My musings on different political topics relevant to America today.

Friday, May 20, 2016

If I were a Socialist

The left is a cognitively dissonant group.  While raging against inequality, their proposals would not actually reduce said inequality.  Their proposals in fact are nothing more than thinly disguised excuses to grow government and give goodies to particular special interests, like college students and the academic elite.  While inequality and the evils of rich bankers are used as the excuse for raising taxes on the "rich," in actuality the sources of income are high income earners in any given year.  If you are a highly indebted doctor that makes a high salary, your taxes will be just as high as that evil hedge fund manager that inherited his wealth under Bernie Sanders' plan.  Yet somehow the left has convinced themselves that anyone earning a six figure salary or more is part of this boogie man called the 1%.  Which that is technically true, that group is highly heterogeneous, and using the logic of punishing the politically well connected in finance to tax all high earners is straight up illogical. 

 The fact is that the provision of government programs is a different issue from that of inequality.  If the goal is to reduce inequality, then I would suggest one read's Thomas Pickety's book on the subject: Capital in the 21st Century.  In it he shows the increase in the total capital stock (capital is another word for wealth, which consists of savings, stocks, property, etc. etc.) over the past 50 years and how the return on capital tends to outpace the total growth rate of an economy.  As a result he argues that inequality will continue to increase to distopian proportions unless something is done by the government.  His solution is a tax on Capital, which I agree is clearly the logical solution for reducing inequality. 

Let me elaborate as to why.  The fact is that income inequality is trickier than wealth inequality.  A given group earning a certain income is highly heterogenous.  Some are highly wealthy and inherited their wealth, while others are newly rich and had to work extremely hard to get there.  The difference between the two groups is night and day.  The person who worked 80 hours a week to start up a company and had to take on tons of debt and fail business after business until he finally succeeded, is a far different creature than the person that inherited his wealth and can live comfortably just off the income his safe investments enjoy over time. 

The easiest way to separate these two groups is to look at total wealth.  The very wealthy are far more likely to have inherited their money than the less wealthy.  There are two reasons for this.  1) Unless you got extremely lucky, most new businesses don't grow exponentially enough to throw the owners into the class of the super rich.  2) As Thomas Pickety explains, wealth begets wealth so to speak.  The more money you have, the higher a return you can receive from your investments.  In the book he looks at college endowments, and shows that the biggest endowments at Harvard and Yale earn close to a 10% return while mid tier schools maybe earn 5%.  There are (in economist speak) economies of scale in investments so to speak, or to put it more colloquially, its easier to make money if you have money.

 Hence to increase income taxes off this basis makes little sense.  It makes more sense to keep income taxes low to allow new blood into the ranks of the super rich while increasing taxes on total wealth.  This in theory would prevent the super rich from consolidating an ever larger and larger share of the total wealth in society.   I actually have a sneaking suspicion that the super rich don't mind higher income taxes, because in general income taxes only affect income that comes from labor, so while CEOs and doctors will be punished, the super wealthy like Warren Buffet or George Soros would pay little since their income does not come from labor, but from capital.  It might even be a way for them and others to prevent the up and comers from joining their ranks. 

I point all this out to show that the logic leftists use to increase income taxes makes little sense.  If the goal is to punish Wall Street and the super rich and to reduce inequality, taxing incomes is not the way to do that.  The fact is that inequality has been increasing all over the world, not just in the US.  Indeed, in Thomas Pickety's book he shows that the super rich in France pay less than their working poor as a percent of income, yet they are more socialist?  I think leftists need to think more critically about what their goals actually are, and how to achieve them.  If their goals are to create a European style welfare state in America, then raising income taxes on high income earners is a way to do that, but don't confuse that with combating inequality.  You may redistribute that way from high income earners to low income earners, but the true enemies of the left, the speculators of Wall Street and the super rich, will pay little with such a policy. 

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