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On Redistributing and Spreading the Wealth   October 30th, 2008


More observations...

Not too long ago I had a discussion with my sister--an avowed Democrat--about the topic I wrote about in the article The Dishonesty of Liberalism; namely that Democrats and environmentalists were both dishonest misrepresenting the facts in order to conceal their real goal of wealth redistribution. As I also said in that article, I'd respect both Democrats and environmentalists a lot more if they'd just own up to the fact that that's what they want to do.

To my surprise my sister made no bones about it: Yes, Democrats like her do want to redistribute wealth. They think that is the purpose of government. She also said that Democrat candidates and politicians, when talking to fellow Democrats, do not make any attempt to conceal that at all. So I'm glad I can respect my sister: She had no problems admitting that Democrats do want to redistribute wealth.

Then on September 18th, 2008, Democratic Vice Presidential candidate Joe Biden said that the rich paying higher taxes is their "patriotic" duty . Subsequently Democratic Presidential candidate Barack Obama famously was captured on video telling a questioner that he intends to take the profits of the wealthy and small business owners and "spread the wealth around." Obama also lamented in 2001 that the civil rights movement had faile to achieve "redistributive change" . Just as amazingly, going back to the Democratic primary debate on April 16th, 2008, Barack Obama said that he would support raising capital gains taxes in the interest of fairness even if doing so lowered government tax revenues. And a poll indicated that 69% of Democrats do agree with the idea of "spreading the wealth."

It seems indisputable that Democrats do want to "spread the wealth." Obama's admission that he wants to increase capital gains taxes even if it decreases government revenues is an admission that he views taxes not as a necessary evil to fund the government but rather as a tool to enforce his vision of "fairness" on society. In fact, he's willing to give up government revenue that could be used to fund his social programs if doing so means the rich are a little more poor. The wealthy would have less money, the government would collect less money, and the government would have to spend less money to help the poor... but that's all acceptable in the interest of "fairness."

Obama's proposed tax cuts go beyond tax cuts and are actually tax credits . A tax credit means that even if you don't pay money in taxes, the government will cut you a check for the amount of the credit. It's this tax credit which moves the debate from a simple question of the progressiveness of the tax code to a debate about fundamental economic theory.

Although Democrats will bristle at the word being used--and the use of this word has been derided in the media as "attacks" on the Democratic party's candidate--any reasonable interpretation of the idea of raising one citizen's taxes in order to be able to give cash money to another citizen would have to conclude that the concept amounts to socialism.

It seems amazing to me that in the 21st century we still find ourselves having to review the flaws of socialism and defend the merits of capitalism. Apparently given enough time, an unpopular Republican president, a charismatic Democratic candidate for president, and a well-timed crisis in the financial industry, we require a refresher course of why we are a capitalistic nation and why socialism has failed every time it has been tried.

The Philosophical Problem of Socialism

Socialism goes against human nature whereas capitalism counts on human nature.

Capitalism counts on human nature. The harder we work or the more we invest or the more we risk to start a business, the more we expect to receive in return. In fact, most states have overtime laws that hours worked over 40 hours/week are paid at time and a half. This is government affirmation that not only should someone that works extra hours be compensated for those extra hours, they should be paid at an even higher rate. This discourages employers from overworking their employees but it also rewards hard-working employees with a higher pay rate--and many employees seek the opportunity to work extra hours because they seek that higher pay rate. The capitalistic promise of a higher pay rate drives them to work harder than they otherwise would.

Socialism--and the progressive income tax system implemented in the United States--takes the opposite approach. The more income you make, the higher the percentage you must pay in taxes. In other words, the more money you earn the less of that money you actually get to keep. While people might be willing to work overtime when they're being paid significantly more, the opposite is true when higher taxes are paid: Those extra hours are not as valuable to the individual because the government is keeping more of the money. Since those hours are not as valuable there is less incentive to work hard.

The reason why capitalism works is because it counts on human nature. The reason why socialism doesn't work is because it tries to resist the reality of human nature.

The Wealthy Are Not the Enemy - They Give us Jobs

The above truth doesn't just apply to employees. It applies to the wealthy as well.

Unfortunately, the wealthy are often made out as the bad guys. How dare they earn millions of dollars when others are just scraping by? So the case is made that the wealth of these "rich people" should be "spread around." The idea is then proposed that the highest tax brackets should be increased from 33% and 35% to 36% and 39.6%, and the wealthy should pay social security tax on all their income. Sounds fair enough and really isn't all that much to ask of the wealthy, right?

But consider this: The wealthy are almost always the ones that create jobs in the economy and give jobs to people like you and me.

A single business owner of a successful small business might be lucky enough to employ 20 people and be personally generating a million dollars a year in personal income. That's certainly a lot of income and I don't pity the person earning a million dollars a year. But that entrepreneur is paying $328,597 in federal taxes and approximately $15,600 in social security (self-employment) taxes--a total of $344,197. With Obama's plan this person's federal taxes would increase to $373,670 and the social security tax would be approximately $124,000 for a total of $497,670. That means the owner of this business would see his taxes go up by $153,473. That's $153,473 that could be better used to invest in his business and create two or three more jobs... which would then grow the business further and allow him to earn more money and create more jobs.

However, when a business owner sees his expenses go up that much, that business will try to cut costs. And that cost-cutting will often be laying off employees. Just as that $153,473 could have been better used to create two or three new jobs, the government's income confiscation may just as easily cause the company to lay off two or three people.

It is not possible to increase taxes on business owners without consequence. The price for increasing the tax on business owners is reduced economic growth and increased unemployment.

The Purpose of Taxes is Not Punishment

Even the vast majority of conservatives recognize that taxes are a necessary evil. Most conservatives advocate for a small government, not a nonexistent government. Obviously a government must levy taxes in order to generate revenues to fund its operation. But, as Obama's quotes above indicate, liberals seem more interested in "what's fair" than in "what works."

Interestingly, Obama himself claims that "It's not that I want to punish your success" . But how else can one describe an ideology that strives to increase taxes as a matter of fairness even if it lowers government revenue? If the reason for increasing taxes is a matter of "fairness" rather than a matter of government revenue, that policy is punishing success. And, due to simple human nature, punishing something discourages it.

"Fairness" In Taxes

Achieving "fairness" in taxation is a dubious proposition. The concept of fairness is inherently subjective--what one person considers fair might be considered unconscionable by someone else. And what is "fair" might not always be practical or reasonable.

If we honestly want to be fair, everyone would pay their "fair share." How much is that? From a standpoint of fairness I'd say that it's fair that everyone pays taxes in proportion to their income. If you earn twice as much, you pay twice as much in taxes. It's simple, straight-forward, and proportional: those who earn more money pay more taxes while those who earn less money pay less taxes.

Although that solution would be "fair" in the strictest sense (everyone is treated equally under the law), it's neither practical nor reasonable. Virtually everyone--conservatives included--realizes that someone earning little money will have a much more difficult time paying his "fair share" while also covering his basic living expenses. So in the interest of compassion (not fairness) we agree that those earning less than a certain amount won't pay any taxes.

Exempting the poor from taxes isn't strictly fair to the rest of society that has to subsidize the cost of government on behalf of those that are exempted, but it's reasonable and compassionate. The argument for giving a tax exemption to the poor isn't one of fairness but one of compassion.

Having established that, there is nothing fair, reasonable, or compassionate in raising taxes on someone based solely on the basis of their success. While I made the case for exempting the poor from taxes on the basis of reasonable compassion, it doesn't seem possible to make the same case for taxing more and more income at higher and higher rates. There's nothing fair about that.

Just because someone can pay more for something doesn't mean that person should pay more for something. In fact, in anything but taxes, such a proposition would be considered unethical and probably illegal. It amounts to needing to buy a new tire at a service station in the middle of the desert and asking how much the tire costs, and the owner asks, "How much you got?" (refer to Chevy Chase in "Vacation" for that precise example).

Repeating the populist claim that "We just want the rich to pay their fair share" is a gross misstatement of reality. The rich are already paying more than their fair share--and liberals want them to pay even more.

Taxes for Redistribution of Wealth

As mentioned earlier, this issue goes beyond a simple disagreement over the income tax rates for different tax brackets. It goes beyond a debate on to what degree our tax system should be progressive. Rather it's a very basic disagreement over the use of government revenue.

The poor in our country don't pay federal income taxes, and you can't reduce taxes on those that don't pay them. What Obama's tax plan amounts to is, indeed, "spreading" and redistributing the wealth: The plan involves increasing the tax on some citizens so that the government, through tax credits, can write checks to other citizens. You can legitimately call that theft, forced charity, welfare, punishing success, spreading or redistributing the wealth, or socialism.

Once the government starts cutting checks to people that don't pay taxes, you go beyond a disagreement on taxes and run into a very basic question of capitalism versus socialism. Those that promote these policies in America may not like the word "socialism" being mentioned, but it's entirely appropriate.

Liberals and Socialism

As I stated at the beginning of this article, I'd respect liberals a lot more if they'd just admit what it is they want to do. My sister admitted it. Obama said it though he has been trying to spin his comments so that people think he meant something else. But regardless of what he claims his words meant, his tax proposal speaks for itself.

I can understand why liberals would like to avoid having their policies associated with the failed economics of socialism. What I can't understand is why, then, they support policies that are simply watered-down versions of that same system.

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