Free Market, Less Poverty

Poor people in America have cell phone, cars, apartments, food, alcohol, cigarettes, medical care, and free time. These people are “poor” for the first time throughout human history, because poor is a relative term, and they live next to people who have twice, 5 times, or a 100 times more stuff or better food etc. But what people seem to gloss over, is that the American market started out as probably one of the freest markets ever. And what it created was some of the lowest poverty in the history of the world.

To clearly distinguish it from crony capitalism, free market or laissez-faire capitalism removes entire populations from poverty. Indeed even having a sort-of capitalist economy in a few major worldwide superpowers has made poverty drop by 80% worldwide over the last 30 years. And the countries with the more free markets still have the least poverty yet! It makes sense when you think about it. When people can keep more of the products of their labor, they create more, and will trade this excess. All of society benefits because more is created. The Mises Institute has posted an article which supports this common sense with more data.

It is an obvious fact that severe poverty has disappeared in the most industrialized countries. Nations like the US, UK, Switzerland, and Japan industrialized within what were predominantlylaissez-faire free-market conditions. Even the so-called social democracies, like Sweden and Germany, developed in free-market conditions, and adopted extensive state welfare and regulatory programs only after achieving high levels of economic development and industrialization. World Bank data shows that there is inequality, but this inequality is between the free-market nations and the crony-capitalist and socialistic nations.[1]

The idea that domestic laissez-faire causes poverty is unfounded. It is a historical fact that India, China, and Kenya never tried capitalism, so this system was never given a chance to work….

There have been significant improvements in living conditions around the world over the past thirty years. The largest improvements in the poorest nations took place during the wave of globalization that took place twenty years ago, after the fall of the USSR. The collapse of the Soviet Union opened the door to unprecedented globalization of industry. What does real data tell us about poverty during this period? Per Capita GDP rose dramatically

Clearly we should be less worried about catering to special interests by pouring money (extracted from the working population by force) down the poverty hole. As wealth is created, it naturally finds its way into the hands of the poor, without having to be stolen: the act of stealing it reduces the entire amount of wealth available. So by allowing people control over the products of their own labor, we are actually helping the poor people by wealth diffusion, more than they would be helped by redistribution.

Workers Moving Into Low Tax States, Out of High Tax States

A new book suggests that competition between states for residents is alive and well. It seems over the past 15 years people have overwhelming moved out of states with higher income taxes, and into states with lower tax burdens. The author says that between “1995 and 2010 over $2 trillion in adjusted gross income moved between the states.”

Obviously wealth is going to move between states as people change jobs and scenery. What makes this move of wealth suggestive of state competition on tax burdens is the net loss/ gain of residents in states with high/ low taxes respectively. “[T]he nine states without a personal income tax gained $146 billion in new wealth while the nine states with the highest income tax rates lost $107 billion.”

It should not be surprising, but states that continue to raise the tax burden on their citizens lose more residents, and have economies that are stagnating. Blue states can whine that the competition between states isn’t fair because of “aging infrastructures, large pensions to pay, and entrenched trade unions” in the more liberal states, but that is the point; these big government tax and spend policies are not sustainable or good for the economy.

Wisconsin however, proves it is never too late to reform. Governor Scott Walker cut taxes and reined in the unions, and since then Wisconsin has been on the rise. An attempted recall of Governor Walker failed to oust him, and he claims that since Wisconsin Democrats “refuse to pledge to roll [reforms] back”, this shows that the electorate sees the success and is unwilling to risk the economy to go back to failing liberal governing policies.

And this is precisely why states need to have more control over their affairs than the federal government. State competition means better policies in states, because people can easily move within the US. Blanket policies that affect all of the US can do more damage when there is nowhere to escape to. Being from Massachusetts, I am from one of the high tax states slowly killing their economy. Massachusetts lost a congressional seat after the 2010 census (as it did after the 2000 and 1990 censuses) because our population didn’t grow as quickly as the rest of the country.

I’ve known multiple young people with engineering degrees who have left the state for economic opportunity elsewhere, at least one nurse, and other skilled workers who have moved to New Hampshire, the Carolinas, and Florida. Family members who want to start a business plan to move to a more business friendly climate down south within a year and a half. As the economy is still the number one issue for voters, the lesson should be clear. Freer states with less restriction and lower taxes are more attractive to workers and business owners, and will therefore be the homes of more economic opportunity.

Kill the Golden Goose: Higher Tax Rates Can Mean Less Tax Revenue

One reporter feels that income distribution in America is less than ideal. That is true, far too much of our income is upwardly distributed to the government and their cronies who build non-functioning websites, unsuccessful energy companies, and cars no one wants. But this reporter thinks the problem is the people who produce, not the leeches attached to their jugulars. He suggests that the top tax rate be raised to 80% because, to hell with the economy, we’ve got to punish the rich! After all, the top tax rate was 90% after WWII, you know, just after most of the world’s manufacturing capability was destroyed, but not America’s.

So now, in the most competitive global economy ever, with abysmal job creation, somehow taxing 80% of what the most productive Americans earn will have no negative effect on jobs and the economy. Somehow, raising the minimum wage to $15 will not slow job creation, will not keep people from hiring, and will not leave more unemployed without the chance to gain skills. Magically, the rich will continue working for merely 20% of what they produce, jobs won’t go overseas, and companies won’t raise their prices. And if you believe all this I have a bridge to sell you.

This reporter, and many others, like to pretend that the top marginal income tax rate only applies to the super rich. This is not true. Earning more than $400,000 a year puts a person in the top income tax bracket. What surgeon is going to keep doing brain surgery, with all the costs and risks, only to make $80,000 in the second half of the year, for the same effort put in for $400,000 in the first half of the year? They won’t, they’ll go on a well deserved vacation to Hawaii, because the work and risk is not worth the reward. This means longer waits, fewer and less skilled surgeons.

Or what about the CEO who makes $10 million a year running a grocery store chain. He might decide to retire early since he only takes home $2.3 million despite earning $10 million. Since everyone who has the skills to properly manage a large successful business also has the means and investment and savings to forgo future employment when the reward is not great enough, this means less qualified people running the grocery store chain. Say goodbye to fresh vegetables, well stocked shelves and affordable products. CEO’s don’t get paid a lot for nothing, they get paid for their skills in making the company money–money that is taxed.

So great, the government makes almost $8 million off this CEO the first year they tax the top bracket at 80%, and $70 million in corporate and capital gains taxes on his company. Then the next year they only make $4 million on the salary, because the new CEO is not as skilled as the last, so he doesn’t get paid as much. As a result, the company does not do as well, earning 75% of the profits from the previous year therefore only contributing $53 million in taxes from corporate and capital gains. The $8 million gained from the CEO being taxed at 80% the first year is quickly lost in a less profitable business, which contributes fewer dollars in taxes from the lower profits of the company.

What could have been a continuous $70 million per year in tax revenue could turn into $78 million the first year, then quickly shrink the next year to $57 million. This is a case of killing the goose that lays the golden egg. If the government would just leave alone the people who do the most work, and produce the most, they could have their cake and eat it too. But its never enough for the government, they always want more, more money, more power, more control. But they don’t seem to realize that when you bite the hand that feeds, you stop getting fed.

Top 10% of Earners pay 70% of Taxes

Research from the tax foundation, based in D.C. has revealed that “the rich” pay way more than their fair share of taxes in the United States. The Daily Caller reports that the top 10% of earners in 2011 payed 70% of federal income taxes. Interestingly enough, 47% of the population has no income tax liability. And to get an idea about the trend in tax structure, in 1986 the top 10% paid 55% of federal taxes. The Congressional Budget Office numbers from 2009 show that the top 20% of earners paid 68% of federal taxes that year. This can only mean that the media and certain politicians are promoting a view of “the rich” which is not accurate. But little pieces of the puzzle are what give the media and politicians a little bit of truth to mix with their lies.

Turns out that last year there were 4,000 households which earned over a million dollars, and paid no income taxes at all. This relatively small group is represented as “the rich”, while in reality, there were 267,996 millionaire tax returns in 2010, according to taxfoundation.org. Many proposals to increase taxes would effect the millionaires who pay taxes, and do virtually nothing to collect taxes from the other 4,000. That is why it makes more sense to close tax loopholes and limit exemptions, because the vast amount of “the rich” are already paying more than their fair share. But not everyone agrees.

Bob McIntyre, director of the liberal Citizens for Tax Justice, says that the federal numbers do not tell the whole story. According to McIntyre, the top 10 percent pay just under half of tax revenues when state and local taxes are accounted for…

“The vast majority of income gains have gone to the people at the top,” he said.

This is another trick politicians and biased media will use to pretend “the rich” is an enduring class. The top 10% who pay 70% of the taxes, includes people who earn just $114,000 a year and up, according to the Heritage blog. This means that a couple who recently retired and sell their home can easily be in the top tax bracket. Even though homes are relatively cheap right now, when compared to a few decades ago, houses are much more expensive, explaining why the top 10% is earning more money these days. A house that cost $30,000 in 1970 may cost $300,000 today, while the average income has not risen at the same rate as housing prices. So the sale of a house today can easily put you in the top 10% of earners, while a sale of a house in the 70’s could easily not put you in the top 10%. Because of this reason, and similar situations, the top 10% takes home a larger share of all income. It is important to remember however that the top 10% does not consist of all the same people from year to year.

Incentives are a big part of how people operate. When the incentives to earn are reduced, people will earn less. That is why raising taxes can lead to less revenue in the end, because people will earn less. Likewise lowing taxes will increase the incentive to earn, meaning more tax revenue could be collected.

Risks and Rewards: Low Capital Gains Tax Creates Jobs

Mitt Romney has been criticized for the fact that he pays a lower percentage of income than most middle class Americans, even though the actual dollar amount is much higher, in the millions. The billionaire Warren Buffet has likewise criticized the capital gains tax rate saying that his secretary pays a higher rate of taxes than he does–although he decided not to volunteer more funds to the government than required. What the discussion on the capital gains tax rate mostly involves is emotion, and what it lacks is rational analysis.

Do we want people to invest? If we want more jobs we do. Investment fuels new companies which means new jobs, and it fuels innovation and experimentation for companies that already exist, which also means new jobs. Does anyone disagree that America needs more jobs? No? Good.

How do we make sure people continue to invest? By making sure that if their investment pays off, they get to keep the rewards of the risk they took. It is so convenient to never talk about the people who’s investments fail, or companies who never make it off the ground, yet this is the reality of the market. People are taking a risk by investing, and in order to take that risk people need a sufficient reward. When 15% of the profit a person makes on an investment is taken in taxes, people still invest a good amount of money, literally fueling the expanse of the economy. If the rate was 0% people would invest even more in the economy, because the reward would be even higher. And if the capital gains tax goes up to 24%, fewer people will invest in job creating industries, because the potential payoff is lower.

The risk of investing is high, and therefore people will not engage in this risk if the payoff is the same or similar to other, less risky financial decisions. Why invest in the stock market when you can make a similar return on a virtually no risk investment in a high interest bank account? So this is not a matter of fairness, this is a matter of economic progress. If you are truly in favor of creating more jobs in America, you cannot be in favor of a higher capital gains tax.

Thomas Sowell discusses the largely misunderstood capital gains tax in a recent article. He points out that most people earn a salary and they know how much they will earn in a one year time. Capital gains however, are not necessarily earned in a one year period. If someone holds onto an investment for 10 years before getting a return of $100,000 than this money was not earned over one year, it was earned over ten years. Apart from the fact that there was no guarantee going into the investment that it would ever pay off (in fact the entire investment could have been lost), it would not be fair to tax this income at a higher rate because it was not income from one year, it was income over ten years. People who make $10,000 per year should not be taxed at a higher rate, and this is the reality of the situation. Not everyone making money on capital gains is a billionaire, or millionaire–in fact during college I made a few thousand dollars on short term capital gains, however I still needed to take out loans to pay for school. The elderly and retired also often rely on capital gains and dividends to pay their bills, so the whole idea that a low capital gains tax only benefits the wealthy is false.

Sowell uses the following examples to illustrate his point about the extreme risk of investing:

McDonald’s teetered on the edge of bankruptcy more than once in its early years. Desperate expedients were resorted to by the people who ran McDonald’s, in order to just keep their noses above the water, while hoping for better days.

At one time, you could have bought half interest in McDonald’s for $25,000 — and there were no takers. Anyone who would have risked $25,000 at that time would be a billionaire today. But there was no guarantee at the time that they wouldn’t be just throwing 25 grand down a rat hole.

Where a capital gain can be documented — when a builder spends ten years creating a housing development, for example — then whatever that builder earns in the tenth year is a capital gain, not ordinary income. There is no guarantee in advance that the builder will ever recover his expenses, much less make a profit…

If a country wants investors to invest, it cannot tax their resulting capital gains the same as the incomes of people whose incomes were guaranteed in advance when they took the job.

It is not just a question of “fairness” to investors. Ultimately, it is investors who guarantee other people’s incomes in a market economy, even though the investors’ own incomes are by no means guaranteed. Reducing investors’ incentives to take risks is reducing the jobs their investments are likely to create.

Business income is different from employees’ income in another way. The profit that a business makes is first taxed as profit and the remainder is then taxed again as the incomes of people who receive dividends.

The biggest losers from politicians who jack up tax rates are likely to be people who are looking for jobs that will not be there, because investments will not be there to create the jobs. (Full Article).