Taxing The Rich To Write Checks To The Poor Is Both Impractical & Unnecessary
There’s a better way to rebuild the shattered middle class than a tax-based wealth transfer
By David Grace (www.DavidGraceAuthor.com)
The Bottom 40% Of American Households Are Essentially Broke
The gap between the top 20% and bottom 20% has increased by over 600% in the last sixty years.
For detailed numbers see my column:
The myth of trickle-down economics and the fantasy that making rich people richer is good for anyone other than rich people has destroyed much of the middle class, and it’s getting worse.
People Are Talking About Using Taxes To Redistribute Wealth
Now people on the left and on the right are increasingly interested in or terrified of schemes to use tax money to redistribute the wealth, but they’re both looking at poverty and wealth in the wrong way.
A Tax-Based Wealth Redistribution Plan Is Based On Two False Ideas About Wealth
Taxing the rich to give money to the poor is a foolish and unnecessary policy that is based on two false, 19th century ideas about wealth, namely, that
- (1) wealth is a fixed supply of physical things like land, gold and physical money, and
- (2) the primary source of new wealth is the government’s printing press.
The truth is:
- (1) Wealth is primarily not physical objects. Wealth is the dynamic money supply which expands and contracts as the economy expands and contracts.
- (2) Most new wealth is privately created and privately destroyed through the expansion and contraction of the economy rather than through government spending.
For an explanation of how the money supply works, see my column:
Wealth Is Not A Zero-Sum Game
If you wrongly think of wealth as a fixed pool of physical money like Uncle Scrooge’s money bin then you assume that wealth and poverty are a zero-sum game.
This naive attitude makes people think that in order to make Bob a dollar richer you have to make Bill a dollar poorer, but that’s not true.
Giving People A Perpetual Welfare Check Is A Terrible Idea
That mistaken belief leads to a second error, the idea that the only way to make poor people richer is for the government to increase taxes on the rich and give those additional tax dollars, less the not inconsiderable government administration fees, to the poor as some kind of subsidy, welfare or “universal basic income.”
That is a very bad idea on many levels. For a detailed listing of the reasons why a UBI is a terrible idea, see my column:
A Universal Basic Income & Professional Sports Are America’s Equivalent Of Rome’s Bread & Circuses
Once you understand that the money supply is (1) dynamic, not fixed and (2) the money supply grows largely independently of the government, you begin to understand that the most effective way to make the bottom 20% to 40% of the population richer is not to have the government tax the rich and write checks to the poor.
Increased Wages Not More Welfare
Instead, the first way you should increase the wealth of the bottom 20% to 40% of households is by increasing the income they earn from their employers, not by increasing welfare payments they are given by the government.
Train Qualified People For Higher-Paying Jobs
The second way you increase the wealth of the bottom 20% to 40% of households is to subsidize non-profit corporations that train people for the skilled and semi-skilled jobs that testing shows they have the required talent and intelligence to perform.
This is an infrastructure expense not that different from building highways and fixing bridges. Skilled workers are an asset to an economy and represent another form of national wealth.
Higher Wages Mean Less Gov’t Spending
When people in the bottom 20%-40% earn more money they use fewer government services like food stamps, Medicaid and Section 8 housing, all of which reduces government spending.
Higher Wages Mean A More Prosperous Economy
When people in the bottom 20%-40% earn more money they pump all that money back into the economy thus increasing sales, profits, savings, jobs and tax revenues. When the economy improves, businesses sell more units and everyone makes more money.
Higher wages expand the economy and increase the total amount of the country’s wealth because wealth is dynamic and increases as the economy increases. Everyone does better when workers have more money to spend.
Higher Wages Do Not Proportionately Increase Prices Or Reduce Profits
But if low-paid workers’ wages go up, won’t that mean prices will increase? Maybe, a little, in some industries, but there is a inverse multiplier at work here. Wages are only a fraction of the cost of a product. Even in the fast food industry, a raise from $10/hour to $15/hour would mean that the price of a $2 burger would only have to increase to about $2.30 to cover the increased wage cost.
In other less labor-intensive industries a wage increase would translate to an even smaller price increase.
This inverse multiplier means that a big increase in wages and a consequent big increase in workers’ disposable income would have a much smaller effect on prices and that most of any small decrease in profits per unit sold would likely be offset by the additional profits earned from selling more units in a more robust economy.
And even if any small increase in prices actually caused a small decrease in the profits for some industries, only a fraction of profits are distributed as dividends so at worst some shareholders might receive a little less money while other shareholders in companies in different sectors would receive a little more money from their company’s increased sales volume.
The Positive Consequences Of Wealth Not Being A Zero-Sum Game
- A richer population makes for a more prosperous economy.
- A poorer population makes for a less prosperous economy.
- A more prosperous economy reduces the costs of government and increases the citizens’ wealth.
- A less prosperous economy increases the costs of government and decreases the citizens’ wealth.
- A richer population is good for everyone and a poorer population is bad for everyone.
Just ask yourself, does making working people poorer make the country better?
The many both long-term and short-term damages to the country from a poorer population are described in my column:
The Poorer The Bottom 20% Are, The More Money It Costs The Rest Of Us.
Why Are You Against Richer Citizens & A More Prosperous Economy?
A portion of the population made richer by earning higher wages will not cause inflation, will not engender the undesirable side effects of more welfare funded by more taxes, and will result in benefits for everyone from lower government spending and a more prosperous economy without any need to take money away from rich people in order to give it to poor people.
Fighting to keep the wages of the workers in the bottom 40% low is a toxic policy for the country. It’s a false economy.
It’s like saving money by putting cheap, contaminated fuel in your truck. It saves you a few dollars for a couple of months and it ends up burning out your engine. It’s just plain stupid.
Impoverishing forty percent of the population hurts everyone and, in the long run, benefits no one. Why are so many of you so determined to do that?
— David Grace (www.DavidGraceAuthor.com)
