Billionaires, Wealth Distribution, and Wealth Taxes—Part Two

Last week’s Commentary focused on the origin of the increase in inequality over the past 30 years. The debate over how to address it is often obscured by the commingling of solutions, taxes, and blame. Solutions, including taxes if necessary, advance the discussion; blame does not. Let’s try to be fact-based and rational.

Two different philosophies tend to dominate the discussion.

Philosophy one is that it is the absolute level of wealth, not the relative level, that matters. Proponents argue that the increase in wealth over time has improved living conditions for everyone. They point to the improvement in life expectancy, the eradication of disease, the ubiquity of indoor plumbing and electrification, the reduction of the average work week, and the steady decline in the real cost of basic goods like cars, televisions, and food. Policy should focus on growing total wealth and everyone will benefit, provided they work hard and obey the rules. Those who don’t benefit generally deserve their plight. This camp sees government regulation and taxes as impediments to growth, exemplified by President Ronald Reagan, who argued, “Government is not the solution; government is the problem.” (Explore this viewpoint in depth in Equal Is Unfair, by Don Watkins and Yaron Brook.)

Philosophy two is that total wealth at any given time is fixed and that we are all competing for our share. Supporters believe that the system is rigged in favor of the wealthy, preventing others from getting their “fair share.” The resultant inequality is unacceptable, and the solution lies in wealth redistribution. Senator Sanders is expressing this philosophy when he says, “In order to reduce the outrageous level of inequality that exists in America today and to rebuild the disappearing middle class, the time has come for the United States to establish an annual tax on the extreme wealth of the top 0.1 percent of U.S. households.” In this logic, taxing billionaires “out of existence” will result in an increase in wealth for everyone else.

Supporters of the first philosophy are criticized for being heartless, and supporters of the second for being punitive. Both in their extreme forms impede rational debate and compromise. Both elicit anger and resentment rather than compassion and kindness.

Perhaps there is a less divisive approach. Why not reframe the question away from cause and blame, away from the assertion that the wealthy exist at the expense of the poor, and away from question of fairness? Why not simply ask, is it acceptable that 12.3% of Americans live in poverty, defined as “lacking sufficient money or goods to meet basic human needs such as food, shelter, and clothing?” That 39 million are “food insecure”? That life expectancy of the poorest amongst us is 14.7 years less than that of the wealthiest, driven by higher rates of alcoholism, suicide, and opiate addiction? That millions are confined to violent inner-city communities and failing schools?

If the answer is no, then we can have a reasonable discussion about the root causes of these conditions.

The cycle of poverty is vicious. Poor children begin kindergarten significantly behind their wealthy peers. Their schools are substandard, after-school activities are limited, and unsupervised summers set them further back. The trauma of poverty scars them from an early age. In these conditions, finishing high school is a heroic achievement, but doesn’t mean that you are actually prepared for college, even if you could afford it.

In our Social Welfare Research, we conclude that early intervention in the cycle is essential, beginning with subsidized day care, like Head Start. Day care not only benefits the child, but also enables single parents to sustain reliable employment. Beyond that, subsidized preschool is necessary to continue the process of learning. (In competitive countries like France, preschool is required at age three.) Inner-city schools have to be improved, with localities like post-Katrina New Orleans providing good examples of how this can be done.

All of this would take money. As discussed in “Do We Need More Taxes,” that conversation should start by challenging the priorities of current government spending. If after such a process (including the reduction of special interest spending—see “Rigged”) more revenue is needed, the burden is on policy makers to demonstrate that new spending will be productive. Only then should the wealthy be asked to pay more—not because they are evil, but because they have the money. In this case, increases in progressive rates of taxation will surely be better received than wealth taxes designed to eliminate the “billionaire class.”