Wealth redistribution - the second best option

Fresh off the State of Union address, I feel compelled to make a succinct argument against the Democrats' unwavering commitment to wealth redistribution.  Let's call wealth redistribution, via the tax system and the government spending that it affords, the second best option for improving the economic outlook for the lower and middle class.  I'm feeling generous.

So what's the best option?

Democrats continue to perpetuate an economic fallacy that supports their argument for wealth redistribution.  Put simply, they believe that the wealthy will only share their wealth with the lower and middle classes if forced to do so.  Therefore, the government must force them to share their wealth by taxing them more (through progressive business, income and inheritance taxes).  The government takes the tax money from the wealthy and redistributes it to the lower and middle classes through a combination of means including reduced taxes, government assistance and government jobs (whether directly or via contract).  This is wealth redistribution at work. 

Through observation, though not firsthand experience, I've found that the wealthy (let's just use Obama's threshold of $250k or more in income) have three options as to what they can do with their cash.  They're the same options all of us have: spend, give or save.  If the wealthy spend their money, even on private jets and outlandish third or forth homes, they create or maintain jobs for lower and middle income Americans (e.g. aircraft machinists and mechanics; framers and lawn care companies).  If they give it away, they redistribute wealth directly and voluntarily.  In either case, the wealthy put money into the hands of lower and middle classes but through means that are much more direct, efficient and productive, and have a greater multiplier effect, than comparable government spending or assistance.

Now let's tackle the slightly more difficult situation of when the wealthy save rather than spend or gift.  If they save, they either pump it into investments or stuff it into pillow cases.  If they invest, they create and maintain jobs for lower and middle income Americans by helping companies grow by providing access to additional capital (e.g. a start-up hires a sales team or a public company decides to open new stores).  Even if some of the wealthy only invest and never spend or gift during their lifetimes, at end of life they either leave their money to their family or give it away.  If they leave it to their family, second generations of wealthy people have proven very adept at spending all of their inheritance very quickly.  Problem solved.  If they gift it, while the benefit was admittedly postponed during their lifetime, assuming decent investment returns the impact may be even greater.

So, out of all of this we're left with one justification for the government forcing wealth redistribution via the tax system: a gripping fear that the wealthy will just hoard their cash in pillow cases and it will never get spent, gifted or invested because it gets lost or destroyed.  Seems ridiculous doesn't it?  Why not just make the system fair for everyone and let the spending, gifting and investing flow through the system naturally?  If you're scared of the pillow case scenario and believe it justifies wealth redistribution, I'd love to hear from you.

Comments

[Jared Orr]

I think that you have really hit the nail on the head in this post. However, I think that there might actually be something more sinister behind the populist redistributor's mindset than simply misunderstanding the three mechanisms that you just explained. Spending, giving, and saving, do indeed end up redistributing wealth from rich people to less rich people and poorer people, but there is a constant cashflow moving up the ladder at the same time. In fact there is a constant flow, from rich to rich, rich to poor, poor to rich, and poor to poor. When these transactions take place freely (meaning that there is no coercion involved) we generally find that something very close to efficiency is achieved and increasingly so over time. Something else is achieved which I consider more important even than efficiency and that is happiness. Your alarm clock is a good example. You gave some of your money to the alarm clock maker and now his happiness increased because he offloaded some inventory and your happiness is increased, because you got a better alarm clock for a good price.

Sorry about all that, I'll try to get to the point. Free(non-coerced) transactions will never make the redistributors happy because they will almost never move any wealth or goods from the "haves" to the "have nots". Sure you will move tons of cash from the "have cash" to the "have not cash", because these poor blokes, have no cash but they have skills to trade for cash. Now there exists another group of people who have no cash, no skill, no talent, no ambition, no patience, no endurance, they have basically got absolutely nothing. Of the three mechanisms you mentioned only the giving mechanism will give this group anything and even then it will be less often because voluntary givers, will be much more likely to give to victims of a natural disaster or something like that than healthy grown men who choose to hold signs up instead of working or some similar group.

Under normal circumstances in a great and prosperous nation like ours this group would be a very, very, small number, and could easily be taken care of by a miniscule amount of voluntary charity. However, the redistributors are out to use the power of the government to confiscate other people's wealth so they can redistribute it exactly where they see fit. This is the only way for them to move large amounts of cash from the "haves" to the "I got nothin's".

One more quick point. There is another type of transaction that the spending and saving of the rich can't accomplish and that is to move enough cash to the "disadvantaged" to completely bridge the gap between "what I want", and "what I can afford". So, since a free people can never accomplish these types of transactions the redistributors will continue to fight for totalitarian control.