On Income Redistribution

The phrases “income redistribution” and “socialism” are thrown around by clueless people a lot these days. Any tax system that has a welfare component probably qualifies as income redistribution so the fact that it already exists in this country shouldn’t surprise anyone. At the other extreme is the Soviet system where the Government kept 100% of the GDP and then redistributed part of it back to the citizens in the form of wages, pensions, subsidized consumer goods prices, free education and health care, etc. In between, there are many countries that struck a certain balance between the socialist and free market economies. What constitutes a good balance is still open for discussion.

Unlike many people who carefully counted other people’s money and decided that they have too much, I am a firm believer that in the market economy everyone it worth exactly what they earn and if they earn it, they should be able to keep their income and pay some reasonable amount of taxes to pay for the infrastructure, defense and certain social services.

Granted, the Soviet Union looked great from the outside, every citizen was taken care of with free social services, 30-day vacations, free or cheap childcare, summer camps for the children, subsidized trips to resorts, cheap food and consumer goods but it was achieved by keeping everyone borderline poor, with many people living in medieval conditions, WWII-era equipped hospitals, ugly, ill-conceived, unusable merchandise that wasn’t always available. Add to that food shortages, long lines everywhere and inability to do anything without prior government approval and you may see why the life behind the Iron Curtain wasn’t so peachy. I think the weakest link in the Soviet system was their attempt to remove normal human greed from the economic equation. The ideal was, of course, that the people will get motivated because they loved their country. After that didn’t work out, various other means were tried out from the New Economic Policy to confiscations and labor camps. People realized that if they can’t achieve anything within the system they were going to do it outside of the system. Soviet Union had probably the biggest shadow economy ever known, as well as the most corrupt population in the world, where everyone from a clerk, to militiamen, to doctors, teachers and government officials accepted and oftentimes demanded bribes. But even if a certain Soviet citizen somehow managed to amass a fortune he would have a hard time spending it without attracting unwanted attention from the government or from fellow concerned citizens who were busy watching out for anyone stupid enough to get ahead. A very famous Soviet-era satirical book “The Little Golden Calf” featured a character who had a suitcase full of money but was forced to live without spending any of it, once a week reuniting with his wealth at the storage.

On the other hand, Sweden is often cited as a triumph of the socialist system but even they had to adjust when it was realized that stifling entrepreneurship with high taxes led to the loss of employment and shrinkage of the GDP. Many would argue that Swedish system is not sustainable and is a myth, for an even-handed article you may want to read this one from Forbes. I think that a very important component of the Swedish model is their ability to control immigration. This way they concentrate on providing social services to their citizens.

This country somehow managed to avoid all-out income redistribution by trying to keep the people content with what they earn, convincing them the opportunity awaits if you work hard and not take any shortcuts, and selling a tempting vision of the American Dream. Theoretically many people had the same opportunity as Steve Jobs, Warren Buffet or 2 guys who invented Google, but not everyone has talent, drive or desire to take the risk, all mixed with luck which are all needed to succeed. Short of winning the lottery, the best way to get one’s hands on other people’s money is to vote. There are many rationalizations on why this is fair or how paying taxes is patriotic and the right thing to do, but most of the people who say that made sure that they are not the ones affected, instead, just like the Soviet citizens in the past they will be making sure that the other people don’t get ahead.

I am pretty sure that anything I say (or ever said) will not change anyone’s mind. Over $600 million invested in Obama’s candidacy will be repaid many-fold with the other people’s money, and to paraphrase the Communist Party’s statement “the eye is on the prize”. Make no mistake, while millions of people shed tears of joy at the rallies, someone is already calculating the profits. To be fair, the same exact process only with a more grotesque set of candidates is going on on the other side of the aisle. People will adapt, I can see a lot more taxpayers making $249,999.99 in the near future; why bother making that extra dollar if you only get to keep fifty cents. Many others will still keep doing what they are doing. Entrepreneurship doesn’t die, it just goes undercover and dedicates itself to undermining the system that’s trying to stifle it. I may sound alarmist, but 80 years ago people in Russia, the biggest grain exporter in the world wouldn’t believe that their children would be standing in bread lines.

There is still a bright side to all of this. On the Election day it would be decided by a vote, instead of this:

  • Joe

    I agree with you. Government cannot stifle people’s need to get ahead in life. Not everyone has the need to get ahead, we have millions on the dole in this country. But, we have millions upon millions more who strive every day to get ahead. Some of us are good at it and some of us aren’t as good. I know I’ve failed at a start up once, but I’ve worked a ton of OT at my job to make more money. Stifling that only drives it underground.

  • Doc

    “People will adapt, I can see a lot more taxpayers making $249,999.99 in the near future; why bother making that extra dollar if you only get to keep fifty cents. ”

    Like much else in life, ‘a lot more taxpayers’ is relative.

    The current U.S. poulation is estimated at 305 million. The number of households grossing $250 grand per annum is -at last count- just at 1 in 60.

    That works out to about 5.1 million households that currently would be subject to Sen. Obama’s proposed tax. As the majority of thee people amssed their gross through 2 or more income streams, my best guess is that you idea will hold little water: they aren’t in control of their income except as it relates to hours worked in a week.

    Of that est. 5.1 mil households, 1,324,000 individuals reported incomes above $250,000 according to the latest U.S. census.

    And who are these people? Well, the stats aren’t discrete enough to pinpoint each and every one of them, but group classification was easy enough. They comprise of the following:

    Investment brokers and speculators, entertainers , athletes, corporate CEOs, health care professionals (including high level administrators) and attorneys, marketing/sales professionals, and, of course, the wealthy. as in, ‘family money’. you know, passed down from generation to generation? after being – in many, if not most cases- obtained though extra-legal means (the Kennedy’s and the Mellon’s come immediately to mind). not that there’s anything wrong with that…

    ; ‘ )

    In fact, the wealthy make up half of this 1.3 mil group.

    So…

    The wealthy aren’t going to drop in income. If anything, they’ll use the latest tax dodge or simply move their lucre off-shore.

    That leaves roughly 800,000 individuals possibly affected by Sen. Obama’s proposal.

    I don’t give a rat’s whisker whether or not Barry Bonds has to pay higher taxes. Nor am I upset that my realtor – who, in a rigged game that I almost have to use ,garners 6% of my house sale- is taxed more. I am also unmoved that attorneys and medical administrators, who have managed to put affordable health care beyond the reach of most people, will be dunned more. Don’t even start with me on the stockbokers and that ilk.

    If all the above worthies start earning a little less, that will be reflected in the fees they charge, which should transfer cash to the other 98% of us in a classic reverse trickle-down instance. The more I think of it the more I am amused.

    This is not an issue that would have any but a positive effect upon the majority of the populace, regardless of how you choose to brand it.

    As for the poor SOBs who would have to cede another 4% of their income to the common weal, let them all eat cake. Or not, I could care less.

  • Burrowowl

    Regarding the argument that successful people won’t work if they have to pay 50% of their additional income in taxes: Bullshit.

    First, nobody currently running for President is proposing a 50% tax rate on income. Nobody. 50% is a straw man.

    Second, there are all kinds of things the presidential candidates want to do that cost money. Obama wants to fund all manner of programs, ostensibly to help people get by and move ahead better. McCain’s got a lot of wars he wants us fighting, and all those high-tech weapons cost a lot of money. That money needs to come from somewhere in either case. So where does it come from? Taxing the poor makes no sense; they don’t have much money. Just printing more money doesn’t make much sense; German 1920’s-style inflation comes to mind. That leaves taxing the people that have money. This isn’t saying they’re too rich, not saying they have too much. It’s just to say that they can afford it. Nobody making over $250,000 a year is going to have his kids go hungry because he only got to keep %60 of his 250,001st dollar.

    Third, while raw income is a great motivator, one that we all understand, sympathize with, and share, it is not the only reason that successful, highly-productive people are successful and highly-productive. There’s also a lot of prestige, pride, and intrinsic value that helps motivate these people. From the high-earners I know, they are primarily motivated by an intense desire to excel in their fields. The money is a byproduct of that, a symptom more than a primary cause. People that are just about to start up a business and say “naw, I don’t wanna pay taxes on the untold riches I’ll accrue” and go back to their crappy jobs are not the people that would have made it.

    I’m sure there’s some breaking point at which taxation in itself truly stifles business. The commies stepped way over that line, obviously, but I don’t think McCain or Obama are proposing we get anywhere near it.

  • I disagree: 1. what prevents the voters from raising taxes or lowering the limits the next time – nothing and (I believe) it will happen. 2. Russians who are a lot better at screwing the system there or here just ended up paying part of the wages in cash. If a person feels that his/her money is unfairly distributed – escaping taxation becomes a goal. My own example- long time ago I worked for low wages , 2 jobs to support my family, while in the other family I knew the husband was working for cash and receiving everything from foodstamps to free baby-food, so much that they couldn’t use it all and gave some back to me. I am still pissed 10 years later. 3. If you are on unemployment which amounts to $10/hr and you are getting a job offer for $10.01 would you take it because of pride or just sit at home and collect the checks. I agree you wouldn’t stop doing your business if you income is much higher than the bracket, but if it’s only slightly (i.e. 50K) higher you may decide that it’s not worth the effort. My view on this is that income redistribution approach will be tried out and it may or may not be successful, the problem is if the people who run the country will have the balls to change direction if needed (like they did in Sweden), from what I’ve seen so far no one has the balls to do anything that will hurt their chances of re-election. And the reason is illustrated by Doc: these people are not us; we don’t like them anyway to fuck’em.

  • travel

    Thank you, Meesha, for sharing the benefit of your experience living under communism with us. We may not be headed for communism, but we will definitely be headed in a new direction that defeats ambition. I have a couple of Canadian friends who can attest to that.

    And, one other thing I’d point out is that $250K for a family may sound pretty good today, but not so wonderful 10-15 years from now. Look only to the altenative minimum tax to see what a problem that has become. At the time it was conceived it was supposed to only hit “the rich” but now it hits many of us “ordinary” folk and the government is in a real pickle because they have come to rely on it.

  • Grace

    What Doc said. And said well too!

  • Burrowowl

    Seriously, folks: do any of you think that a 39.6% rate on income after $250,000 is going to kill our economy? Anybody at all? Keep in mind that after about $102,000 there’s no social security tax, so don’t factor in that assumed 6.5% that you think about in regards to your own peasant wages.

    Would it be better to set everybody’s tax rate to… what? What’s an acceptable tax rate? 11%? 2%? Let people just voluntarily pay into whatever programs they think are appropriate? Various churches to pretty well on a voluntary tithe system. Maybe we could run the federal government that way? Pass the place every April 15th and hope we can pay our soldiers?

    I get the impression that most people who are overreacting to a comment about spreading the wealth around are just reluctant to pony up.

  • Burrowowl

    Plate. Pass the plate. I hate typing sometimes.

  • travel

    Burrow…I don’t know how old you are, but most people in their 20’s-30’s don’t make $250K as a family unit but get into your 50’s and two people who have worked for years, moved up the ladder, invested wisely, and started to become empty nesters can earn that kind of money and more together. And, it isn’t just salary we’re talking here. There are stock investments, profit sharing, etc for the investors among us and even 401K withdrawals after 59-1/2.

    But, personally I don’t believe it’s just going to stop there. There’s been plenty of talk of raising the lid on SS, limiting mortgage deductions, even eliminating the deferral for 401K’s. And, we all know you can’t add trillions of dollars of spending and not raise taxes. It just doesn’t add up. I don’t believe that $250K is going to be the magiv number. I believe it will be quite a bit lower than that.

  • Burrowowl

    @travel: sounds like you should read the candidates’ actual proposals regarding capital gains, taxes on dividends, and retirement funds instead of relying on how they’re characterized by pundits and know-it-all bloggers 🙂

    And most people in their 20’s don’t make $250,000 a year. Neither do most people in their 50’s. Or in their 60’s, or in any other age group for that matter. The median income in Kansas was $43,725 from 2002-2004 (according to the U.S. Census Bureau), $43,988 in Missouri, $49,894 here in California. $250,000 is a quantity that is pretty far beyond the means of most Americans.

    A modest increase in their taxes to help get us out of the hole we’re in isn’t punitive or crushing or any of that. It’s reasonable.

  • Joe

    Burrow, you’re right. I don’t want to pony up. I pay enough in taxes and I’m not close to the $250k we’re talking about. I see so much of my tax money wasted on silliness that it sickens me. Look at the bailout. Only when 150 billion in pork was added did it pass. So, its up to 900 billion of our tax dollars to bail out greed. Hell yes I don’t want to pony up, not for this.

  • Grace

    meesh, that’s an amazing clip. did you guys grow up watching it and what did you think at the time? i saw alexander nevsky with the prokofiev score played live at the ny philharmonic. um, boring though. i was young. but i think i’d prob still find it boring.

  • I watched enough Lenin movies for 3 lifetimes. This on is Octyabr By Eisenstein, music is from the 80’s. If I had to watch silent movies I’d stick with Charlie Chaplin. 🙂

  • Rick

    You’re a wise man, Meesha. I appreciate your perspective.