The seeming rise of inequality is a big concern. “Tax the rich” a frequent refrain. Billionaire Warren Buffett once famously said he pays a lower tax rate than his secretary. Bernie Sanders talks as though billionairehood should be disallowed.
There’s a lot of plain old envy. A friend obsesses that Bill Gates just has too much, you’d think it makes her poorer. Indeed, it’s often said the rich “take” their wealth from the rest. But while some may be “robber barons,” the real route to riches has always been creating value for others — goods and services people want or need and willingly buy.
In contrast, zero-sum thinking assumes anyone gains only at someone else’s expense. Forgetting that no transaction happens unless benefiting both sides. Enlarging the pie for everyone. That’s basically how Gates got rich.
So the ultra-rich’s existence is not a problem. Not by itself impairing the well-being of the masses, which should instead be our focus. And in fact, notwithstanding extremes of wealth, ordinary people have become much better off.
For most of our history, nearly everyone was squalidly poor, with very few rich. And practically no economic growth. That’s changed dramatically in the two centuries following the Industrial Revolution. Not only producing economic growth, but spreading it, with mass affluence replacing mass poverty. Compared to the past, today’s inequality is really an inequality of riches. And while it’s said the middle class is hollowing out, mainly this isn’t people falling out of it but rising out of it.
Looking globally, inequality has decreased since WWII simply by virtue of economic growth rates in developing nations exceeding those in advanced ones. Freer trade a big factor. As a result (while many reflexively suppose poverty is always rising), far fewer people, worldwide, now suffer real deprivation.
The “tax the rich” trope implies we don’t already do so, at least not enough. Often pointing to the 1950’s top 91% income tax bracket. In reality, with deductions and loopholes, nobody ever paid so much. Whereas nowadays the top 1% of earners pay about 40% of all federal tax revenue (up from 33% in 2001). The top 0.01% pay around a third of their income.
That reflects a tax system premised on richer people able to pay more. We can argue over exactly how much more might be fair. But fairness should not mean punitiveness; nobody should be taxed just for the sake of making them less rich. Rather, only because the money’s needed.
The Economist recently presented an analysis of this whole inequality and taxation issue. Arguing that high taxes can be economically damaging, disincentivizing effort. Citing, for example, recent research showing that higher income tax rates correlate with fewer patent filings, because the potential reward is reduced. And people are not captives, they can move to avoid taxes. High-tax New York has the nation’s lowest population growth rate.
Meantime, says The Economist, the rich world does more redistribution than ever. In America, economic inequality has risen in recent decades, but that’s before you count government taxation and spending. Top earners again do pay a lot of tax, while federal benefits going to the lowest earners have risen greatly. All in, America now redistributes about twice as much as in the 1960s, offsetting much of the inequality rise. Though the Trump regime has partially reversed this.
Also noted is that whereas European social spending somewhat exceeds America’s, they finance it more through “broad-based levies,” like 20% VAT or sales taxes, which disproportionately hit ordinary people — whereas the U.S. taxes less overall, but with a system that soaks the rich more. In fact, for 80% of Americans, today’s percentage tax burden is far lower than in the ’60s and ’70s (a big factor being expansion of the earned income tax credit).
But we need more tax revenue. Government deficit spending is out of control, funded by borrowing, with resulting interest costs eating up ever more of the budget, a doom loop. Taxing just fat-cats couldn’t come close to what’s needed. While a broad-based tax rise is politically impossible, especially with “affordability” such a big concern. Given all this, Trump cutting taxes mainly on the rich was, let’s just say, ill-advised.
The Rational Pessimist 
