Tearing down the good and successful, just because they are

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by John Goodman,

from NCPA,

In Ayn Rand’s novel The Fountainhead, Dominque Francon and Ellsworth Toohey are in a high rise apartment, looking out at the evening lights of New York City. Toohey speaks:

Look at it. A sublime achievement, isn’t it? A heroic achievement. Think of the thousands who worked to create it and of the millions who profit by it. And it is said that but for the spirit of a dozen men, here and there down the ages, but for a dozen men — less, perhaps — none of this would have been possible. And that might be true. If so, there are — again — two possible attitudes to take. We can say that these twelve were great benefactors, that we are all fed by the overflow of the magnificent wealth of their spirit, and that we are glad to accept it in gratitude and brotherhood. Or, we can say that by the splendour of their achievement which we can neither equal nor keep, these twelve have shown us what we are, that we do not want the free gifts of their grandeur, that a cave by an oozing swamp and a fire of sticks rubbed together are preferable to skyscrapers and neon lights — if the cave and the sticks are the limit of our own creative capacities. Of the two attitudes, Dominique, which would you call the truly humanitarian one? Because, you see, I’m a humanitarian.

Until recently, I thought that the latter attitude had become completely disreputable. The idea that we should tear down the good just because they are good or the successful just because they are successful is bad economics, bad ethics and an embarrassingly childish form of envy.

But it has recently re-emerged in large part because of Thomas Piketty’s new book, Capital in the Twenty First Century. Piketty argues that we have been experiencing and will continue to experience growing inequality of income and wealth. To prevent this he argues for punitive taxes on high incomes and a worldwide tax on wealth.

Piketty’s book has created near ecstasy on the political left, where it is taken as an unquestioned article of faith that inequality of income and wealth is bad. See gushing praise from Paul Krugman and gloating over the right’s ineffectual response to the book. Among other economists, Robert Solo praises the book in The New Republic (“Piketty is Right”), but Greg Mankiw has a more measured response.

What is more interesting than the book itself is that the left now seems free to say things they previously would have been embarrassed to say.

Taxing the rich just for the spite of it. Until now, the main focus of reducing inequality has been to lift up those at the bottom. The new focus is on pushing down those at the top.

Does it matter who owns capital? For those of us who haven’t bought into the religion, it’s fair to ask: what’s wrong with inequality? There are lots of economic studies showing that capital is good. More capital means higher wages and higher incomes for everybody. There are plenty of studies showing it’s important for capital to be owned. Unowned capital can lead to the tragedy of the commons. But I don’t know of any studies that show who owns capital is important.

Inequality of wealth vs. inequality of consumption. As it turns out Warren Buffet agrees with Thomas Piketty to a point. Buffett thinks he should pay higher taxes. But as I pointed out before:

You and I should not be indifferent about the taxes Warren Buffett pays. How he is taxed and how much he pays affects our own economic future…

Consider that when Warren Buffett is consuming, he’s benefiting himself. When he’s saving and investing, he’s benefiting you and me. Every time Buffett forgoes personal consumption (a pricey dinner, a larger house, a huge yacht) and puts his money in the capital market instead, he’s doing an enormous favor for everyone else. A larger capital stock means higher productivity and that means everyone can have more income for the same amount of work.

Why it is foolish to tax capital. The idea that if you want to help workers, the best tax rate on capital is zero has been long known in the economics profession. Garrett Jones explains:

Market-oriented economies that learn to live with inequality will reap the rewards: More domestic capital for workers to use on their jobs, more foreign capital flowing in to a country perceived as a safe investment, and a political and cultural system that can spend its time on topics other than the 1 percent. Market-oriented economies that instead follow Piketty’s preferred path — taxing capital heavily, preferably through international consortiums so the taxes are harder to evade — will end up with less domestic and foreign capital, fewer lenders willing to fund new housing projects, fewer new office buildings, and a cultural system focused on who has more and who has less.

In defense of inequality. Would you rather live beside the millionaire next door or someone who has the same amount of wealth that you have? Some time back I wrote this:

I know I would much rather live around billionaires than people who earn what I do. People with a lot of money create business opportunities, employment opportunities and even social opportunities that I would otherwise miss out on. If there were no rich people around, I would never have been able to sit in a box at Cowboy Stadium, or sail in a yacht, or drive an Aston Martin. In fact, if there were no rich people, there wouldn’t be any sports boxes or yachts or Aston Martins.

Postscript. Even though the Piketty book is being treated by almost everyone as a breakthrough in understanding income and wealth inequality, it turns out that a decade ago another paper was able to explain the distribution of income and wealth in the United States quite well without any reference to the theoretical constructs proposed by Piketty. Furthermore this paper was completely ignored by Piketty and has been ignored by just about everyone else who has been commenting on his book.

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