Should Wealth Creation Be Rewarded?

Dean Zarras, Contributor

I write about big government's corrosive effects on civil society.

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Do we want to motivate people to create wealth or not?   It’s the unspoken question, the elephant in the room, when President Obama attempts to whip up the populace with stories of “billionaires paying lower tax rates than their secretaries” and other class-warfare demagoguery.

Mitt Romney recently said his effective tax rate is probably close to 15%, because most of his income comes from long term capital gains.  The admission hasn’t helped his campaign much, to be kind.  Warren Buffett has famously said similar things, and has become the President’s biggest gift in his drive towards wealth redistribution.

Nearly since the beginning of the income tax, the government has treated long term capital gains differently than “ordinary income.”  In 2003 the long term capital gains rate was cut to 15%.  Why are we surprised to see that people like Romney and Buffett have matched their behavior to the incentives?  Surely even President Obama understands the concept of incentives. Under certain conditions, section 2011 of his Small Business Jobs Act of 2010 establishes a particularly favorable long term capital gains rate: 0%.

Presumably what everyone’s attempting to foster here are wealth creation and capital formation.  From wealth comes the ability to invest, which creates jobs and, if created via free market capitalism — as opposed to crony-capitalism — advances society.  The opposite of wealth of course is poverty.   We see endless government reporting and programs attempting to alleviate the latter, but little understanding of the need to create the former.   If we want less poverty, we need to create more wealth.

So what a great incentive we all have:  create wealth over the long term, and pay lower tax rates!

Image by AFP/Getty Images via @daylife

And indeed, this is exactly what Messrs. Romney and Buffett have done.  And in creating wealth for themselves, they’ve created wealth for vast numbers of other people as well as jobs and opportunities for countless more.   They’ve “given at the office”, so to speak — so why do Obama and his minions beat up on them to “give” again and again to the tax man?   Stranger still, why does Buffett believe his money would be put to better use by government than by his own management?

Obama’s beef with the above situation is that not everybody is equal in their ability to create wealth.  Yet this is no more an injustice than my permanent inability to dunk a basketball.   Do we need to punish Shaquille O’Neal, LeBron James or Kobe Bryant because I can’t jump three feet into the air?   While we cheer for O’Neal, James and Byrant on the court, can’t we similarly cheer for the entrepreneurs in the business world who create the jobs that everyone talks about wanting?

In the end it all goes back to Obama’s core belief that government itself can (and should) right the O’Neal vs. Zarras injustice by creating the opportunities for me that The Shaq somehow took away.  Notice, however, that if the tax rate “inequality” between Warren and his secretary is too high for Obama, he’s not proposing that we reduce the secretary’s rate to that of Warren’s, and then match government’s spending to the resulting revenue.  No, Obama wants Buffett to pay more in taxes and he’s going to figure out a way to give that extra money to the secretary through additional government services, programs and transfer payments.

Note that no additional wealth is being created here.   Every dollar that is to somehow benefit the secretary must be raised from Buffett, Romney, and others like them (the nefarious “one percent”), and then somehow appropriated to the secretary’s benefit.   Keynesians always point to the visible benefit to the secretary.   In stark contrast, followers of Bastiat always “see the unseen” in the additional wealth creation that doesn’t take place.

To really feel good about themselves, Obama and his followers have to assume that the government is going to do something of greater benefit to society than the creator of the wealth would do instead.   There’s one small problem though: it doesn’t stand up to scrutiny.

Imagine the government proposes collecting an additional one million dollars in taxes from some rich person.   What could the rich person do with that one million dollars instead?   They could:

Which of the four rich man’s activities above is harmful?   Furthermore, in which of the above does government claim to have a better track record when compared to the private sector?   I’d suggest that the answer to both questions is: none of the above.

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Since the wealthy (i.e. job creators) are wealthier than ever and pay taxes at the lowest rates since WWII, shouldn’t unemployment be at record lows as well?

Regulations on job creators and the global supply of workers are at their highest rates since WWII as well. Global standards of living are rising like never before. The challenge for the U.S. will be to remain competitive in this new landscape, not to try to bulldoze the landscape instead.

Regulation isn’t all bad. It keeps toxic toys out of babies’ mouths, makes sure your artificial joint isn’t going to fail in 6mo or that the new car you buy isn’t a deathtrap.

The banks weren’t tightly regulated and as a result were allowed to create deriviative mortgage backed securites that few, if anyone understood. That didn’t exactly go well in the end.

I’ve worked in and around banks for much of my career, including many years of derivatives of all sorts. That they weren’t tightly regulated is simply mythology. Entire floors (sometime of pricey Manhattan real estate) existed to house people that were doing nothing other than complying with regulations. Banks, like all other collections of human beings, repsond to incentives, pure and simple.

The other myth is that without government regulation, all babies would crawl around with toxic toys in their mouths all day long. I guarantee you that if a private company popped up to expose which toys were toxic, parents would keep it in business and lawyers would try to put the company out of business, both of which would be welcomed by me. Oh wait, that’s Consumer Reports and our tort law industry.

Please don’t repsond that the government is less likely to be corrupted than the private company, unless the government has some new talent pool species that I’m not aware of.

Seriously, I don’t think our regulators could ever top the ingenuity and tenaciousness of the trial lawyer industry — they serve the exact function you’re looking for. If we simply counter-balanced them with Britain’s “Loser Pays” provision, we’d be all set.

I’ve worked in a regulated industry as well; the medical device field. I know what regulatory compliance is like, I’ve done it. It’s a royal pain. It also sets a minimum standard for a company’s actions. In good companies, non-compliance is addressed internally. In others, regulators can shut down a company, quarantine and or seize defective product immediately.

The problem with trial lawyers performing a regulatory function is that lawsuits take years or even decades to come to trial, meanwhile the company producing bad products continues business as usual, profiting while increasing the number of victims.

Of course, some victims will settle with the company. Those settlements are usually closed and confidential with neither side admitting guilt. Gag orders on both sides mean the public never gets to hear the victim’s story.

In the banking industry, of course, no one dies as a direct result of a banks screwup. People just see their life savings just go “poof!” and instead of a relatively easy retirement, they’re now faced with eviction or working well into their golden years.

The “loser pays” provision simply imbalances the playing field in favor of the Corporate Goliaths it doesn’t just discourage frivolous lawsuits, it discourages ALL lawsuits.

—–” If we want less poverty, we need to create more wealth.”——

Wealth for whom?

What brilliant insight and thoughtful analysis.

That type of thinking led directly to the French Revolution, the Bolshevik Revolution, and the Long March.

Those who do not learn from history are doomed to repeat it.

Repeat what? The kind of history where the poor rise up and physically beat down and steal from the rich? Or the kind of history where the Left uses the force of government to do the same thing?

Obviously let’s allow the system to create wealth for everyone, but how do Obama’s plans do that?

——–” Obviously let's allow the system to create wealth for everyone, but how do Obama's plans do that?”———

People who see the rich becoming ever richer while they are getting poorer end up not caring too much about being called such emotionally loaded epithets as lazy, worthless, thieves etc. etc.

———” Repeat what? The kind of history where the poor rise up and physically beat down and steal from the rich? Or the kind of history where the Left uses the force of government to do the same thing?”————

Well, in a capitalistic system, either the government does it, or people take up arms and do it themselves. Then install a government that will continue to do it, a Marxist totalitarian type government.

Nobody really cares very much what the other guy has as long as they are able to meet their own family’s needs and has an equal opportunity for betterment.

The monkey has to let go of a few of the peanuts to get his hand out of the jar.

That is the difference between communism and social democracy.

Mr. Zarras,

You ask:”Should Wealth Creation Be Rewarded?”. The answer is, as always, answered by old question “Cui bono”, who benefits? Wealth creation for whom and at what cost.

Problem is that over the last 40 years or so “wealth creation” has come by impoverishing millions Americans. Consider this blog by Pr. Kotkin of Forbes.com who writes"¦

"According to the latest data, the current unemployment rate is the highest it has been so deep into a recovery since the 1940s. Even more troubling, over 6 million Americans have been unemployed for more than six months "” the largest number since the feds have begun tracking this number decades ago.

That's not the worst of it. The pool of ‘missing workers’ "” those who are unemployed but are not counted as such "” has soared to over 4.4 million. And under the first African-American president the employment rate for black men now sits at a record low since the government started measuring the statistic four decades ago." [1]

Here is a piece entitled "Disappearing Middle-Class Jobs" written by a Forbes staff writer Jenna Goudreau.