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Do we need the rich?

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In the midst of an emotional-charged presidential election year, each political party has a strategy to secure the presidential victory. The vilification of the rich is a common theme trumpeted in the news today. Are the rich paying their fair share? Why the increasing, growing disparity between the rich and the poor? We can debate another time whether it is the greed of the rich or the current governmental policies, intended to correct the disparity, that are actually causing more disparity than closing the gap. This column seeks to address the fundamental question: does a society need the rich?

For the sake of full disclosure, I do not belong to the 1 percent. I am in the lower middle of the 99 percent. Most likely, I will never belong to the 1 percent in my life. Yet, for the health of our society, do we need the rich?

A fixed definition of rich seems to be elusive. First, we were told those making over $250,000 a year. Then we began hearing that anyone making over $150,000 a year was rich. For the sake of discussion, you pick your definition of rich and I will be fine with that. Again, does society need people who fit into your definition of rich? Or, should all Americans be economically equal? If we were all economically equal, what would that look like? What appropriate wage level would be assigned to all equally? Also, who would determine it?

God speaks clearly about wealth. The love of money is the root of all kinds of evils, and by craving money many have caused themselves much harm (1 Timothy 6:10). Acquiring wealth through immorality is wrong (Proverbs 10:2; 21:6). Yet, wealth earned in a God-honoring way is the gift of God (Ecclesiastes 5:19). Being rich in and of itself is not evil, but, depending how a person acquired that wealth or uses that wealth, then it could be determined to be evil or good.

There have been rich and poor in the world in all ages. Often the rich have been extremely abusive, exploitive and arrogant towards the poor. That will always be wrong, in all ages.  It is a sin. Because some have sinned, does that disqualify all the rich from being beneficial to society? Do we need the rich?

Here are two ways in which the rich play an important, beneficial role in society. The rich can be thanked for the current American standard of living, which most people in America enjoy. When the first major appliances, cell phones, or flat screen TVs appeared on the market, most Americans could not afford them. The purchase price exceeded well beyond what the average person could pay. The rich were the only people who could buy them. As the rich purchased goods, manufacturers reinvested the profits, eventually making the product less expensive to purchase. If there were no rich to initially buy the expensive product, manufacturers would not have been able to produce goods at a cost at which most Americans could afford. If a manufacturer initially produced a product which most people could afford, it must of necessity be a low quality product. The rich have helped make quality products available for the average American, raising our standard of living.

The American society is built upon the division of labor. Most of us do not live on self-contained farms from which we can meet all our needs. If we all did, there would be no need for additional jobs in society to meet the needs we could not meet ourselves. We depend on others to meet some of our needs. In turn, the product of our labor meets others’ needs. Jobs are created to meet the needs of society.

Perhaps in the best possible world, we would all be self-employed and barter our services with others to meet needs that we could not meet on our own. That is not the world we live in. Most of us work for another, who compensates us for our labor. We, in turn, spend the money to purchase goods and services to meet our needs. Someone has to provide the jobs, to take the financial risk of providing a good or service. Poor people do not create jobs. Businesses create jobs.  According to the United States Census Bureau statistic from 2008, there are slightly over 11.2 million firms with 1-19 employees, employing 142,365,284 people, the majority of employed Americans. Many of these small businesses would qualify as rich according to current political definition. The rich supply the vast majority of jobs in America.

Do we need the rich? Yes, yes I think we do.

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Bruce

Is it possible for the gap between the rich and the poor to become too great as to be unhealthy for a society?

Mark Hudson

Yes, when capital shifts into the hands of the few, the probability of the few abusing and controlling the rest grows. People need to be able to keep more of what they earn (capital), so that they can grow more capital. That has been the genius of the American experiment.

Ernesto Tinajero

Dear Eric,

I appreciate your post and taking on a hot topic such as wealth. i would ask how you would respond to those that do not want to make everyone equal, but who want the wealthiest among us take more of the burden, which after all is Biblical principle by returning to the taxes of the mid-nineties, say. The so call Buffet rule, when Warren Buffet argued that having himself paying less in taxes per percentage than his secretary was indication of a structural problem. With our national tax structure (all national, state and local) the poor pay a great deal more of their income than the wealthy. Sales taxes, (very regressive tax system) income tax (capital gains taxes at a much lower rate and most of the wealthy’s income comes from these) the poor and middle class. Smart money, a publication under wall street journal umbrella, said it best in their ten things a Millionaire wont tell you, http://www.smartmoney.com/spend/rip-offs/10-things-millionaires-wont-tell-you-23697/#articleTabs 6. Taxes are for little people. Since the 80s, we have seen the erosion of the tax base among the wealthy, and increase burden on the poor and middle classes with the results of more poor, less living standard for the middle class and a explosion of wealth on the top end. The Bible does have a lot to say about this. I would like you opinion on this situation.

Luke 12.48 From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked.

Eric Blauer

Ernesto you mean Mark not Eric, right?

Ernesto Tinajero

Sorry, Eric, I meant Mark.
Too early in the morning and not enough coffee

Mark Hudson

I do not agree with the premise, “the poor pay a great deal more of their income than the wealthy.” First, the Buffet rule is a political joke for those who do not know the difference between federal income tax and capital gains tax. When Warren Buffet originally made the money, he paid upwards of 35% federal income taxes on the money, maybe even more taxes in the 90’s. Then he invested the profit he made. Now he receives return on the invested money, capital gains. Buffet pays 15-16% on his capital gains; his money effectively being taxed twice with a sum total of 50% low end to 60-70% depending on the initial federal income tax rate. Therefore Warren Buffet is paying more than his secretary in overall taxes on his capital.
Secondly, the sales tax is a consumption tax; I am taxed on what I consume. If I do not buy anything, I have no sales tax. Since everyone purchases something, everyone pays a sales tax. In stands to reason that the rich purchases more than the poor (if they are spending their money), simply because the rich has more money to spend. So the rich are paying a higher consumption tax than the poor, because they are consuming more.
Thirdly, according to the latest statistics that I have seen 49.5% of Americans do not pay federal income taxes, $0 dollars in federal income taxes. That means we are funding the government from the 50.5% of the American people who are paying federal income taxes. if everyone were doing their fair share, everyone should be paying federal income taxes, because they are benefiting from the tax dollars spent by the government.
Therefore, I am in support of a flat tax, in which all Americans pay a set percentage of their federal income, with no deductions granted to anyone. A flat tax would provide more revenue to the federal government than any other tax structure, and not penalize any particular socio-economic group.
I agree that whoever has more, will be accountable for the stewardship of the wealth they have. But, the generosity must come from the individual, not mandated by the State. When an individual is generous, there is a blessing attached to it. When the State takes wealth from the individual to be distributed to others, it is called theft.

LynnM

Mark, you are obviously being disingenuous about tax code in the US. Capital gains are NOT double taxed. They are not earned income, are not taxed by income tax laws, but ONLY by tax laws pertaining to capital investments, which are rates lower than those who earn their paycheck through actual work.
Your 60 – 70 % is complete balderdash, and you know it.
I, too might support a flat tax, but only if the rest of the tax code was thrown out, from mortgage deductions to corporate welfare.
When the wealthy hope for educated, cultured neighbors and employees, nice transportation to move about on, but to not pay taxes, while the poor can neither purchase goods nor travel, the wealthy are suffering from a very sickening myopia, even they will not survive in such a society. Except for maybe the uber wealthy, which is a group i doubt you are invited to join either.

Mark Hudson

Lynn, my intention was not to be disingenuous. You are correct, one is federal income tax and the other is capital gains tax. They are not the same. It seems to me that if I already paid taxes on the money I earned and then have to pay again if I make money on the money I earned, is that not double taxation? If I am mistaken, I stand corrected. The money seems to be taxed twice, but I am not an accountant. It just seemed to me that that would be the case. So, if 60-70% (high end) is not the actual amount, I apologize for the error in my statement.
Are you implying that the rich do not pay their fair share? I think everyone hopes to pay less in taxes, but I am not of the opinion that most of the rich do not mind paying their fair share. According to IRS data from 2009 on Adjusted Gross Income of those making $10 million a year they paid 22 percent taxes, $1 million to $10 million paid 25 percent, and $50,000 to $75,000 paid 7 percent. (http://abcnews.go.com/blogs/politics/2011/09/fact-check-the-richtheir-secretaries-and-taxes/). It seems to me that the rich are paying their fair share.
You are correct, I will probably never be in the 1%. If I were, I would pay exactly what the law requires. If we don’t like the current tax laws, let’s lobby congress to repeal them.

Ernesto Tinajero

Mark,

i do know the difference between Capital gains and income. i am also familiar with the double taxation argument. Let us break it down, though. If Mr. Buffet bought $100,000 worth of Company x’s shares. The company does well and it stock doubles in price and Mr Buffet made $100,000. He is taxed on the Made money of $100,000 and not $200,000. Now if the company paid a dividend of 3% off its profits. back to its sharholders, then the argument of double taxation could be made in that 3% was taxed profits. But the actual values came from growth in stock price and not in profits given back. So no double taxation except on the limited 3% (even is doubtful as the dividend is an investment to attract more investors and increase share prices). The next argument, and it does have some merit, that by taxing the increase in stock prices at a lower rate it encourages people to invest, and as such it gives stimulus to the economy. This was the first argument for Capital gains rate. It encourages people to take risks. But how this applies to “carried interest” I am not sure. Buffet (and Romney) are allowed to use the investment income garnered by not taking risk with their own money, but being hire to risk other people’s money.

So if I have a piece of art I bought at $100,000 and hire a crack sales man to sell it. He sells it at $200,000. I pay him $20,00o as commission. He gets taxed at income rates. But if I hire a hedge fund to make my $100,000 double and then they charge me the same $20,000 for the process and now they pay Capital Gains or less than half as the art dealer.

Also on the post you cite, it is very clever and it is true that those with high income pay more than those that make less and it seems to seal the argument. The key word to understand is “income.” Warren Buffet actually only made $100,000 in salaried income last year (and for the last 20 or so years), but don’t ask about carried interest. So movie stars, professional athletes paid the higher incomes, but the Buffets and Romney’s a paid whole lot less. Also by limiting it to income tax and not actual taxes verse actual income it provides the illusion that the wealthy are paying their fair share. We know it is an illusion as taking those numbers, Warren Buffet is closer in terms of earned income to the $75,000 than to the people making $250,000. But in terms of real dollars made last year, let say he did not become one of the wealthiest men in the world through his $100,000 salary. The Buffet rule would rid the system of playing games with words and all income not just salaried income would be charge at 30%.

Mark Hudson

Ernesto,

Well said! You are right. I was wrong by stating that it was double taxation. Your example makes great sense for anyone following the discussion. I still think that a flat tax would be the fairest approach to taxation. I would even concede capital gains to be taxed at the same rate as earned income, if it were a set flat tax, equal for everyone.
Have you ever looked into how the federal government was funded prior to instituting the federal income tax? Do you think that would work today as it did back then?

Ernesto Tinajero

Mark,

Thank you for your kind words, I have looked at some of the ways the government raised revenues. Some of them I don’t think the old way will work as the major way was through tariffs, which have proven to much of a burden on trade. I think that both you and I would agree that there probably too much cronyism in our current system of taxation. This is one of the most bipartisan efforts in our country, though with different clients. Unions, corporations, farmers, and big money entering the political discourse and buying the taxes and rules that best grease their wheels though with predictable results in decline of competition and efficiency. in the economy. So, things like interest carrying for hedge fund managers, private equity firms and mutual funds to preferred status in the tax code for unions, the tax code is full of loop holes that many people who contribute to one or both parties have put in place. They will not lose their privileges without a fight. Both party dance in this and only point to the other as way of making themselves the good guys protecting the bad, but not looking at their own log in their own eye. I am not hopeful that this will change until more pressure from other countries pushes real reform.

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