All Commentary
Saturday, August 6, 2016

Can We Chill on Denouncing the Rich?

A workman without tools is useless, and someone has to make them.

Who paid for that truck—a poor guy or a rich guy? The mother lode of higher wages and higher standards of living is capital. Consider: what’s a trucker worth without a truck?

Let the question (and your intuitive response to self) sink in for a bit, while we ask similar questions of others. What’s a gaffer worth without the lights? What’s a ballplayer worth without TV? What’s a server worth without a restaurant? What’s a store clerk worth without the store and computer chips and scanner? I’ll even ask it of myself: what am I worth without my computer?

Let’s go back to the trucker. Without a truck, his value to others diminishes to near-zero. Compared with a Chinese Cooley carrying the trucker’s cargo on his back, the Cooley is worth a lot less, isn’t he? The trucker might not be as smart, as educated or as strong; yet, he’s worth thousands of times more than the Cooley. Why? Because of the truck.

Now, ask a simple question: who paid for that truck—a poor guy or a rich guy? You know the answer. Who employed the trucker—and kept him employed—a poor guy or a rich guy? Likely a rich guy. Few remain employed by poor guys, at least for very long.

Poor people don’t build those; rich guys do.Likewise, who paid for the factory that built the truck? A rich guy, but ok, maybe lots of rich guys or, in the United States, median-income guys (who are rich when compared with the living standards of those in most other countries). Same with the factory that makes computer chips in enough volume to bring the price down to pennies per gigabyte, which takes billion dollar factories.

Poor people don’t build those; rich guys do. The same is true for the lighting and TV/movie studios where the gaffer executes lighting plans, the TV factories and cables that put the ballplayer (and actors and news anchors) on television; the restaurant and factories that build the supplies every server uses every workday; the store the clerk works at and the registers and scanners he uses.

And, me too. I’m worth a heck of a lot less without a computer, which has made things immeasurably more efficient (even as it allows government to complicate things to a degree unimaginable in the paper and pencil age). I hold no grudges against those with the brains and savings to create and build the computer chips and monitors that make my work far more efficient than it would be without such chips and monitors. In fact, I’d like to make it easier for them—which would make me worth even more to consumers of my services. I’d like to let them keep more of their earnings. In fact, all of it.

Three Ways to Create Wealth

There are only three ways to create real wealth, none of which involve involuntary transfers or, more bluntly, theft. The obvious is via the production of goods or services that are sold to willing buyers, or donated to willing recipients. Except for voluntary donations of wealth, if others don’t willingly purchase goods and services, they don’t ascribe higher values than payments made and, therefore, wealth hasn’t been created; it has been consumed. If they are voluntarily given, to the extent the property or services were of less value to the donor and more value to the donee, wealth has been created, even if there is no unit by which to measure such wealth creation. (Still, there’s nothing wrong or immoral about such charity.) Note that sales or otherwise voluntary transfers imply that such goods and services work, operate or act as advertised (i.e., fraudulent conveyances do not create wealth).

A less obvious way of creating wealth is by investing in plant, equipment, education and training that increases the quality and quantity of the production of goods and services that can be traded. An even less obvious way is via protecting that which has been produced. This creates wealth indirectly: people are more likely to produce whatever they can keep or trade for other kinds of wealth, which means property rights and contract enforcement are fundamental to the creation of wealth.

Higher tax rates at every level discourage increased production.Most people see that education or training creates wealth, directly or indirectly. Yet, by itself, little or no wealth is created. Of what value is a computer programmer without a computer? How much are newscasters, actors or professional athletes worth without TV and the billions in (private) infrastructure to showcase their talents? How much wealth is created by a skilled welder without welding equipment, or machines or tools to weld? Is any wealth created by training an astronaut when there is no space capsule (built by private contractors)? How about a geologist without a drilling rig or the millions of dollars in equipment required to dig—or a trucker without a truck?

The Trouble with Taxing the Rich

Higher tax rates at every level discourage increased production. When a retiree, with a wealth of knowledge and a lifetime of experience, is subjected to federal income tax rates of 46.25% on a “chunk” of income because of the way Social Security is added to the taxable base, she is much less likely to work—which means she is less likely to produce things that others consume. When she realizes she is slammed with 15.3% Self-Employment tax and a 9% state income tax on top of the 46.25% federal tax, she is likely to walk off the job; after all, even serfs were required to render unto Caesar only 20% of what they produced.

Investors are often a different breed.When a young entrepreneur grasps the fact that every dollar he earns, representing the creation of goods or services that others willingly purchase, is subject to 40% tax rates, he is much less likely to work longer or harder. At some point, the trade-off of pleasure is perceived as having greater value than work, which means the provision of value for others reaches an early limit.

Worse, the budding entrepreneur has less capital, which translates to less production and fewer purchases of the tools, equipment and continuing education required to increase productivity—thereby decreasing the supply of goods and services that would otherwise be made available to others.

Investors are often a different breed. They don’t usually stop investing, making them a rich target for exorbitant taxation. However, taxes remove from their coffers the funds with which to create the tools, equipment and machinery required for the use of educated, trained or skilled worker-producers.

Such funds are moved into the hands of government, which usually simply transfers funds and, when it invests (as in infrastructure and education) has proven itself time and again to be a lousy investor (think: Solyndra). Because it lacks a cybernetic feedback mechanism informing it’s doing a great, good or lousy job—specifically, a profit or a loss that threatens to put it out of business or actually does so for not pleasing King Consumer—goods and services are not as efficiently provided.

If instead investors were allowed to keep their funds and invest, we would all be wealthier—including those of us who make their living via the use of trucks and computers.

Beyond a point, wealthy people invest. They often live far below their means and invest the rest. Is it really them, then, that benefit from their capital? No. It’s the billions of people who benefit from the billions invested in microchip factories; it’s the billions benefiting from car production facilities; it’s the millions of people who benefit from rides at Disneyland every year—where most Americans can take multiple million-dollar rides for the price of a day’s work or less.

The benefits of capital—owned by both the super-wealthy and more middle-to-upper income folks largely via retirement accounts, investing more modest amounts—are provided to us, from smartphones and laptops to trips to Disneyland and ocean cruises—for our enjoyment for a tiny fraction of the cost of that capital. Billions for the enjoyment and benefit of billions.

Stop with the Taxes

Hence, low marginal tax rates on high-income earners are desirable not because they need the money—but rather because WE need it, in the form of capital, which comprises investable funds. Only this creates plant and equipment that produce our smart phones and airliners and cruise ships making possible our vacations to faraway places our ancestors only a century ago couldn’t even dream of.

This capital, too, is the mother of income equality: when you consider all the “things” we have today that either didn’t exist 50 years ago or did but for which the real cost has collapsed, capital equalizes earning power among the unskilled, weak and infirm.

Consider: nearly anyone can operate machinery that does the vast majority of the work—the production—and earn a decent income. A person with an IQ of 120 has no advantage over one with an IQ of 80 when operating a big rig; nor does one weighing 240 pounds have an advantage over one weighing 120 pounds. A man has no advantage over a woman programming or operating a computer. The able-bodied have little or no advantage over the disabled in creating computer imagery.

Flat and low tax rates create a motherlode of capital. Middle-to-upper income people who do not consume all their earnings invest their savings and create the capital required for the plant and equipment— the microprocessor factories and the trucks—that create a higher standard of living for everyone, including the poor, infirm and disabled. 

  • Doug Thorburn, EA, CFP, Alcoholism Researcher, Author of "Alcoholism Myths and Realities" and numerous other books and articles. "Protect yourself from financial abuse."