Alms for the Rich

It doesn’t take an economist to realize that when the rich pay less in taxes, everyone else is essentially giving their money to the rich.

Government redistributes wealth, through taxes, for the common good. If you don’t like that, go find an anarchist commune to join. Without taxes — and therefore wealth redistribution — there would be no infrastructure (roads, bridges, snow plowing, sewage), military, free education through grade 12, and many other services we take for granted. The idea is that, by redistributing wealth, society benefits as a whole.

But during the last decade or so, government has been redistributing wealth to those who don’t need it: the wealthy.

Taxing, spending, and welfare

Welfare gets its name from the General Welfare Clause of the U.S. Constitution:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence[note 1] and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

In practice, we generally use the word welfare to refer to the system of public benefits that allows people to survive and get basic needs met while (hopefully) getting back on their feet. Or in the case of the elderly, until they die (to be blunt).

In any case, the redistribution of wealth through taxing and spending is written into the Constitution. It is fundamental to our system of government — to any system of government, really. Of course, the extent to which the government ought to tax and spend has always been hotly debated, and probably always will be.

Redistributing wealth to the poor and to corporations

Welfare for the poor makes sense because, without a safety net, the same people would become a greater drain on society through their use of other, more-expensive resources, like emergency rooms, jails, and so on. To fund public benefits like unemployment, food stamps, and medical care, the government takes your money and gives it to the people who are able to claim those benefits. (Well, really it gives the money to the providers of those benefits, but it amounts to the same thing.)

The government also gives tax breaks to corporations as a way to attract jobs to one place instead of another. For example, let’s say a Company X wants to build a factory that will employ 200 people. City A offers to waive property taxes for the land on which the factory sits, because those jobs will be better for City A’s economy than the property taxes. (Assuming Company X is going to build the factory anyway, there is no clear benefit to giving a tax break, but if Company X is smart, it will threaten to build its factory in City B if City A doesn’t give it a tax break. The tax break then becomes the price of those jobs.)

These tax breaks amount to buying jobs, and the reason state and local governments give these tax breaks is because if they don’t, another state or local government — or another country — will, and will get the jobs, instead. It kind of sucks, but it is an unavoidable consequence of a free market.

Tax breaks to the rich — welfare with no public benefit

The rich also get tax breaks, meaning they get to keep more of their money than everyone else. While tax breaks don’t mean our money literally winds up in the pockets of the wealthy, it amounts to the same thing because we have to spend more on public benefits to compensate for the money the rich aren’t putting into public benefits through their taxes.

The reason usually given for tax breaks for the rich is that the rich create jobs, just like corporations looking to build factories, and if we give the rich more of our money, they will use it to create more jobs. The problem is, it isn’t true.

Demand — not profit — creates jobs.

Companies do not hire anyone because their owners have more money in their pockets. They hire people when there is more demand for their products. If demand doesn’t go up, they just keep more money.

I know this from personal experience, as I happen to own a couple of businesses. Why would I hire a lawyer if I did not have the clients to keep him busy? Why would I hire a blogger if I did not have the demand from advertisers to pay her wages? I wouldn’t, because I am not that stupid. If I were making more money, but there were not enough demand to support another worker, I would keep the extra money.

So unlike welfare for the poor or for corporations, which are directly connected to the public good, the only thing we accomplish by giving money to the rich is to make them more rich, leaving everyone to get poorer.

Increase demand, increase jobs

The only way to increase demand is for people — you and me — to spend more money, which we can’t do while we’re giving all our money to the rich. The only way to create more jobs is to increase demand, which means, at a minimum, rolling back tax breaks for the rich.

We ought to at least consider using some of the money saved on tax breaks for rich on tax breaks for the middle class, who do spend money when they have more of it, which will create jobs, which will result in more people with more money to go out and spend it and create demand, and jobs, and so on.

There is a lag, as recent years have shown. The middle class is deeply in debt, and we are using most of any surplus we might have to pay down debt and build up savings. But as we get more confident in our ability to continue generating a surplus, we will spend.

It’s the opposite of the tax policy we have now, which functions like a vacuum cleaner, sucking money out of the middle class and depositing it into the pockets of the rich, where the only demand it creates is for a few more bankers to manage their money. And maybe a mega-yacht here and there.

We don’t need more mega-yachts. Mega-yachts don’t create jobs; demand creates jobs.

(photo: http://www.flickr.com/photos/30366049@N06/2842469126/)

  • J. Andru

    Respectfully, this is a very limited understanding of the cumulative economic problems we are facing.

    The “rich” get tax breaks for many reasons. As this is America, “keep[ing] more of your” money is a good thing. If you earn it, you deserve it. If you didn’t, (and you CAN, but choose not to), why should a successful entrepreneur who risks his life savings have to bear a higher % tax bracket?

    And regarding redistribution: Redistribution does not necessarily create jobs. More often than not, giving free hand-outs to those who don’t “need” them (please see a third-world understanding of this word…) De-incentiveses them from putting forth effort and playing threir part to contribute to the economy.

    What I don’t hear much of in the article is a sense of:
    1. Personal accountability for people’s financial situation, and

    2. Accountability by our GOVERNMENT reps for their Gross mis-spendings of our hard-earned tax dollars.

    Lastly, it is not the government who uses our tax dollars to create jobs. As you can see (historically and currently), big government = inefficiency. While the US postal service is a wonderful service, its efficiency and operational standards as a business and do not compare to a FedEx.

    It is most often private “rich” people who start businesses, which provide jobs, not the sluggish government. The responsibility on these people is tremendous (ensuring the continuation of such a venture). And while I agree that their salaries should not be in the hundreds of millions… who am I to tell them what they should do financially? If I don’t own that company’s stock, I have no business complaining. Their shareholders will take care of it. Either way, at the end of the day:

    That “rich people money” will end up back into the Free-Market economy, where it will promote competition and development. It will make its way to the highest and best use- a benefit for everyone. Give it to the government, and they will reallocate it to projects of the representatives’ buddies (to whom he/she Rep owes a favor OR to constituents who will re-elect them). Think property law: “highest and best use.”

    It is tough to make remarks about taking from one party and giving it to someone else just because one has more. That, my friend, is a socialist principle. And unless you have experienced it, it is tough to understand.

    I agree that great socioeconomic imbalance is not fair. But what’s more unfair is having an expectationist mentality when you put no skin in the game (excluding those not capable). Let’s hold the government accountable to their whimsical spending habits, their weak prioritization abilities, and their efforts to conceal their avarice for More control, and I promise you a nice Charleston dinner that our problems as a nation will be reduced (once again) to choosing between “Diet or Regular.”

    Best luck in your endeavors, and keep an objective eye to the Real causal relationships out there. Simple solutions (like redistribution) are hardly ever the answer (no matter what the government tells you). –This was written on my cell phone so please pardon any grammatical/spelling errors–

    R/,

    J.Andru

    • http://caveatemptorblog.com Sam Glover

      It is most often private “rich” people who start businesses

      You really think so? I know a ton of entrepreneurs, and only a tiny fraction were rich when they started their business(es). A similarly tiny fraction wind up rich after doing so. The vast majority fall somewhere in the middle class.

      That “rich people money” will end up back into the Free-Market economy

      Not unless there is enough demand for the rich person’s products to create an incentive for the rich person to create jobs or stock up on inventory. Otherwise, your rich person will just invest the profits to make more money.

    • Sam Glover

      over-taxing the rich

      Who said the rich should be over-taxed? I’d be happy if they just paid taxes at the same rate the rest of us do.

      (Apologies; I accidentally deleted your second comment in which the above quote appeared.)