Income Inequality: One of the Ways to Help Wreck an Economy

“Give a man fish. Feed him for a day. Teach a man to fish. Feed for a longtime.” Spanish proverb.

How can we help the people who aren’t keeping up, who are slipping into poverty? The politically popular answer these days is to demand policies of income equality. The latter will be achieved, supporters of this misguided policy say, by railing against income inequality and taxing the rich much more. So, with the government acting as a Robin Hood middle man, taking from Peter, who is successful, and giving it to Paul, who is not successful.

(By the way, we have been down this road before. At one point, in post-World War II America, we actually had some highly paid people who were in the 91 percent tax bracket. They reached a certain point and were only able to keep nine cents on each extra dollar they made. What happened? Many of them would stop working for the rest of the year, removing their talents from the economy. The Kennedy-Johnson tax cuts in the early 1960s started to reverse that madness).

Of course, taking property from one to give to another inevitably leads to bigger government because middle men usually charge a lot. It is uncanny how so much bigger expensive government programs, usually burdened with outrageous administrative costs, never seem to achieve their goals of helping the poor. And the byproduct of taxing the rich—however, one wants to define them and there is a tremendous difference in achieving wealth in America in New York City as opposed to a Middle America place such as Peoria, Illinois—is that then the rich don’t generate as many jobs, many of which, in good times, go to people who are working their way up; people like me forty-five years or so ago who were just getting started.

Robin Hood Hurts the Poor

So the unintended consequences of enacting Robin Hood policies are that the economy, or some part of it, is not as productive as it could be under a regime of low taxes. This is very important for all of us, but especially those at the bottom rungs.

Let’s say GDP in the United States grows at an annual rate of one percent instead of three percent, which is certainly achieved under enlightened policies. In the three percent scenario, millions more people get jobs, often people like Gregory Bresiger in his early 20s, as I was some 40 years and 40 pounds ago. That was a time when I was just trying to hack out a living as a reporter.

Those Lousy Rich People!

But people who rail against income inequality often don’t think seriously about how pulling down the rich—or the people who happen to be rich today but in a free society won’t necessarily be rich tomorrow—won’t help the poor. That is no matter how well this Robin Hood policy plays with mainstream media people, people who tend to drink up every drop of it, then ask for another bottle of this political moonshine.

An example of this let’s tax the rich and go after an unpopular industry perceived as outrageously wealthy is happening here in New York. The Empire State’s junior U.S. senator now favors a new charge on a major local industry, an industry she was once a great friend of since it employs many of her constituents.

New York Senator Kristen Gillibrand is supporting a securities transaction tax (STT) proposal backed by Vermont Senator Bernie Sanders. However, she faces criticism from the Tax Foundation and others.

The tax, which has been proposed and defeated several previous times, has been called a progressive measure. Advocates say the tax is a good idea because it is relatively small and could be spread across a broad investor base. That means it could hurt small investors, people just starting out on an investment program as I was some 25 years ago, as well as those with considerable assets.

The Greatest Risk?

In recently arguing for the so-called Robin Hood tax, which would add .03 percent on every securities trade, Gillibrand said that “the greatest risk we have to our democracy now is income inequality.”

Maybe. But it would also hurt slow the ability of our economy to create more jobs for the people Gillibrand supposedly wants to help. Indeed, a 2011 study by the Congressional Budget Office found a STT, “would raise the cost of financing new investment.”

And the Tax Foundation called Gillibrand’s backing of the financial transaction tax plan, “a retread of bad ideas.” In theory, the Foundation conceded, the tax would “raise significant revenue while not hurting the economy too much.”

Still the Tax Foundation warned that a financial transactions tax would “distort asset markets, as types of securities traded more frequently would be taxed much more than assets traded less frequently.” Investors, it adds, would hold on to securities for longer periods to avoid the tax.

However, the senator, in a prepared statement, said she supports the tax. She said it will help the economy grow. It is an idea, she added, “that has worked in other countries.”

The latter comment is highly debatable. Gillibrand also contends the STT “is one example of how Congress can ensure that we reward companies that reward work, not hedge funds using high frequency trading.”

The Senator Changes

The senator’s embrace of the tax comes as a surprise to some in the securities industry. In 2011 she came to its defense when she argued, along with other New York lawmakers including Senator Charles Schumer, that regulators should reconsider new derivatives rules.

But many critics say a securities tax is a bad idea. Ultimately, a STT “decreases liquidity and increases transaction costs,” the Tax Foundation said.

The securities industry, through its major trade organizations, also objects. It contends that a STT hurts the economy and individuals.

“We believe they being directly passed on to them or in the lower performance on their investment vehicles which are impacted by this cost,” according to Jim Toes, President and CEO of the Security Traders Association.

“The allure of a tax on securities transaction may sound good to some policy makers,” says Kenneth Bentsen, President and CEO of SIFMA, “but the policy outcomes have nearly always been negative.”

Bentsen argues that taxes on trades “have always led to higher costs for investors and retirement savers, far less revenue than projected, and unnecessary barriers to investment that reduce market liquidity and raise the cost of capital.”

“Raising My Costs? O.K., I Raise the Price”

The economic burden of an STT, or any other tax, on corporations is always zero, but there’s a caveat. Corporations are legal, not physical, entities. They are established to serve the best interests of shareholders. As such, corporations themselves are not the beneficiaries of their profits.

Rather, the corporation’s owners benefit from the profits. Other individuals, such as employees or consumers, might also benefit from corporation’s activities. Thus, the cost of an STT imposed on the transactions by corporate entities would ultimately be passed onto individual taxpayers: the corporation’s owners, its workforce, its customers, or its suppliers.

So we all pay one way or the another because we are all part of the economy. Customers of the firm pay higher prices for their products. The buyers obtain fewer of the products or maybe they stop buying any. Fewer sales mean fewer jobs. New workers aren’t hired and maybe some veteran workers are fired because products are too pricy and profits disappear or sag. Shareholders see less in capital gains or dividends. Fewer people want to invest in the company, which was hurt by a chain reaction to higher prices. A lot of people who are hurt don’t understand what is going on.

What You Don’t See Can Hurt You

The cost of a STT to individual taxpayers may be hidden. Individuals typically trade through brokers, who might not state the tax explicitly, but rather incorporate it in a trading fee. This “invisibility” of the tax might make it more politically attractive to some.

But invisible or not, everyone pays. If your favorite store has a higher cost because of a tax, then you will pay more for its services. The problem is lawmakers like Gillibrand never understood the adage made famous by Professor Milton Friedman: “There is no such thing as a free lunch.”

So how do people advance, besides working hard, which happens when government is taking more of our product?

Create Your Own Income Equality

People advance not through tax gimmicks designed to take from one group and give to another along with big government programs that are great for the people who administer them but no one else. People improve their fortunes through old-time principles of thrift, sensible spending, regular saving and investing.

These were the ideas of our grandparents. Many of them came to this country with little more than the clothes on their backs (You can count the Bresigers among those. They were people who were poor and were refugees of the collapsing Hapsburg Empire. They settled in a poor section of the East Side of Manhattan around World War I).

Somehow, for millions of Americans who expect the government to rescue them, those ideas of self-help have been lost. They certainly aren’t taught in state schools where even basic money management is rarely on the menu.

It is time for us to give these ideas of self-improvement a rebirth. It is one of the reasons that GregoryBresiger.com is here.