Hushbeck – Question 4 Reply 1 – Income Inequality

Question 4
Hushbeck Answer to Question 4
Watts Answer to Question 4
Watts Question 4 Reply 1
(The numbered questions were posed by Joel Watts to Elgin Hushbeck. See links above.)
1.) We have created a tax system set against work. You noted something like this in your analogy of those who earn and those who rest, but have the same IRS value. Do you think our tax system needs to change focus and instead tax at a higher rate those who do not earn but have?
I believe that the tax system needs to change focus, but not in the way you, or the article you cite, envisions.  I agree the current system is far too complex and there are far too many loopholes.  I also agree that this resulted in people making decisions for tax reasons rather than for business or personal reasons.  In short the tax system has become as much if not more a means of control and favoritism, than a means of raising revenue.
Thus I would support a far simpler tax system. One option would be to switch to a consumption tax, such as the Fair Tax, but such a radical change is most likely impossible, and not without risks.  If we stick with an income tax, it should be greatly simplified, preferably with a single rate.  The progressive nature of the code can be handled through a personal deduction shared by all.
I would also draw a distinction between money earned in wages, and money invested at risk. I disagree with the article and its implication that we should tax capital gains before they are realized. This would have a devastating effect on our economy, if for nothing else simply consider all the home owners who struggle to make ends meet suddenly being asked to come up with thousands of dollars because their their home had appreciated in value.  In addition, as simply a fiscal matter, higher capital gains taxes suppress growth and so often lower revenue.  As I document in my book, Bush’s cutting of capital gains taxes early in his first term, resulted in more money not less from capital gains taxes.
But for me the big difference is the issue of risk. When I work for an hourly wage, the law protects me and mandates that I get paid, as it should.  The biggest risk is that I will be laid off and even then I can get unemployment. However if I earn money from an investment, not only is there no guarantee that I will ever get paid, I might even lose my investment. This is why taxing unrealized capital gains is so dangerous, as it would at times represent a tax on money that one never even had.
One other factor in all this is the issue of corporate taxes.  A lot of the alleged inequality in taxes paid by the rich ignores the fact that their income is often taxed twice, once at the corporate level and then again at the personal level.  But it is only the taxes paid at the personal level that are factored into these statistics.
Finally I disagree with the article that our current problems are due to income inequality.  The problem is that very few people are investing.  In simplified terms those with money are either seeking to grow what they have at one end of the spectrum, or they are seeking to preserve what they have at the other.  Those seeking to grow do so by investing it at risk, just the type of investment that grows the economy.  Currently most people and companies are very much into preservation.
2.) You say, “growing the economy end up being very wealthy. ”But, you can only take from others. Sometimes, this involves selling, but if you are “growing the economy” this usually means you are a job creator. Thus, you are taking (to use some Marxism here) from the worker who is producing your product and giving him only a little in return. So, the question is, who really grows the economy? Is it the very wealthy, or the workers who aren’t?
Your question is based on a false premise, and serious misunderstanding of economics.  Wealth can be generated. The process is not just a matter taking from others, but also of giving to others something that they value in exchange.  Innovations and ideals that allow the economy to perform more efficiently can generate wealth.   In short the economy can grow, just like it can contract.
Still, to answer your question, while all are important, the most important are the first and foremost the entrepreneurs with the ideals and courage to start a business, and secondly those who fund them, which by necessity are normally, but not always, the wealth.  Note here that I draw a distinction between entrepreneurs who take risks, and a lot of upper management, who I consider to be just employees, assuming of course they are not themselves entrepreneurs.  Without entrepreneurs and the investors who fund them, there would be no jobs for the worker.
Most of the entrepreneurs I know, have had times when after paying the bills and meeting payroll, there simply was nothing left to pay themselves. And there is another key factor, which is that most businesses fail.  Not only is government ill-suited to pick winners and losers because bureaucracies tend to resist anything that is new and innovative; not only will they tend to make choices for political rather than business reasons; but most investments fail and thus the odds of picking the winners are very small. This is why you want thousands and thousands of individuals trying things out, this is why it is so important to encourage investment, not penalize it.
3.) You write, “where there is real choice and competition” in regards to an economy, but to create such a force, we have to get back this idea of the free hand of the market and entertain some sort of Government control of the markets. Is this acceptable, and if so, to what extent?
Of course I think it is acceptable. I am a conservative, not a libertarian. Government has a very important role to play.  However as I detail in my book, government action tends to be toward more planning and control that squelches growth rather than encourage it.  Thus I found George McGovern’s comments on this matter quite ironic.  After leaving government, and trying his hand at business, he commented that he never realized how difficult government makes things.
For me some key questions that government needs to ask are:
1) Will it actually address the problem?
2) What will the impact been on choice and competition?
3) What will it do to people’s lives? Not just its aspirations, but it’s actually effects.
I believe that a lot of what Government does would fail all three tests.  Thus for another recent example, the Dodd/Frank banking law would not have stopped the recent financial crisis.  It is particularly onerous on smaller institutions causing some to quit, and other to consolidate, and thus is reducing choice and competition.  It is one of the factors holding back the economy, as the role out period will take about another decade, and there remains a lot of uncertainty as to how all the regulations will come out.
So while government has an important role to play, the role should be one that encourages choice and competition, rather seeking to plan and control.