Raising taxes on the rich seems like a great idea politically, socially,
morally, and economically. Our country has huge debts, failing social programs,
and a slowing economy. So, it seems only fair and reasonable that we should get
help from those who can afford it: rich people, right? Wrong.
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| Source: NYUlocal.com |
Ken Langone, the CEO of Home Depot, said on CNBC, “raise my taxes, go ahead. Nothing will change in my life...”THAT’S PRECISELY THE POINT!!! His life won’t change, but someone’s will. The question is: whose life will change?
Life Will Change for the Less Fortunate
Life will change for the people who depend on the capital that Mr. Langone saves
and invests: entrepreneurs and small businesses. If you want to borrow money to
start or expand your business, or to buy a home, you borrow from a bank or
lender who attained their capital from a rich person. If you tax rich people
more, they don’t spend less (duh!): they save and invest less. That makes
borrowing money harder for the little guys because banks have that much less
capital to lend out. So Mr. Langone is half-way to the right answer, but then
veers in the wrong direction.
Langone proved my point when he said this: “In reality I don’t believe people making a million dollars a year are gonna do anything different in how they spend money if they pay more taxes. A person making a million dollars will pay the higher tax and will still spend as much money.”
Again, he's right, and that’s PRECISLEY the point. Rich people will spend the same amount, but save and invest less (Rand Paul failed to make this point in response to that comment in the video above). Mr. Langone is obviously economically challenged (like everyone else). And we understand here at HNW that saving and investing (in capital projects) drive the economy, not borrowing and spending (on consumption).
When rich people, like Mr. Langone, put their money in banks (lending institutions) and investments, entrepreneurs and small businesses attempt to make products for which there is future consumer demand. This leads to a higher standard of living for everyone. This means cheaper toilets, cheaper cell phones, cheaper healthcare, and cheaper everything. If you tax Langone more the way we tax today, he won't cut expenses, and his taxes will be paid from money that otherwise would have been saved and invested. So, his life doesn't change, but borrowing costs will be higher for everyone.
The more we incentivize spending, the worse off we are, because we're incentivizing the current (relatively expensive) way of doing things. We should wish for rich people to keep producing, keep underconsuming (rather than lavishly spending on useless things like yachts), and keep making life better for everyone else by saving and keeping their money in the hands of those willing to lend it out for profit. That means we should tax their spending, not their savings. A higher tax on income/investments merely taxes those who depend on the capital of rich people, which is everyone else.
"But the Government Will Put That Money to Good Use!"
Some will argue, with a straight face, that even though taxing the rich means less money to be lent out to entrepreneurs, it's all OK because the government will spend that money on much-needed programs: social security, medicare, etc. A rebuttal of this argument will get its own post here, so I'll just say that fortunately, the general public and even some politicians are beginning to understand that these programs are unsustainable because they incentivize detrimental economic behavior.
Thanks, Mr. Langone!
So, while Mr. Langone can pat himself on the back and sleep well at
night, he's actually advocating a policy (taxing the rich) that would hurt the poor, and the overall economy. The rest of us suffer
because he is a moron, like most others, including our politicians and
policy-makers, when it comes to basic economics. Hopefully people like him, who were smart enough to make their
money in the first place, are smart enough to eventually come to their common senses. We can only hope.
Well stated, but isn't this simply a long-winded way of explaining trickle-down economics?
ReplyDeleteHey Lukey, thanks for commenting. Perhaps you're right. But, though I may be wrong or just talking semantics here, I would differentiate this explanation of taxing the rich from conventional "trickle down economics."
DeleteWhen I hear "trickle down economics," I think of the government giving special treatment (tax breaks, subsidies, etc.) to big oil companies, farmers, "job creators," and so on, in a dumb effort to make food and energy cheap, create jobs, and generally get the economy going. This is just as moronic, and even more evil, than taxing the rich more.
Maybe you've heard or read this explanation of taxes before. But it's new to me, and I don't see it out there much.
I think it depends on what the rich guy would do with his money. For example, if he owns a business and due to increase taxes he can't hire as many people, then yes taxing the rich will possibly hurt the economy. On the other hand, if he would have just used that money to buy more Pepsi stock (or gold), I'm not sure that taxing the rich guy more will hurt the overall economy that much.
DeleteThe term "trickle down economics was used extensively back during the Reagan/Bush Sr days trying to justify lowering the tax rates on the rich (which were too high IMO). The whole theory was that the rich got to keep more money and then would invest/spend that money and eventually it would trickle down to the masses. Sounds good in theory, but I'd venture to guess that a lot of that money didn't trickle down very far.
DeleteAnonymous,
DeleteI agree: if that businessman would have hired more people with the tax money, then, all else being equal, that's bad for the economy.
However, it's better if the businessman buys Pepsi stock than spend the money on consumption. When the businessman buys stock in Pepsi, then Pepsi has that much more capital to use at its disposal (in the form of equity) to invest in the future. So, the executives can decide to build another factory, hire more workers, pay higher wages, etc. Likewise, the shareholders, who now hold more valuable shares, can then either sell and spend that money, keep it and therefore hold the equity value high, borrow against the equity, etc. If the businessman, on the other hand, buys a vintage Rolling Stones guitar, then that doesn't help anyone except the guy who's selling it to him.
PatrickA5,
DeleteI think you've hit the nail on the head. "Trickle down economics" has the connotation that the rich should be given special privileges because they create jobs, invest wisely, etc. That, to me, is economic nonsense. They shouldn't get any more (or less) reward than the market is willing to give them. Giving the rich more money due to government decree is more evil and possibly economically dumber than taxing the rich more. Either way, my main point here is that the market should decide who gets "special privileges," not the government, because the government shifts land, labor, and capital unsustainably.