In chapter three of The Road to Freedom, Arthur Brooks points out that many of his students at Syracuse University believed that the government should redistribute wealth from rich to poor. Brooks proposed to the students the following idea. He would “take a quarter of the points earned by the top half of the class and pass them on to the students in the lower half of the class.” Despite their support for wealth redistribution, the students “were in unanimous agreement that this was a stupid idea.” Of course, but what’s the difference between grade-point redistribution and wealth distribution? If redistributing GPAs is wrong, doesn’t it follow that redistributing wealth is also wrong?
Turns out that Brooks is not alone in making this analogy, and many students have taken the opportunity to post amusing Youtube videos in which their fellow students struggle to explain why they support redistribution of wealth but not GPAs.
The GPA analogy must have hit a nerve, because “progressive” students got out their video cameras to make responses. Check out this reply by the young tax experts at something called TYT (The Young Turks) University.
To the best we can discern, the young people in this video make two main points.
First, the top 1% of rich people are not paying their fair share of taxes, as evinced by the fact that Mitt Romney paid only 13% of his income, while middle-class people typically have to pay a higher rate.
We agree that rich people should pay more in taxes than should middle-class or poor people. But the U.S. tax code is already very progressive. The top 1% of earners account for more than one-third of the income-tax revenue, and the top 10% account for more than one-half.
Furthermore, the 13% figure is grossly misleading. As the Young Turks themselves acknowledge, Romney’s tax rate was relatively low because the vast majority of his income was derived from investments, which are taxed at 15%, lower than the rate on “ordinary” income. What the Young Turks probably don’t realize is that there was a time, years ago, in this country when investment income was in fact taxed at a rate similar to that on ordinary income. That policy didn’t work out very well because the tax deterred investment and didn’t do much to generate revenue. As a result, something like a bipartisan consensus formed to tax investment income–dividends and capital gains–at a lower rate.
Nevertheless, it is not true that investors like Romney are taxed at only 15%, and that is because taxing investment income amounts to double taxation. The money that investors use to purchase securities comes from after-tax income. The money that Romney invested was already taxed–as ordinary income–at the time that he first earned it. If he had immediately blown the money he earned on hookers and booze, he would have owed no further tax. That’s because current consumption is taxed only once. But since Romney invested the money instead of spending it, he’s taxed again. Future consumption is taxed more than once, which creates a distortion and an inefficiency. It follows that the efficient tax rate on investment income is (approximately) ZERO, which happens to be the actual rate in Japan. The Young Turks think 15% is too low, but in fact the rate should be near zero!
Future consumption, however, is not just double taxed, it is triple taxed. That’s because, before the corporations get around to paying Romney his dividends, they must first pay the corporate income tax. At 35%, the U.S. has one of the highest corporate income tax rates of any country in the world. The tax accountants, however, usually find enough deductions so that corporations pay on average about 25%. Still, that means that Romney’s dividends were already taxed at 25% before being payed out to him, and then taxed another 15% when he received them. The combined effect of these taxes is 36.25%, and again, this falls on top of the taxes Romney already paid during the year in which he first saved the money.
Maybe the Young Turks should learn something about our tax system before they upload their thoughts about it to youtube.
The second major point the Turks try to make is that competition in the marketplace, unlike competition for school grades, is fundamentally unfair. Indeed, the female Turk argues that “the 1%” are “mostly bankers” who got rich by “cheating” or otherwise doing unspecified things “that society frowns upon,” and so they do not “deserve” the money that they have. The male Turk then uses bribery as a metaphor to describe how the rich got rich. In short, the whole system, according to the Turks, is rigged.
But can this be true? Did Henry Ford get rich by bribery, or by revolutionizing the auto industry? Did Bill Gates get rich by bribery, or by revolutionizing the computer industry? Was Steve Jobs a crooked banker? Look, nobody said life was fair, and we can always dig up examples of people trying to gain unfair advantage by engaging in various shenanigans. The fact remains, however, that our largely (for now) market-oriented system does, for the most part, reward hard work and ingenuity.
We do find it disturbing that young people in particular should argue that the system is rigged and opportunity a mirage. Young people, with the chance before them to shape their entire adult lives, should be optimistically planning and pursuing their dreams, not whining about how the deck is hopelessly stacked against them. For this failure, some of the blame must be assigned to the schools.
Furthermore, even if we accept the Young Turk argument that people are cheating, how does this justify redistribution? For instance, to pursue their own metaphor, suppose that some people were obtaining high grades by resorting to bribery. In that case, would the obvious solution be to redistribute grades by giving extra marks to those who have not earned them, and in the process perhaps also taking marks away from those who did earn them? Or would the proper response be to, you know, put a stop to the bribery?
And which is the economic system that eliminates getting ahead through ‘bribery’ of one sort or another? Would it be a socialistic system, where government officials have the power to determine who gets what, where, when and how? Or would it be a system of free-enterprise, where everyone is forced to earn their living by competing in the marketplace? If the Young Turks really want a “level playing field,” they should advocate for free markets.
The really interesting thing, however, is that the Turks felt compelled to argue that the rich did not earn their wealth legitimately. Inadvertently, they have effectively conceded the point that wealth earned legitimately should not be redistributed. Since different people have widely varying willingness and abilities to legitimately create wealth, it follows that wide disparities of wealth can exist without justifying distribution, just as wide disparities exist in GPAs. That was indeed the exact point that the GPA analogy was intended to make. As the kids say, “Game over.”
We cannot conclude this post, however, without noting Female Turk’s really jaw-dropping argument that the way the rich “give people opportunities” is by “paying taxes.” Oh, is that where opportunity comes from? Gosh, all these years we thought that rich people gave opportunities by starting and expanding businesses and thereby creating jobs.
Female Turk–another proud product of modern America’s schools.