In developing a strategy for Bill Clinton’s 1992 presidential campaign, James Carville coined a simple but effective phrase: “It’s the Economy Stupid”. He understood that voters expect the president to maintain low unemployment and a rising GDP. For the most part, however, politicians talk and the economy takes its own course. Even the best economists are rarely able to predict recessions. They simply analyze historical data and make lame predictions based on past economic indicators.
In 2012 Obama was able to run his campaign on a successful recovery from the “Great Recession”. In 2016, Hillary Clinton ran on the robust “Obama Economy.” In 2020 (assuming the economy cooperates) the Republicans will run on the “Trump Economy”, which is a continuation of the longest peacetime economic expansion in history. From 2010 to the present, regardless of who was in office, the economy maintained modest growth, with fluctuations between 1.5% and 3%. Aside from Obamacare, new banking regulations, and some “Green” initiatives, Obama simply carried forward past economic policies from tax rates to international trade. Trump, on the other hand, dramatically lowered tax rates, initiated several trade wars and deregulated certain industries. Yet through ten years of all these political machinations; what did the economy do? It yawned and chugged along!
Looking forward to 2020, the democrats badly needed to come up with a new economic “talking point” that could counter the “Trump Economy.” One that would resonate with enough voters to win back the presidency from their much-hated nemesis, Donald J. Trump. So far, it appears that “Income Inequality” is gaining the most traction. As expected, MSNBC and CNN have readily accepted the following premise: In the United States, the income gap between the rich and everyone else has been growing for more than 30 years and that this is a major crisis that government needs to fix. Interesting, even Fox News has jumped on the band wagon. In a Fox News Sunday interview with Larry Kudlow (June 30, 2019), the host, Chris Wallace stated: “…but there is clearly a stark income inequality in this country. Bernie Sanders stressed that point. Take a listen:”
At a time when we have 3 people in this country owning more wealth than the bottom half of America, while 500,000 people are sleeping out on the streets today, we think it is time for a change — Real Change!
Chris then asked Larry the following question: “If President Trump is reelected in 2020 what specifically will he do to reduce, not eliminate, but reduce the huge gap in income inequality in America.” Larry didn’t have a particularly good answer. But then neither do the democrats.
Elizabeth Warren wants a special 2% “Wealth Tax” on all assets — worldwide — of those individuals holding more than $50 million in assets and 3% over $1 billion. Congresswomen Alexandria Ocasio-Cortez has advocated for a top marginal income tax rate of 70% on those making more than $10 million. Senator Bernie Sanders has proposed an expanded estate tax with a top rate of 77 percent for estates valued at more than $1 billion.
They should remember that in Marxist Socialism, the government steps in to represent the interests of the workers, as opposed to representing the interests of the bourgeoisie, by gradually enacting policies that restrict and eventually eliminate private property rights, particularly the means of production. In theory, this will be accomplished when the government has complete control over all corporations. This will be accomplished through heavy-handed regulations, and increasingly oppressive taxation on corporations, the wealthy, and inheritance. Eventually all industry and agriculture will be nationalized and everyone will essentially work for the government. The only real difference between Marxist Socialism and Democratic Socialism is the means to the end, not the end result. The intention in both cases, is that government gives primacy to the working class at the expense of the rich, greedy business owners; and that the super-rich will be taxed to where their wealth is reduced to a level deemed appropriate by the government.
First let’s look at some assumptions regarding the wealth tax. You own 100% of a privately held corporation, you are individually required to pay a 2% annual wealth tax, every year you take 2% of the company’s asset value out of your after-tax corporate earnings to pay the tax on your individual tax return. Therefore, every year your corporate earnings (that could have been reinvested in the company and its employees) are now going to Uncle Sam. And that assumes your company has earnings high enough to pay the tax and not go bankrupt. Asset rich corporations with low profitability would require the owners of the company to sell off their corporate share simply to pay the tax. Eventually, they would lose ownership control of their businesses or be forced to downsize their assets to below $50 million. Company’s approaching $50 million in assets would be motivated to restrict growth by not reinvesting profits. All of these scenarios would inhibit economic growth. Countries that have enacted a wealth tax have experienced a flight of capital to other countries, their economies have shrunk resulting in far less tax revenues than anticipated. Typically, countries compete with each other to attract capital by lowering tax rates and burdensome regulations. According to an article in Vox: “In a very basic, stripped-down view, the accumulation of capital (buildings, machinery, business equipment, etc.) leads to higher wages and living standards. A wealth tax, by discouraging the accumulation of financial capital, could also discourage the accumulation of physical capital and thus lead to lower wages and living standards.” Further, asking the IRS to chase down the worldwide assets of the super-wealthy, then asking them to value and collect the appropriate tax may make for a good soundbite, but would be a practical and logistical nightmare. Believe it or not, 61% of voters polled are in favor of this proposal.
AOC’s 70% top tax rate is a less popular proposal, though the majority of Americans generally favor higher taxes for millionaires. Again, it makes for a good soundbite, but would have no meaningful impact on government revenues. There are only two thousand U.S. taxpayers earning over $10 million per year and they have expensive tax experts to help them shelter a good portion of their income.
There is no polling data on Bernie’s proposal to implement a 77% estate tax on billionaires, but Marx would approve. In a couple of generations, through taxation, there would be no billionaires left in America. Practically speaking, however, there would be a capital flight to offshore accounts and huge asset purchases overseas.
All of these proposals miss the point. They all would marginally increase revenues to the federal government, cut into the fortunes of the super wealthy, but essentially would do nothing to raise the living standards of average Americans. And shouldn’t that be the goal of fixing income inequality!
Socialism, whether democratic or Marxist, has a goal of giving primacy to the worker-class at the expense of the bourgeoisie, capitalists. I approve of some democratic party proposals; however, we live in a democratic republic that shouldn’t give primacy to any group over another. Granted, several special interests have gamed our political system to their advantage, often with money, but not always. Big political donors enjoy a disproportionate level of influence over politicians, but that is a function of our campaign finance laws and the extreme cost of running for federal office.
The philosophy behind the great success of our economic system stems from the following: Private property can be viewed as an extension of, and a return on, a person’s investment in labor. In the free-enterprise system, a worker is willing to commit to your company a certain number of hours per day of her time, energy and talent (labor) to further your company’s goals. In exchange, you will pay her an agreed upon amount of money that can be used to further her goals. The more perceived value a person has to her employer, the higher her wages. Of course, however, this is relative to the supply of comparable labor in a given market. If the money that results from this wage is invested wisely, wealth (private property) will increase. This can be compared to a product, in that the more perceived value a product has to a consumer, the higher the price (again relative to supply); and the higher the price relative to the costs of production, the higher the profits. If the profits are invested wisely, the company becomes wealthier (more private property). And if you replace the word society with the words company and employee, then you can begin to see that all of the combined work and productive processes only benefit the worker and employer because society has placed a higher value on the services and products than their costs to society.
The fact that the builder, the butcher or the plumber is working for personal financial gain or that the corporate executive is working to further his company’s profitability does not diminish the value that each has provided their employers, employees or customers. Otherwise they would be either unemployed or out of business.