The square root of intelligence

FEMA, compassion, indignation
The beauty of choice

2012-12-02-square root

The art of taxation consists in so plucking the goose as to
obtain the largest possible amount of feathers with
the smallest possible amount of hissing
Jean Baptiste Colbert

I did not plan it this way, but this post will be a continuation of the previous one in some respects.
I tortured myself yesterday for nearly two hours listening to this debate.

The motion was as follows: “The Rich is taxed enough

Arguing for the motion: R. Glenn Hubbard & Arthur Laffer; arguing against: Robert Reich & Mark Zandi
(They also have short bios on the debate site)

I do not know how much you can expect from a project backed by NPR and Bloomberg, but this one ticked me off so much that I had to walk away from it three times. I only went back watching because it is an important subject and because I wanted to confirm what I knew after 20 minutes: ‘my side’ will lose. I was right. It did. Spectacularly.

It did not lose because of the audience. The audience was predictably on the left but if you engage yourself in a debate in front of such an audience, you should be prepared for it.
‘My side’ did not lose because  it did not have qualified debaters, and it did not lose because their arguments had no merit.
The side for the motion lost because they failed to properly frame the argument, they just kept repeating the same pragmatic point: it will not work, it will do harm.
The team against the motion won because they framed better, they were populist, because they played the audience and the other team better. They played on emotions, appealing to envy and righteous indignation. The rich have all the money and we need it more.
Both sides sounded like politicians repeating and elaborating on simple talking points and in such contests the emotional side will always win.

The pro side had three arguments:

  • The rates are already high
  • Raising the rates will not raise revenues but it will harm the economy
  • If we grow the economy, everybody will be better off

The other side argued that:

  • We really, really, really, really, really need the money and the rich have it and they can afford it
  • Everybody who matters agrees with us.
  • The rich never had it this good, we don’t have money and they do, that is why they are called the rich

The pro side was lame and tame, bending over for being allowed to the table. They made special efforts to assure their opponents that there are certain lines that they are not going to cross.
They will not question whether taxation should necessarily be part of the solution to the fiscal problems; they will not question the progressiveness of the taxation; they will not ask questions or make points that would make their opponent feel uncomfortable and they will not question the morality of the other side’s position or debating techniques. The first two they explicitly declared.

The contra side was sleazy, manipulative and evasive, simply advancing the Willy Sutton reasoning which is, basically, the only true justification for taxing the rich more than anybody else.
Willy Sutton, the bank robber was once asked why is he robbing banks. “Because that is where the money is,” he said.
Neither side was ready to address the fundamental questions. I will try to do that now making the argument for the motion.

When we ask the question whether the rich is taxed enough, we have to understand that the question has three fundamentally different components: a philosophical, an ethical and a pragmatic one. We are, in fact asking three different questions:

  • Will a tax increase on the rich achieve its stated goals? (the pragmatic question)
  • Do the rich pay their ‘fair’ share? (the ethical question)
  • Who is best equipped to make decisions about the economy: the state, or the market? (the philosophical question)

Let me address them in this reverse order leaving the most substantial question for last.

Will a tax increase on the rich achieve its stated goals?

Arthur Laffer’s claim to fame is the curve that was named after him establishing the relationship  between tax rates and tax revenues.
We are not talking about a kooky theory but one that has been well proven and analyzed to death. There are scholarly studies trying to determine what is the optimal level tax rate that will produce the highest level of revenue with the most acceptable level of harm.
There is a very real limit to how much can be taken away from the rich, as pointed out in a recent Mark Steyn article:

“….as Warren Buffett pointed out in the New York Times this week, the Forbes 400 richest Americans have a combined wealth of $1.7 trillion. That sounds a lot, and once upon a time it was. But today, if you confiscated every penny the Forbes 400 have, it would be enough to cover just over one year’s federal deficit. And after that you’re back to square one.”

Communists tried this with an incredibly consistent result. When it is tried the other way, when taxes are lowered the results are also remarkably consistent.

Gravity is a bitch. I don’t like it. I want to fly, but I will not jump off of tall buildings expecting a miracle. The conversation should, in a way, end right here. It never worked, it never will. The reasons are easy to explain, simple and logical, and there is empirical evidence to support them. Now, in an ever more globalized economy, taxing the rich is even less likely to achieve its revenue goals than in the past. The rich are mobile; capital is mobile. Excessive taxes on the rich would cause more harm than any possible benefit even if we could realize some benefits.

Think about the above quote again. The rich simply do not have enough money to satisfy the appetite of an Obama style government.
Even if it was possible to get all the money from the rich, it would not make a significant impact. What is most likely to follow is a massive rate hike on lower income groups as well.
Raising the tax rates of the rich will not solve the problem of reckless spending, it will only postpone, for a very short time, the need to face the consequences. The ONLY thing raising the tax rate on the rich will achieve is to satisfy our lowliest moral impulses: greed and envy.

Do the rich pay their ‘fair’ share?


What the rich are forced to pay is grossly unfair. It is our collective shame that so many of us are accepting the idea that forced income redistribution is the foundation of a moral society.

That the institutional robbing of Peter to pay Paul represents justice and fairness.

Picture yourself going into a bakery. You are standing there with 10 people. The baker turns to you and says:

“I have ten loafs of bread. Baking one costs me $1.80. I want to make some profit so I want to sell it for $2.00 but I am a highly moral person, a firm believer in social justice and I want to create a better world by ensuring that everybody pays a fair price for my bread. I hope you understand that I am the only baker in town, and I have the sheriff on my side to make sure that you will buy a loaf of bread from me every day. You can eat rice if you wish, but only after you bought my bread.”

Then he turns to you addressing each:

“A”, you are the richest man in town, you will pay $14.- for the bread
“B” you are also pretty well off, you can afford to pay $4
“C” & “D” –   you will get it for cost and profit – $2.- each
“E” & “F” – you will only have to pay $1,- for it
“G”& “H” – you will get it for free
“I” & “J” – in the interest of fairness and good society, you will get the bread and $ 2.- each so that you will not feel so bad about “A” having so much more money than you.

Thank you for shopping at the Bread Justice Bakery!

But WAIT! My workers just informed me that their feelings are also hurt and since I have the monopoly on bread justice, they want to have a piece of that justice too. They are already making 30% more than anybody else for similar work, but they will make it impossible for me to provide you with your daily bread unless I give them a 20% raise. In the interest of justice, and to make sure that I can keep my promises to you, starting tomorrow, “A” will have to pay $16.- for his bread.”

Would you consider this justice? If you substitute bread for one unit of government service and the dollar amount to percentages of all tax revenues paid by various income groups, this is what we already do. It is revoltingly unfair, but not in the way most of you think it is.
Even a flat tax is immoral because it means that if you make five times as much money as I do, then you have to pay five times as much for the same loaf of bread as I do.
When it comes to morality, we also have to keep in mind that the rich is not a static group, it is in fact the most volatile of ALL income groups. The narrower it is, the more volatile it  becomes. About a third of the top 0.1% only show up in that group once in their lifetime. CEOs cashing out their stock options, small business owners selling their business before retiring, etc. On those people, the proposed rate hike is punishment for a lifetime of effort. Do you consider that moral?

Who is best equipped to make decisions about the economy: the state, or the market?

The most fundamental question underlying this debate is the nature of wealth as it creates social goods. All of that rests on our concept of wealth and social goods.

What is a rich man? What does being wealthy mean? Nineteenth century communist caricatures pictured the ‘rich’ as a stocky little fat man with a cigar and a monocle in black frock with a top hat. The image may have changed, but the basic concept did not. Being rich means that you can buy another hamburger, another bottle of Dom Pérignon, another yacht or another private jet. That is what everybody envies, that is what everybody wants to take away from the rich. Why should they have another hamburger when I cannot afford it? The whole notion is, of course, both ludicrous and ignorant. There are limits to how much we can consume. Hollywood celebrities non-withstanding, there are limits to how much one can spend on personal luxuries. Most of the wealth of the rich is invested, it is making money for the future. If we take that money away, there will be less to invest, there will be less economic activity.

When we have money in our hands, there are only two things that we can do with it. Spend it or save it (saving means most of the time investing it.)
When we tax the rich, especially the ultra-rich, what we take away from them is not the extra hamburger but the power to make economic decisions. The power to decide how to invest their money. Into solar panels or drilling platforms; hospitals or sport arenas; services or manufacturing; agriculture or technology; real estate or toll roads.
The rich are also very generous when it comes to charities. Mitt Romney gives away a good chunk of his money every year. It is no accident that the biggest foundations are named after rich people. What we take away from them is the chance to find the charity where their benevolence can produce the most social good.

The questions we have to ask therefore are these:
Who can make  the best decisions about the economy? Someone who cares about the best possible economic outcome (profit, success, happy customers) or someone who has no skin in the game but strong motivation to have political gain which pretty much by definition means economic loss?

Who can make the best decisions when spending money on social goods through charities? Someone who has no self-interest because he is giving away his own money freely, or someone whose main motivation is his own welfare maintaining his job distributing the loot, the tax dollars of the rich?
To either question, the answer should be obvious.
The money we take away from the rich (or from the taxpayer in general) will end up in the hands of the distributor class with its own interests and motivations which will influence the way they are going to spend it far more than the interest of the people, the economy or the country.


The problem with this debate is that the question is wrong.

This debate is not about fairness, not about balancing the budget, not about the needs of the American people.
The question is a proxy.
A proxy for an even bigger government, a proxy for more spending, a proxy for more power to the distributor class. A proxy for Obama’s dream of turning the USA into Greece.
As long as you stand for all of the above, as long as you do not care about the adverse (crippling) effect on the economy; as long as you want capital to flee the US for friendlier jurisdictions; as long as you want to see politicians and bureaucrats making economic decisions instead of businessmen; as  long as you do not mind an overreaching corrupt and bureaucratic federal government, as long as you want to see socialism in the USA, as long as you want to see America bankrupt and losing its dominant status in the world, you must vote against the motion. You just have to understand clearly, that this is what you are voting for. Not for justice, not for fairness and DEFINITELY NOT for a solution to the fiscal problems we are facing.

If, on the other hand, you want to see a free, prosperous, dynamic and growing America as the economic, moral and cultural leader of the world, you must vote for the notion, making it clear that the source of the problem is too much spending, not insufficient revenue.

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