Monday, February 17, 2014

Wealth Creation and Wealth Distribution

With the gap growing on a worldwide basis between those who have much and those who have little, the debate has been ongoing for some time now as to how that gap can be closed whereupon some people started to question if we should even try to do something about it. One of these people is Scott A. Hodge who is president of the Tax Foundation in America. He wrote an article on the subject in the February 14, 2014 edition of the Wall Street Journal that came under the title: “Here's What 'Income Equality' Would Look Like” and the subtitle ”Take about $4 trillion from the top 40% of families and give it to the bottom 60% – voila, no more inequality.” Before we look at this article, let's try to understand what it is that we're tackling here.

Society produces wealth and consumes it. Most nations, however, export some of what they produce, and consume some products they import from abroad. This is called foreign trade; a commercial activity that is important to the economy of some nations but not as important to other nations. To better understand the gist of this discussion, we ignore the foreign trade portion of a nation's give and take, and stay with its domestic activities.

A modern nation produces goods and services more or less abundantly depending on the natural resources it is blessed with, the level of development it has attained, and the culture that determines how hard and how efficiently its people work at producing what they consume. And what people consume are of two kinds: There are the essentials and there are the luxuries. What must not be forgotten, however, is that the line separating that which is essential from what is luxury varies from nation to nation depending on several local factors.

For example, a society that is barely developed and living on a tropical island that is bathed in sunshine throughout the year does not view as essential having running hot water in the bathrooms, but considers essential having ice by virtue of owning a refrigerator, or being able to buy ice at the store. Likewise, a society that is living close to the arctic region of the planet does not miss seeing sandals and bikinis displayed in the windows of its department stores, but would miss seeing boots and warm clothing.

There are, however, a number of generic products that all societies need as a minimum to preserve life. They would be the sort of products that all organisms require such as food, a covering to protect the body from the elements, and a shelter to also protect from the elements and protect from the kind of predators that would prey on them. As it happens, every society is able to provide these essentials for its members unless something happens to the climate, such as a drought or a flood that would inflict a calamity on the land.

In addition, most societies are able to produce a surplus of essentials, a blessing that allows them to free some of their members who then engage in the production of luxuries; be they hard goods or services. This happens because every able body in the society contributes time and effort to get the work done, and everyone – able bodied or not – receives a share of the bounty that is produced communally. Harmony is thus ensured in a place where everyone knows everyone, and a kind of idyllic life sets in where everybody contributes to the welfare of the young, the old and the frail.

Looking now at a modern industrial nation, we see that most people live in urban centers called cities where the essentials that are required to sustain life exceed by far those of a setting that is not developed as much, such as a tropical island, for example. Two such requirements would be mechanical means by which transportation is done, and electronic devices by which communication at a distance is achieved.

Unlike the simple life of the tropical islands where people know each other and look after one another, the urban people rarely get to know their immediate neighbors, let alone interact with strangers. And they refrain from helping each other unless a disaster strikes, and they all find themselves in the same proverbial boat. This is why there arose the need for government to provide everyday services that range from babysitting the children of working mothers to providing assisted living for the elderly who happen to live longer than ever before given the breakthroughs that were achieved in medicine and the delivery of healthcare.

When you add to this the fact that children need more education to work in the modern age than they did at a time when they joined the farm at the age of fourteen, it becomes clear that the working age segment of society is now required to support a larger number of people than ever before. And this is where the question as to how the wealth produced by a nation ought to be taxed by government and redistributed among those who need assistance – all this to maintain the sense of fairness toward everyone, and to ensure domestic tranquility.

Getting back to the Hodge article, we see that studies have been conducted in this regards and have yielded some surprising results. The studies say that everybody in America receives a handout from the government, even the households in the top fifth of the income scale where they received 17 cents for every dollar they paid in federal taxes in 2006, the year before the recession. As to the middle class, they received $1.19 in government spending for every dollar they paid. Only those at the bottom fifth of the income scale received what may be called meaningful help. They received $9.62 in federal spending for every dollar they paid. And this is a finding that even Mr. Hodge admits “isn't surprising since people with low incomes pay little in taxes but receive a lot in transfers.”

Since there is nothing that is shocking in these studies, we ask: What is it that ruffles Scott Hodge and people like him at the idea that some sort of income distribution is essential for maintaining a sense of fairness toward everyone in society, and ensuring domestic tranquility? You find that the answer to this question lies in the way that these people look at the subject. You get a taste of this in the first paragraph of the article where the author writes: “the [Obama] project would require redistribution on a staggering scale.”

And so you ask: Obama project? Which Obama project is he talking about? You look through the article to see if there is a hint of it, and find this: “How much more would be needed to make every family equal?” But there is nothing in the Obama project that says every family must be exactly equal. To think that this is what the President is trying to achieve is to show mental instability. To be paranoid is bad enough; to self induce paranoia on an ongoing basis is another thing because it makes you sound like a relentless idiot.

All that the needy ask for is to live without the constant fear of being without food or adequate clothing, or being evicted from the home in which they live. They would also appreciate receiving the sort of healthcare that will alleviate their pain. Hodge says this will cost the very rich an extra 2.4 trillion dollars in extra taxes, and this is pure hogwash. Call it Hodge-wash.