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Friday, June 28, 2024

What the Socialist Left Fails to Grasp about Wealth and Innovation in America

Billionaires benefit greatly from their ventures, but so do other Americans.

Image Credit: Gage Skidmore - Flickr | CC BY-SA 2.0

“We cannot afford a billionaire class whose greed and corruption have been at war with the working families of this country for 45 years,” Sen. Bernie Sanders (I-VT) once said. But when you consider the vital economic activities funded by billionaires, it becomes clear that it’s a society without billionaires that we can’t afford.

Not all Americans are rich. But all of them are more prosperous because they live in a society where great entrepreneurs can attain great wealth through their vision, innovation, and industriousness.

A typical American living in the mid-1800s couldn’t have imagined the amount of wealth and prosperity Americans would enjoy in the 20th century, let alone today. Simple appliances and conveniences that modern middle-class Americans take for granted didn’t exist. The innovators who were most instrumental in inventing and commercializing revolutionary new products became very wealthy, but they improved other Americans’ lives in the process. Their wealth reflected the value their work brought to the lives of millions of people.

People in the mid-1800s lit their homes with candles or oil lamps. They couldn’t flip on a light switch or plug in an electric appliance. They cooked meals with a wood or coal stove or over an open flame. They relied on animal power for transportation and agriculture. They had no refrigerators, cars, phones, microwaves, music recordings, or personal cameras.

Then, especially beginning around 1870, waves of new inventions and innovations burst onto the scene and changed people’s lives. In the 1870s, Thomas Edison invented the incandescent light bulb and the phonograph (recorded sound). Alexander Graham Bell invented the telephone. By the 1880s Edison was building electrical grids, and Andrew Carnegie’s cost-efficient steel was revolutionizing transportation and industry.

In the 1890s, Richard Sears and Alvah Roebuck were sending out mail order catalogs, giving rural Americans access to far more choice in consumer products. In the early 1900s, Willis Carrier’s air conditioning was improving productivity in factories and making people’s lives more bearable on hot summer days. In 1908, Henry Ford introduced the Model T, making car ownership attainable for the middle class.

Edison, Bell, Carnegie, Sears and Roebuck, Carrier, and Ford all became very wealthy from their inventions and endeavors. Major companies today can still trace their roots to each of these men. General Electric traces its roots back to Edison. AT&T traces its roots to Bell. The successor to the Carnegie Steel Company, U.S. Steel, is still one of America’s largest steel companies.

Carrier, Ford, and Sears, of course, all have their namesakes. Further, the ideas and successes of these entrepreneurs attracted competition and spawned whole new industries that were made possible by the availability of lighting and electric grids, telephone communication, low-cost steel, air-conditioned factories, automobiles, and the like.

Over the past 150 years, there have been thousands of other inventions and innovations—some large and transformative, others modest and incremental.

As much as some may wish it weren’t so, entrepreneurs and investors looking for profits have done infinitely more to lift people out of poverty than any government redistribution program.

Wealth and innovation are still closely intertwined today. The richest Americans today—from Elon Musk to Jeff Bezos to Warren Buffett to Larry Ellison—became wealthy by building innovative companies that changed industries, commerce, and daily life. The richest Americans’ wealth is typically concentrated in one asset or a small handful of assets—the stock or ownership of the company (or companies) that they run. As a result, their fortunes have literally risen and fallen with the companies they have founded or built.

The wealth of billionaires, millionaires, small business owners, and investors doesn’t sit idly in safes. It’s actively at work throughout the economy: building factories, filling inventories, shipping products, researching and developing new products, and making payrolls.

Billionaires benefit greatly from their ventures, but so do other Americans. Their companies employ millions of workers. Consumers enjoy their products. And others who have invested in their companies—either directly or through a mutual fund or retirement account—ultimately take home most of the companies’ profits. For every dollar of wealth the richest billionaires earn from their companies, about seven dollars typically accrues to other investors.

Also, the richest Americans’ taxes fund a substantial portion of the federal government. According to government estimates, the top 0.1 percent of the highest-income taxpayers are expected to pay more in net federal income taxes in 2024 than the bottom 90 percent combined.

Socialists who want to soak the rich further and redistribute their wealth greatly overestimate how much could be squeezed out of the richest Americans, and they greatly underestimate the harm it would cause to the economy and to America’s entrepreneurial spirit. On paper, the Forbes 400 Richest Americans are worth a combined $4.5 trillion, or about 13 percent of the national debt. But that wealth is tenuous and not just tied up in their companies; their wealth is their share of those companies.

A company’s market value doesn’t primarily consist of assets they currently hold; it comes from investors’ expectations of the future profits the company will be able to produce. In other words, most of the market value of a company is based on what it has yet to create.

The government can’t take what doesn’t yet exist. Worse, onerous taxes on wealthy business owners run the risk of killing the goose that laid the golden egg. Or at least driving it away.

When a self-proclaimed socialist politician says that there shouldn’t be billionaires, they mean simply that those innovations shouldn’t exist. What we can’t afford is to become a society that villainizes success and suffocates growth and innovation.

This piece is a part of The Heritage Foundation’s Wealth and Innovation project which stands to defend and promote the freedom to innovate, create and use wealth. These are essential to the delicate process by which innovators and entrepreneurs work to build a prosperous and purposeful society.

  • Preston Brashers is a Research Fellow in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation.