Diminishing Returns on Wealth

Capitalism vs. Marxism

Capitalism vs. Marxism

“To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.” – Thomas Jefferson

“From each according to his ability to each according to his need.” – Karl Marx

The visions expressed above represent the ideals of capitalism and socialism. Reality for most of the world lies in between, as most forms of government incorporate both ideals in different amounts. Generally, the more capitalistic a society, the more wealthy it is, but the larger the inequality between groups of individuals. Is there a perfect balance? Hmmm, another timeless question I would be happy to solve for you. Now, where is my blindfold and my darts?

Should the rich pay more in taxes than the poor? Most people will say yes, especially since most people are not rich. That’s what I call a no-brainer question because there is only one expected answer. Why people to continue to ask this question on surveys, I’ll never know. So, how about this one: how much more is enough? Sorry, but this is the opposite of a no-brainer. It is, in fact, impossible to answer not just because it is subjective, but because we have never really defined what rich is and the different ways in which it could be measured.

Cost of Living by County

Cost of Living by County

Quiz: What does a resident of Brownsville TX earning $165,000 have in common with a resident of New York City earning $450,000? Answer: They have about the same purchasing power according to Kiplinger’s 2012 Cost of Living Index. But do they pay the same in taxes? Of course not! Why would they? The person in New York is rich while the person in Texas is not, right? What if the New Yorker has ten kids and the person in Texas has none? Too bad, the federal child tax credit is phased out for the higher earner. He can also forget about qualifying for any need-based financial aid according to the federal formula that is used to calculate the expected family contribution.

What if the New Yorker has to work an 80-hour work week and never takes a vacation? Sorry, but the tax laws place no value on your time or your health. If you choose to sacrifice one in order to earn more money to support your family, that’s your choice. If both parents work and place their kids in day care, resulting in less time for family and chores and higher expenses for transportation and necessities for the workplace, the result is a decrease in quality of life. Aside from a small child care credit that gets phased out if your income gets too high, you will get no sympathy or credit for these choices.

In fact, some families would actually be better off financially if one adult stayed home with the kids. Unfortunately, it is hard for everyone to figure this out because the calculations can be complex and nobody wants to believe that their hard work may, after taxes, actually be worth very little. This is too bad not only because they are paying a high price for working, but also because somebody else who is unemployed might gain far more than you if they could only have your job.

What if you are self employed and work yourself to death when the economy is good because you know that your income may plunge when the economy tanks? Sorry, but you still have to pay the higher tax rate for the calendar year when you did well, but you don’t get any sympathy or credit when you are down. Even if your average income over multiple years is the same as someone in a lower tax bracket, you could easily pay more in taxes overall.

Tax Paid by Income

Tax Paid by Income

Life is complicated, but it is even more so when we try and set a simple standard for who is wealthy and what is fair. I’m really tired of hearing how the “rich” aren’t paying their fair share. There is no such thing as fair. It is a relative term that depends on your perspective. When Nelson Rockefeller was asked how much money is enough, his answer was “just a little bit more.” That used to be exclusively a rich person’s joke. Now it also belongs to the government and to those who continue to expect ever higher government benefits that are paid for by somebody else. It is no longer a joke.

For those who pay higher taxes, there are at least some unintended benefits. Because charitable donations are tax deductible, those in the higher tax brackets get the pleasure of having their donations subsidized by all other taxpayers, who ultimately have to pay more. Yet, those who bestow the donations still get all the benefits of being someone’s benefactor, whether that be social recognition, political influence, the ability to attend fabulous charity balls, or other side benefits. This is another economic, political, and social distortion caused by the tax code.

Every year, the American republic celebrates its independence from the English crown and its system of inherited privilege. During the past two centuries of independence, some claim that a new kind aristocracy has arisen in America, the super-rich, who also have acquired significant political influence. The wealthiest Americans contribute to political campaigns and receive in return subsidies, tax breaks and protection against reform. Do we now have an aristocracy of wealth and a permanent underclass of poverty? Let’s put that question on hold for now until we can examine how wealth is acquired and maintained in America.

Distribution of Wealth

Distribution of Wealth

How much wealth is enough? Should there be a cap on personal net worth? A million dollars? No way, you can’t even live well today on the interest. A billion? That is a lot of money, so it really does seem excessive. I suspect that somewhere in between would be just fine with 99.99% of people. But the question really should be, is the government capable of doing a better job of redistributing wealth than the wealth owners themselves? Based on its record, I would say probably not.

We certainly don’t want to take away the incentives to work hard and produce. But isn’t there a middle ground? Would it be reasonable if someone owned everything? No. Is it reasonable if nobody can own more than anyone else? Again, no. So, the answer lies somewhere in between. Any cap on income or wealth would have to be high enough that people still can benefit greatly from their hard work for the rest of their lives and pass much of it on to their heirs, while those at the bottom would have a reasonable minimum standard of living with incentives to pursue honest work to improve their situation.

Andrew Carnegie believed in the Gospel of Wealth, that persons of wealth should not live ostentatiously, should provide moderately for their dependents, and return all surplus revenues to the community through philanthropy. Warren Buffett has the same basic philosophy. But not everyone lives this way and they have enough political influence to ensure it stays that way.

French Revolution

French Revolution

If the nation continues to thrive, but most of the prosperity is held in the hands of a small fraction of the population, do we believe that aids or hinders the search for life, liberty, and the pursuit of happiness? Wouldn’t the lives of the wealthiest citizens be less desirable if they were surrounded by stagnation and hopelessness? I would rather be a middle income earner living in the United States than a rich person living in a poor third-world country, surrounded by poverty. At some point, isn’t there a diminishing return on wealth?

2 thoughts on “Diminishing Returns on Wealth

  1. Pingback: Plucking the Goose | Earth People are Crazy

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