Robin Hood economics doesn’t deliver the goods in modern times
Those who argue for increasing taxes on the rich to support the middle class miss the larger point: Redistributive taxation is not only insufficient to ensure that our country’s wealth is equitably shared; it is also ineffective. Humans don’t like to be forced to do anything, and taxation is a form of compulsory sharing. When the rich feel their taxes are too high, they employ lobbyists, lawyers and accountants to avoid paying them, and will even leave the country, sometimes taking their businesses with them.
There are only two ways to make money: Trade your labor for wages, or own capital and charge other people to use it. “Capital” is what economists call stuff that makes other stuff. For example, machinery that makes cars, or shoes, or 3-D printers are capital. Also, money that you have saved and can therefore lend to or invest in a business, is capital.
Florida’s 19.5 million citizens earned, on average, $26,236 in 2013, according to the U.S. Census Bureau. According to the Bureau of Labor Statistics, 9.6 million of those citizens were employed — that is, they were working for wages. And chances are, they weren’t “rich,” because the main thing that distinguishes the rich from everyone else is that the rich get most of their income from owning capital.
In this year’s State of the Union address, President Obama proposed increasing the tax rate on capital gains and eliminating the “step-up” in basis upon death. Yes, the 16 percent gap between the top income (wage) tax rate and the top capital-gains tax rate is a huge boon to the wealthy, but eliminating the step-up would hit the middle class hard, levying a large tax on some middle-class people upon certain events (chiefly, the deaths of their parents) in order to give a small tax credit to other middle-class people (or even the same people, if only at different times).
To illustrate: If my client dies leaving her middle-class son with a $150,000 house that she bought in 1970 for $50,000, he gets a “step-up” in tax basis (what the media is presently calling the “angel of death” or “trust fund” loophole). That is, he pays no tax on his $100,000 gain, because the IRS treats him as if he bought the property on the day his mother died, and paid what it was worth on that date. If he loses the step-up, he’ll pay about $15,000 in tax when he sells. He’d rather avoid that tax than receive the $500 tax credit the Obama administration is estimating each middle-class household will receive if its proposal becomes law.
How should the fruits of economic activity be shared between the owners of capital, and those who only own their own labor? In America, we’ve managed to avoid the question, as unprecedented peace and prosperity lifted the prospects of capitalists and laborers alike for much of our country’s history. But since the 1980s, as French economist Thomas Piketty has recently demonstrated, the share of wealth going to owners of capital has rapidly increased, while the share going to labor has fallen faster than John Henry’s hammer.
Why is this? Part of the reason is that, as technological advances increase “productivity,” business owners replace relatively expensive human labor with machines. This has been going on since the industrial revolution began, and cheap oil, reliable global transport and ever-better telecommunications are accelerating the trend.
Machines relentlessly replace humans. Capital relentlessly replaces labor. Wealth relentlessly concentrates in the hands of the owners of capital. Redistributive taxation couldn’t possibly keep up, even if the rich would sit still for it, which they won’t. But as fewer and fewer of our citizens control the means of production, we must answer the question we have avoided for so long: What entitles a person to a share of the wealth of creation?