One of the ongoing “problems” of economics is the inherent conflict between “fair” distribution of wealth and “the propensity to invest”.
Basically, rich folks put more of their money into investments for future gain, and less of it into immediate consumption. Yes, they consume a LOT more than poor folks, but a dirt poor person consumes 100% (or more…) of their income. As the average wealth increases, increasing investment happens. At extreme levels of wealth, it is simply not possible to consume all the income and wealth that flows to the individual (or family).
So take a Bill Gates. Think he could possibly consume his $Billions in the years left in his life? Only via buying companies (investments), or land (farms or housing investments), or putting it into a “charity” 501c3 corporation that also uses money for things that are not personal consumption.
The net result is that “wealth accumulates”, mostly at the top.
Over time, this leads to two outcomes. One good, one not so good.
First off, the good one, we have large accumulations of wealth in the hands of a few, who do more investing with it. That’s sort of the whole point behind “allowing” wealth accumulation. To move more money out of consumption and into investment. Increasing the average “propensity to invest” via those rich pools leads to more total investment and more total economic growth. This is that “trickle down” folks talk about. Some “rich guy” like Bill Gates makes a bundle, and a few million ‘poor guys’ get jobs taking care of PCs running his software. We ALL get richer as investment leads to more economic growth.
Tax that wealth creation phase too much, the economy as a whole gets poorer. Yet, leave it as a totally ‘free market’ there are forces toward Monopoly Power that will result in there being ONE “rich guy” with all the chips. Not just manufacturing ‘economies of scale’ like in making steel, but ‘financial economies of scale’ where just being rich gets you lower costs at the bank… or you OWN the bank…and can exclude others from financing. So we need ‘anti monopoly laws’ and ‘anti-trust laws’ to prevent that kind of monopoly abuse or formation of ‘trusts’ to suppress competition. Yet we do need that wealth accumulation. History is littered with Democracies that fail as the voters “vote for themselves the largess of the public purse” and consume all the wealth. Ending in poverty. It’s a bad idea to eat your seed corn and someone needs to be in a position to make that “evil” choice that some folks don’t get to eat much now, so we have more to eat later.
Second, “The rich get richer” and the poor do not get rich (they get a better standard of living as the economy grows, but stay with high ‘income disparity’ compared to the ever more distantly rich folks). The expectation is that if the individual is frugal, and works hard; or has a very bright idea, they, too, can break into the “rich” group. Those who are rich but bad managers will squander their wealth and end up poor (or inherit it and end up spending it).
Furthermore, even a very bright and very frugal ‘poor person’ is faced with substantially insurmountable advantage in the hands of the wealthy. There are very rare exceptions, but substantially the patent and corporation / finance process lets the very rich squash the ‘poor but bright’ by a variety of means. (The ‘nicest’ of them being the ‘buy out’ where the poor guy gets a few $Million for an idea or company that threatens a few $Billion business of a rich person. In that case, they get a small step into the ‘rich’ group, but are still massively less rich. It is both a common strategy – the start up – and a common tool of wealth concentration “sell to us or we will crush you with our excess power”…)
“Redistribution” depends on life cycle changes. It also depends on there not being a “Dynasty” effect. Unfortunately, even dumb Rich Kids can hire smart lawyers and accountants to keep the dynastic wealth flowing and accumulating. The generally proposed “fix” for this is a “death tax”. When you die, a large part of the estate is taken as taxes and used to fund the economic game via the government.
While that sounds like a good idea, it causes 3 immediate effects.
First off, money that goes to the government leaves the productive sphere. So IFF I’ve got $10 Billion in productive investment, and there’s a 25% inheritance tax, then by definition $2.5 Billion of productive assets have to be dumped on the market and the money spent, via the government, upon a point event. That can be highly disruptive. (In particular, a large “family farm” often ends up sold, or sold in part, as that is the only way to raise the cash. Reducing the size of the farm and making it less efficient.)
Second, wealthy people (or their lawyers) are also fairly smart, so find ways to hand over the wealth prior to death. A load of insurance products exist to bypass the inheritance laws. Largely NOT of any benefit to the economy at large and mostly representing “gimmicks” that bypass the inheritance tax while wasting productive people on re-arranging the chips. Similarly, there are a load of “charities” that come into existence (like for Gates) where “the kids” can be on the executive board and get a nice paycheck for life, all while the “charity” is tax exempt. So the “kids” get to play in perpetuity doing quasi-productive (or often “looks nice but unproductive” work for “charity”…) A HUGE waste of effort in large part.
Finally, that money STILL piled up for a lifetime (sometimes wealthy folks live into their 80s or more…) and it just doesn’t “redistribute” anywhere near a rate that matters to most folks who are not wealthy. It puts very large “lumps” into the flow of wealth due to point event based actions. Furthermore, the wealthy move a lot of their wealth into corporations so it is NOT a personal wealth (then the ‘kid’ gets hired as an ‘executive’ and granted a load of cheap stock options to retain ownership of the wealth in the family). Again, more “games” and less productive activity; but with dynastic distortions that can last 100 years.
Somehow we want to maintain that increased propensity to invest, and wealth generation, while finding ways to eliminate the “inheritance games” that happen when rich folks die. To reduce the Dynastic Dominance and retain the wealth creation.
The socialist answer is to have the Nation be the “Rich Evil Bastard” who has the increased propensity to invest. This is a good idea if you have nearly nobody already in a position to do investing. (So if a nation is entirely impoverished, there isn’t a Rich Guy do do the excess investing. Putting that power into the hands of foreign rich rarely results in your nation having a large creation of a wealth creating class). Thus we saw large gains in investment under Stalin in Russia and even in China today under the Central Committee.
But Socialism has the same problems of wealth concentration and the conflict with immediate consumption desires. It just makes “The Rich Evil Bastard” the head of the government. Personally, having ONE Evil Bastard (or Evil Bastard Party) owning everything and living a life of great power and advantage does not look like much of an improvement to me. IF the Socialism tries to fix that via ‘enough’ democratic power, it eventually decays into over consumption and under investment. Along the way you end up with the same ‘income disparity’ as under capitalism, but via who has the most Political Skill and can kiss up the right people enough to get the right government position. This often leads to bad investment decisions that are politically beneficial to the individuals. So then you have the same ‘disparity’ but with even worse investment decisions. While it’s easy in the early stages for a Stalin to say “make more steel mills”, it is much harder for them to envision cell phones obsoleting their whole telephone infrastructure, and even harder for them make that choice of ‘creative destruction’.
The end result is that Central Planning in Socialism (either in the Communist form or in the Fascist form) works well in early stages of economic growth when massive underinvestment is the problem and which investment isn’t a very important question; but it does not work nearly so well in developed economies where you absolutely need those unexpected ‘bright ideas’ that are politically hard, but economically smart. Also, over time, the Central Authority is subject to “power corrupts and absolute power corrupts absolutely”. The dynastic power forms, but via political means, and without much competition to assure it’s the better decision making and not just the most ruthless. So most Socialisms have ended in tyranny or underinvestment / poor investment. (The “National Socialisms” like Fascism in Italy and Nazism in Germany headed more into tryanny – though Stalin was rather a bit of a tyrant too. The USSR and Mao’s China were incredibly stupid on investments in economic growth.)
The “answer” to this has been proposed as “Market Socialism”. Where there’s a whole zoo of different variations. The whole idea being to have “managed markets” or “regulated markets” where the best of market forces are kept in play (so competition moves things along to better investment choices) yet under the thumb of Central Planners (sometime called Government Regulators…) to prevent too much disruption and too much exploitation “of the people”. While this has some very good advantages, it still ‘has issues’.
The prototypical form of this is Lange Type Socialism. At the most modest, it is called “The Mixed Economy” (as pushed by Samuelson – and the form of Economics in which I was most indoctrinated). The whole idea in Lange Type is that major industries, like steel, are pretty well obvious in what to do and there isn’t much reason to leave it owned by some private wealthy Evil Bastard, who will largely just use it as a cash cow to dominate other industries. So we make it owned ‘by the people’. But leave the average hot dog cart and shoe store in private hands (since, presumably, they make better decisions about their local clients and a Central Committee is less likely to know that the locals like a special mustard on their Polish Dog…)
There are a host of problems here. The question of “are they less than the alternatives of Communism and Capitalism” are hard to answer. IMHO, there’s an existence proof that it beats Communism once past the basic investment decision level rising out of poverty. The history in Germany, Italy, even in post-Mao China all argue for it being a fairly effective system. (The USSR stands out as a spectacular example of how Communism stagnates and fails once past the ‘steel, concrete, and rails’ phase. Similarly Mao’s China and the current North Koreans). For Capitalism, we also know that unbridled Free Markets lead to the domination of a few (very few in most cases) families with great dynastic wealth. The ‘limit case’ shows up in Monarchy where both money and political power are concentrated in one set of hands. Over history, we’ve tried to split political power from monetary. That, then, resulted in the USA and the Robber Barron era. Very effective economic growth, but with the formation of family dynastic wealth that persists to this day. (Rockefellers anyone?…)
So the USA put in place a lot of anti-trust and anti-monopoly laws, put in place an income tax and inheritance tax (and a load of other taxes) and we ended up with the “mixed economy”. Then began the growth of the Regulation Nation.
And that, IMHO, points up the major “problem” with the mixed economy spectrum into the Lange Type Socialism.
There is a very fuzzy line between ‘regulated capitalism with progressive taxes and laws’ and “Central Planning Socialism”.
So we end up with ongoing fights between the private capital owners and the public regulators / taxers.
On the one hand, that can reduce private investment and lead to under-investment and under-invention. A Central Planned Economy will suppress (either deliberately or by ‘accident’) such things as the creation of cell phones and mp3 downloads. The direct suppression will come from things like The Communications Commissar who doesn’t want a threat to his authority. The more indirect comes from simply having things like, say, a “regulation” stating that “all telephones must be connected to the network via a 2 twisted pair wire of 16 gauge”. How can you have a ‘cell phone’ without wires when the Law requires wires? You end up in ‘catch 22’ situations where you can’t make a company due to the law, and can’t change the law due to ‘no market’ or ‘no demand’ (yet). ONE of the advantages of a ‘free market’ is that the individual can say “up yours!” and just start making cell phones.
Yet somehow we need to prevent things like Monsanto dumping PCBs that can make them a lot of money, but at the expense of making a lot of other folks sick. Unfortunately, the history of Socialism has been that the Central Commissar Of Chemicals is often just as willing to dump toxic chemicals into the environment that makes folks sick. Basically. the “Evil Bastard” is not made any less evil if acting out of Political Greed instead of Economic Greed.
The “hard bit” is finding a way to let the “Free Market” run, and gore whatever established ox needs goring, while still having enough “regulation” to prevent the Evil Bastards of the world from sticking it to US. Attempts to do this via Government Regulation are only partly successful. Private Corporations come to dominate the regulatory bodies and turn them to private purposes. So, for example, Monsanto has had a large ‘turn over’ of people between them and the regulatory agencies. They also fund a lot of political campaigns. The result is that they have effectively bought the right to patent life, owning the very stuff of life, and getting the regulations they want (essentially no limit on GMO foods).
Similarly, GE has moved to dominance in light bulbs via the “Green Bulb” movement ban on cheap bulbs. About 4 years back, there were 3 or 4 major bulb vendors on the shelves, with the typical bulb about 20 cents. (I bought many for inventory…) As the incandescents were so cheap, the “curly bulbs” were not selling well at $5 to $10 each. “Subsidy” was applied and even at $1 each, they didn’t sell all that well. ( I also bought an inventory on ‘subsidy’ for $1 to 50 cents each. I now have a lifetime supply of bulbs ;-) So GE started pushing for a lightbulb ban law. And got it. Now if you go into Target, or heck, even Walmart, the lightbulb section is substantially the “GE section”. Only a very small token non-GE part remains. Gone are all the “subsidy” curly bulbs (so Lights Of America was not found on my last trip to Walmart – despite having bought most of my inventory there as L.O.A. bulbs) but a large section of GE bulbs at $5 to $10 each was on display. Similarly a visit to the local Lucky’s Grocery store has been interesting. The “light bulb” section has shrunk from about 12 linear feet of 5 foot tall shelving to about 3 to 4 feet (and about 1/3 of THAT is non-bulb electrical things like drop cords and such). Gone are several vendors and their products. In essence, GE has now bought less competition and much better profit margin via influencing the regulations to their benefit.
Is that a “good thing”? Well, if you like paying $5 for light bulbs, I suppose it is… If you like NOT having choice. A ‘curly bulb’ can take 5 minutes to warm up and produce full brightness. It also has a limited number of ‘starts’. So a ‘bad choice’ for things like closets where you want instant light for about 30 seconds, many times a day. A 19 cent incandescent is a much better economic decision in that case. Similarly, a ‘yard light’ for security lighting needs fast brightness and often benefits greatly from NOT dumping mercury on the ground when broken – as ‘bad folks’ often did at one rental – making a ‘hazardous waste’ zone. If you are a GE stockholder, it’s likely a ‘good thing’ too. But for the average poor person buying a light bulb, it’s a very bad result.
So those are a couple of examples of “how it goes bad” when you attempt to use regulation and Central Planning. Largely as ways to patch around problems in Capitalism while still avoiding the bigger problems of Socialism. We need some regulation, but with a light hand. Certainly guarded against corporate influence pedaling. I can’t answer how to get that part done here, but realize ‘it is an issue’. But what about the wealth concentration ‘problem’? Could we reduce that focused concentration and the political influence it buys?
The Immodest Suggestion
So we’ve now got a full blown Progressive Socialist as President, elected for a second term by The People (so clearly that’s what they want).
Is there any way to solve some of the wealth concentration and dynastic wealth problems without a slide into full blow Socialism?
IMHO, the major problems with the present system are based on two points. First, concentration on income instead of wealth and second, use of death as a triggering event. A third point is the exemption of Corporations from much of this nonsense since they “never die”. So there’s a lot of incentive to wash things through the corporate form.
It looks to me like the answer is just to address those point ‘head on’.
First off, why wait for death to redistribute? The idea is to let the wealth accumulate to get more total investment. That if you just take it away during life, there isn’t much incentive to create it in the first place. So we tax ‘income’ in a progressive way, but leave wealth taxing for the dying point. Why wait?
So I’d propose a “wealth tax” based on “what you own”. Make it low, like say 2% / year. That way it doesn’t wipe someone out once they ‘retire’, and does let wealth grow, but helps to prevent dynastic wealth and helps to prevent the ‘point event’ problem. Any decent investments ought to be yielding more than 2% anyway, so the only folks this would ‘wipe out’ are the ones making bad investment decisions. The incentive will be to make only those investments that yield more than 2%, so we ought to get more investment into better yielding productive areas. At 2% a year, there are a couple of nice effects. First, it takes more than a lifetime to tax it all away. Second, as it is a percentage, the most wealthy pay more and as your wealth dissipates, it is 2% of an every smaller pool, so your taxes drop. You are never taxed to poverty, only to less wealthy. Also, I’d add a simple “progressive” aspect. Anyone with less than ‘the average wealth’ would pay no tax. Only those with ‘above average wealth’ get to fund the system that is making them wealthy. As soon as you drop below the 50% percentile of wealth, you too get a free ride.
Since it doesn’t matter when you give the wealth to the kids, it eliminates a whole lot of that dynastic planning dislocation. In fact, as long as they are ‘below the average’ you can shelter wealth by giving it to them.
Now I’d also remove the corporate exemption. MOST of America is owned by corporations. Why should THEY get a ‘free ride’ on the wealth hoarding issue? Any company that can’t make more than 2% ought to be finding something else to do anyway. Those making more than 2% can continue to grow nicely, so we’ll continue to get wealth creation. All the ‘corporate shelters’ evaporate as moving the money into a non-growing company doesn’t gain you anything. Oh, and no exemption for “charities”. They, too, need to pay some of the costs of the rest of us. As the money will be used by the government to do “good things” and the poor are not paying for them, it’s a kind of charitable expenditure anyway …
In this way the biggest concentrations of wealth can be properly redistributed to public goods, while leaving plenty of incentive to wealth creation (in fact, focusing it into the 2%+ better areas) and getting rid of a lot of unproductive ‘make work’ tax dodge activity.
I’d eliminate the death tax in this context. In that way you don’t have the dislocations of the ‘point events’. A large family farm can keep on being a large family farm (as long as it can produce more than 2% per year of gain) and folks know each year how much ‘bite’ to prepare for. As there are no exemptions or legal manipulations, there’s no need for all the millions of hours of labor that go into ‘estate planning’ and lawyers and accountants. Just one number, the average wealth of every ‘person’ in the country, needs be published once a year. If above that, you pay 2%. If below that, you don’t. ( I’ll leave it for others to decide if you ought to get a cheque if below that cut off, or just a ‘free ride’ on the system…)
Over time, those “foundations” and “charities” that have a large endowment, but invest badly, will decrease. Those that invest at better than 2% gains will continue to grow (and pay ever higher ‘wealth tax’, as they ought). Those people who are creating massive wealth gains (like Gates did, or like all the folks who make money on the IPO of Facebook) can still gain loads of wealth on those events (but slowly be taxed back to ‘average’ over 50 years or so if not continuing to be productive).
We continue the advantages of wealth concentration and propensity to invest, but focus it more accurately. We removed a lot of ‘dead weight’ costs from the death tax. We eliminate the ‘point event’ dislocations and we eliminate the ‘corporate exemption’ (why ought ‘un-natural persons’ be advantaged over natural persons?) While allowing plenty of wealth to be created, we still provide a good supply to be ‘redistributed’ to those who are most in need. 2% / year is a load of money. Realize there’s a lot more wealth than there is income… Speaking of which, I could see a very good case for elimination of the income tax. It, mostly, prevents folks at the bottom (who MUST live off of income) from getting ahead via saving and investing it. Since, once they are ‘above average wealth’ we start taxing that anyway, why not let income be free of taxation? Now the ‘least wealthy’ but bright can accumulate their income as ‘petty capitalists’ until such time as they, too, become wealthy. Over time, an ever larger wealthy cohort of folks will form at the ‘just above average’ point.
The end result of this would be ‘most folks just above average wealth’. The exceptionally wealthy and the obscenely wealthy corporations and foundations would be paying most of the costs of the ‘game’ they are winning. The poor get a free ride. The ‘Middle Class’ get a low cost ride until they are ‘above average wealth’, and then get to start paying too. Folks can still ‘strike it big’, yet have an incentive to ‘outperform 2%’ even in pedantic investments. So ongoing investment incentive remains. Yet the dynastic wealth and power games, along with the Death Tax Dodge games also end.
That’s my proposed solution to our Socialist Dilemma. Since we are now firmly on the track to a Socialist System, might as well look for ways to avoid the bad things of other Socialisms while exploiting the benefits. Leave most investment in the hands of capitalists, competing with each other. Regulate, but minimally. (I’d eliminate the ability of corporations to make campaign contributions or lobby congress, but that’s just me. Frankly, it ought not make much difference if the Rockefeller’s write the check personally, or via their ‘foundation’, or via a corporation they own. Once the incentives to ‘wash’ the money through corporations via their infinite life are removed, then there’s less need for corporate funding of campaigns anyway.) And have the system ‘somewhat progressive’ in that the poor don’t have to ‘pay to lose’ while the rich have to ‘pay to win’.
The 2% hurdle rate is low enough that it ought not discourage investment, invention, and risk taking to any significant degree. The losses from “badly investing wealthy folks” ought to be more than made up by ‘better investing poor people’ who are not now burdened by income taxes and the lack of corporate advantages.
In the end, all of society ought to be lifted up at a reasonable rate, while letting the poorer folks be lifted faster while the richer are not too heavily burdened.
That’s the best solution I’ve been able to think up so far. So kick it around… Since we’re going to be stuck in this Socialist Trap for at least a generation (that’s how long it seems to take to go from this point to ‘revolt’) we might as well try to find the best way to make it comfortable.
Oh. and this is only about 1/2 sarc…
Update: Just don’t call it The Smith Tax ;-)