Rough Draft of Taxing the Rich

Let me know what you think.

3 ways the rich create jobs:

1.       They spend lots of money on consumable goods

2.       They save money in banks which invest that money

3.       They invest in their own ventures, creating jobs

1 They spend money on planes and expensive cars and houses, vacations and other luxuries. When anyone spends money there must, as a law of nature, be someone on the receiving end of the transaction. Nobody gives money to air etc… So when rich people spend money on a jet or car they are paying people to build those things for them. The jets and cars do not appear out of thin air, there are millions of people that go into manufacturing the car; and many will not have a job if the rich people stop buying their fancy jets and cars. It takes more than one person to produce a car. It takes miners to mine the metals, engineers to design the tools to mine and craftsmen to construct them, trains or trucks to ship the metal to refineries, engineers to design trucks and train and craftsmen to construct them, people to use the metal to build the car, after it has been designed etc… and a million other people along the way. All of these people have these jobs because people like the rich person paid money, which then circulated through the system and down to these individuals, for their expensive car. Adam Smith called this the Division of Labor.

·         For Examples see Adam Smith’s The Wealth of Nations: “The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! how much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce the wool coat.” (p.19)

·         Another example is that used by Milton Freidman when he discusses who made a pencil: “Look at this lead pencil, there’s not a single person in the world who could make this pencil. Remarkable statement? Not at all.  The wood from which it was made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree it took a saw, to make the saw it took steel, to make the steel it took iron ore. This black center, we call it lead but it’s really graphite, I’m not sure where it comes from, but I think it comes from some mines in South America. This red top, the eraser, a bit of rubber, probably comes from Malaya. This brass piece, I haven’t the slightest idea where it came from, or the yellow paint, or the paint that made the black lines, or the glue that holds it together. Literally thousands of people cooperated to make this pencil. They are people who don’t speak the same language, who practice different religions, who might hate one another if they ever met. When you go down to the store to buy this pencil you are, in effect, trading some of your (money) for the (labor) of these thousands of people.” – Milton Freidman, Free to Choose series (TV show). The more expensive the item is that you’re purchasing the more money other people make.

2 They save money in banks which then invest that money. When someone puts money in a bank it doesn’t just sit there, the bank turns around and invests it in other things. That is why they can pay interest on your savings account. They give it to people to buy houses or cars or to start businesses. The more money banks have to loan out the more opportunities there are for the middle and lower income people to receive loans for cars, houses, businesses and other things that a bank lends for.

·         Once some rich person saves money in the bank the division of labor starts all over again: The rich person gets paid a high wage. The rich person then puts his money in the bank to save it for a rainy day. The bank uses that money to make loans. The loans go to housing developments. The money injected by the rich person’s money from the bank in the housing development provides jobs for the construction workers. The construction workers buy the raw materials, wood, nails, plaster etc… which then starts the whole division of labor cycle over again. Therefore, a rich person putting his money in the bank puts food on the table for countless people.

3 They invest in factories or other businesses. When a rich person has a lot of money they would like to make more money. In order for them to do this they might build a factory or start a new business or give money to others so that they can start a business. This, once again, starts the whole cycle of the Division of Labor all over again. They may make more money but they also provide jobs for others.

Wealth is not caused by the person receiving the wealth, but by those who buy their products. If we think it is unfair for rich people to make so much money and not pay taxes we should stop buying their products, not penalize them for filling a market need. Ludwig von Mises says:

·         “In the market economy (like in the United States) the consumers are supreme. Their buying and their abstention from buying ultimately determine what the entrepreneurs produce and in what quantity and quality (nobody forces anyone to buy anything). It determines directly the prices of the consumer’s goods and indirectly the prices of all producers’ goods, viz., labor and material factors of production. It determines the emergence of profits and losses and the formation of the rate of interest. It determines every individual’s income… It makes all men in their capacity as producers responsible to the consumers… The market adjusts the efforts of all those engaged in supplying the needs of the consumers to the wishes of those for whom they produce, the consumers. It subjects production to consumption.

·         “The market is a democracy in which every penny gives a right to vote. It is true that various individuals have not the same power to vote. The richer man casts more ballots than the poorer fellow. But to be rich and earn a higher income is, in the market economy, already an outcome of a previous election. The only means to acquire wealth and to preserve it, in the market economy not adulterated by government-made privileges and restrictions, is to serve the consumers in the best and cheapest way. Capitalist and landowners who fail in this regard suffer losses. If they do not change their procedure, they lose their wealth and become poor. It is consumers who make poor people rich and rich people poor. It is the consumers who fix the wages of a movie star and an opera singer at a higher level than those of a welder or an accountant.” (Socialism, p.490)

·         “What made some enterprises develop into ‘big businesses’ was precisely their success in filling the best demand of the masses.” (p. 487) Therefore it is not that they stole from the common man to become rich. The common man put them there by the common man’s choice. We caused them to be rich, not the other way around.

Taxing the rich is said to benefit the poor. Even if the poor receive money that was taken from the rich it does not help them. Giving money to people just because they are poor creates a “welfare state” where people feel like they no longer have to work and can depend on the government to support them. The government creates a form of dependency which eliminates the desire of people to work. If someone is paid by the government just because they were poor they would have little to no desire to work. It therefore, does not help anyone, neither those receiving or those losing the money.

Taxing the rich to give that money to the poor destroys the moral of hard work and eliminates the merit based system. It restricts the rich people on their right of the “pursuit of happiness.” It turns the society into a society of victims and not of earners. I deserve it vs. I must earn it. It creates a sense of entitlements by people who should not, by nature, be entitled to anything. The world runs on people pursuing their own self-interest; i.e. if you did not earn it you do not deserve it.

·         In an interview this is what Ayn Rand says: Interviewer: Let me ask you this question about human rights. You’ve spoken favorably about the right to the freedom of speech and other human rights; but I assume you would not ascent to the usual list of rights so much publicized these days, such as: the right to a minimum standard of living, the right to the equality of opportunity, the right to a free education and so on. Why? What is the basis of the distinction? Ayn Rand: Well there you have a complete contradiction! This concept of rights demands, as a right, values which do not in fact belong to man in nature. In other words, the right to a minimum sustenance means that a man without any effort on his part is entitled to sustain his life. Well since nature does not provide men with a minimum sustenance, the only way of maintaining or implementing such a right would be to breach, infringe and deny the right of some other man. It means that some other man is charged with the un-chosen responsibility to support the man who is guaranteed the minimum sustenance. It means that some men are to be enslaved to the minimum or maximum needs of others. Not only is it a vicious concept but whichever you might wish to call it, it cannot possibly be called a right. Nobody could in fact maintain the right of some men to enslave others. …Since nobody gets any production, any material values, any physical substance from nature itself, nobody has the right to claim any minimum guarantee because it can come only from other men, and nobody can claim the right to enslave other men.

The rich don’t get richer, the middle class does. 75% of people who are in the top 2% of income earners in America were not there last year and will not be there next year. People’s incomes change from year to year based on a million different factors. Here is an interview between economist Thomas Sowell and radio personality Dennis Prager:

Dennis Prager: The next charge that is made: We have greater income inequality, the gap between the rich and the poor, than ever before in America.
Thomas Sowell: That is the number one big lie of our time. And it’s based on abstract statistical categories rather than flesh and blood human beings… If you follow specific individuals over time you discover, for example, that the bottom 20% of tax payers in 1996 had their income increase by 91% by 2005. Meanwhile, the top 1% of taxpayers had their income decline by 26% over that same time period. Now, it’s true that the top bracket has a higher percentage of the income than the bottom bracket by a greater percentage at the end than the beginning (of that time period).  But they are wholly different people in these brackets.
Prager: There are wholly different people in these brackets, meaning?
Sowell: Over half of the people who were in the bottom 20% in 1995 were not there in 2005.
Prager: Oh I see, I see. That’s right.
Sowell: If you get it into the top one hundredth of one percent of income earners, which presumably are the rich everyone talking about, the turnover is 75%. Three-quarters of the people who were in that bracket in 1996, were no longer in that bracket in 2005… It’s usually people who have a spike in income one year that puts them in that bracket. You know you sell your house in California, well good heavens you’re way up there that one year. Now, unless you have a second house that sells a second year, that’s a one year wonder.
Prager: So your answer to the Democrats refrain, that the inequality is greater than ever, is that those groups fluctuate; and that in fact since ’96, in any event, the income of the bottom fifth has risen far more and the top one percent has declined?
Sowell: Absolutely!
I met a UC Berkeley professor while I was in Mexico. He had owned a nice house in California for several decades, before the houses were very expensive. He also owned a house in upstate New York. When he retired he sold his personal residence in Berkeley (when you sell a personal residence it is taxed as income, not capital gains) and moved to New York. For that one year his income was in the millions because he sold his house. He never made that much before and will never make that much again. This is just an example of how skewed the statistics are, and how they are made to seem like the rich always stay rich and the poor are always subject to them. There is no logical base for this argument.

The rich don’t get richer, the middle class does. Think of the top five wealthiest people in the United States. People like Warren Buffet, Bill Gates, Ted Turner, Steve Jobs, Michael Dell and Sam Walton are some that would come to mind. What do all these people have in common? They are all billionaires. What else do they have in common? None of them inherited their wealth, they are all self-made men, as are 80% of all millionaires and billionaires (The Millionaire Next Door p. 2). They are all founders of the companies that made them billionaires. What else do they have in common? They all started in the middle class. Here is another way the statistics are skewed in favor of those who are pushing for more taxes on the rich, saying the rich are getting richer and the poor are getting poorer. It is obvious from only casual thinking that none of these men started out rich. They were middle class. So when they made their billions does that mean the rich got richer or that the middle class got richer? The middle class is the one that produced these people, so shouldn’t they get the credit?

The government caused the problems we are in today, not the rich, so why penalize the rich for something they didn’t do? Government spending is out of control, we are nearly $15.2 trillion in debt. Modern rhetoric says that we have to have some way to pay for this problem and that it should be the rich who are paying for it. Why give them the responsibility for something that was out of their control. The unbridled spending habits of the American government caused the deficit, and the rich have to pay for it. However, if the government had been responsible in the first place there would be no need of taxing them any higher than others. “For classical nineteenth-century liberalism, which assigns to the state the sole task of safeguarding the citizen’s property and person, the problem of raising the means needed for public services is a matter of small importance… If liberal writers of that period have been concerned to find the best form of taxation, they have done so because they wish to arrange every detail of the social system in the most effective way, not because they think that public finance is one of the main problems of society” (Mises, p. 444). If the government could control itself taxation on the rich would not be an issue. It is the governments fault we are in debt, no the rich, so why tax the rich?

We should not tax the rich because we are therefore penalizing people for being successful. The vast, vast majority of those who are wealthy have earned their wealth through legal and ethical means. So why should we penalize them for being successful and doing what others couldn’t? People don’t realize that the top 2% of a country that has 310,000,000 people in it means that there are 6,200,000 people that make up the top 2%. Not a small number by any means, and to think that they all got their wealth in unethical way is a slap in the face of logic. There is a strong chance that anyone we come in contact with will someday be a wealthy person. It’s actually a one out of fifty chance that you will, at one time in your life or another, make it to the top 2% of all income earners in the country. When you get there it will most likely be because you made smart decisions and worked hard. You invested your money and researched what would be the most profitable venture for you to take. It will take time, not just overnight. So why should you be fined because you put in all that hard work and achieved what took years to achieve? If you did it why can’t someone else? Everyone is capable, through work and diligence, to realize wealth, so why penalize them when they are successful? “To maintain and accumulate capital involves costs. It involves sacrificing present satisfactions in order that greater satisfactions may be obtained in the future. Under Capitalism the sacrifice that has to be made by the possessors of the means of production, and those who, by limiting consumption, are on the way themselves to being possessors of the means of production. The advantage which they thereby procure for the future does indeed not entirely accrue to them. They are obliged to share it with those whose incomes are derived from work, since other things being equal, the accumulation of capital increases the marginal productivity of labor and therewith wages. But the fact that, in the main, the gain of not living beyond their means (i.e. not consuming capital) and saving (i.e. increasing capital) does pay them is a sufficient stimulus to incite them to maintain and extend it. And this stimulus is the stronger the more completely their immediate needs are satisfied. For the less urgent are those present needs, which are not satisfied when provision is made for the future, the easier it is to make the sacrifice. Under Capitalism the maintenance and accumulation of capital is one of the functions of the unequal distribution of property and income” (Mises, p.178).

People wanting to tax the rich are jealous, and are in it for selfish reasons. “It is untrue that some are poor because others are rich. If an order of society in which incomes were equal replaced the capitalist order, everyone would become poorer. Paradoxical though it may sound, the poor receive what they do because rich people exist.

“And if we reject the argument for the general conscription of labor and for equality of wealth and incomes which is based on the statement that some have their leisure and fortune at the expense of the increased labor and poverty of others, then there remains no basis for these ethical postulates except resentment. No one shall be idle if I have to work; no one shall be rich if I am poor. Thus we see, again and again, that resentment lies behind all socialist ideas” (Mises p. 394).