thrive.

When wealthy people, or any person for that matter makes money, they do three things: spend, save or invest. People spend on things so they can survive and/or if they have excess income to live a more comfortable than sufficient lifestyle. This money goes to the producers of products who take this money and in turn pay out salaries to their workers or re-invest it in the company for making more and better products. If the wealthy people save their money (and by this I mean put it in a bank), that money is then lent out to other people in the economy which can be used to invest in other business ventures which in turn may help spark more economic growth. Finally, the maker of money can re-invest this money. What does re-investment do? Just as for the seller of the good, re-investing means creating more jobs for people (which helps an economy grow and helps give people opportunities to work and to acquire new skills and greater income), or alternatively goes towards providing better products more cheaply for the consumer.

While this is a simplistic model, and doesn’t take into account all sorts of ways in which the government can interfere with this process, this is instructive in that it shows that the rich should not be hated. Whether they spend, save or invest, if their main goal is to make more money this produces positive externalities for all, as all money whether spent, saved or invested goes towards the growth of the economy. Following this line of thinking, if we were to tax not just the wealthy less, but all people less, the economy might actually grow at such a rate so as to allow the revenue base of the government to be even greater, by incentivizing people to produce, instead of handicapping them for achieving economic success.

A wise man once said “don’t hate the player, hate the game.” To that I say, don’t hate the rich, hate the government.

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