Unequal Wealth Distribution in the Economy is An American Right

Brooks-DeBartolo Collegiate High School, a local charter school that Pro Football Linebacker and Hall of Famer Derrick Brooks and previous San Francisco Giants owner Edwin DeBartolo founded, has only been in operation for seven years. It offers tuition-free education to families of diverse cultural backgrounds in our economy, has a 100% graduation rate, a 100% higher education placement rate, and has earned an “A” rating from the state of Florida for four years.

There’s a long list of people waiting to get in, which means the same people are very interested in getting out of something else: public education.

This is a local solution to a local problem, and is driven by local people (Brooks and DeBartolo are both residents of the area) who are using their wealth and visibility to improve the lives of others, and in their own way, the economy.

Brooks earned his fortune one hit at a time on the gridiron. DeBartolo stepped into an existing family business (inherited) which he expanded. They could just as easily have spent their wealth on art, or wine, or not at all. But that’s the issue: they get to choose.

This brings me to French Economist Thomas Piketty and his book, Capital in the Twenty-First Century, which are much in the news these days. His basic premise is that having money gives you the ability to make more money than simply working for it.

That strikes me as what an old professor of mine would call a “blinding glimpse of the obvious.” Since people with more capital can grow their capital, our distribution of capital gets distorted over time. In other words, rich people can get richer. Got it. (Harry spoke about this in some detail on Monday.)

Piketty points out that this is unfair, particularly for those in the economy who inherit their wealth. His solution is a very high, progressive tax: 80% on income over $500,000 or $1 million, and 50% to 60% on incomes over $200,000, and a global tax on wealth.

But I’d like to back up to the part where Piketty declares that an unequal distribution of wealth in the economy, and then the ability to determine how your wealth is used, is unfair.

I might believe that Derrick Brooks was overpaid to play football (no offense, Mr. Brooks), and that Mr. DeBartolo got a leg up in life because he was born into the right family. But I don’t see how that translates into my ability, or our collective ability, to confiscate part of what they have accumulated beyond what is necessary to provide for the common good. And that’s where the fight starts.

Mr. Piketty claims that taxes are levied so that all members of an economy contribute to the social structure, which would be common defense, contract enforcement, etc. He also claims that taxation exists to encourage behavior. Hmm. Maybe on his side of the pond.

I think we had this fight a couple hundred years ago, where a group of smart guys who left their homes to live in a place where governments did the least amount possible and then got out of the way.

Communities were entrusted with governance over most facets of everyday life. Only decisions that couldn’t be easily handled at the local level were kicked upstream, like tariffs on trade and mustering armed forces.

The notion was that individuals could, and should, decide as much of their own lives as possible, and then only hand off items to larger entities (cities, states, and the federal government) when a lower level decision couldn’t be effective.

This didn’t mean a lower decision couldn’t be a bad decision. Bad ideas (depending on whom you ask), with their bad outcomes, were part of the charm. One man’s dumb idea is another man’s stroke of brilliance. It also doesn’t mean things can’t change. If too many people in a local community don’t like the decisions made, they can work to change the decisions, or simply leave.

The caveat was the fact that the country is a republic, not a democracy. The rule of law, not the rule of the majority, was supposed to be paramount. Every individual had his own rights protected, even if that person was wildly unpopular.

Taxation was, and in my view should be, set only so high as to provide for such items that must be decided by larger entities, and there should be a regular review of all laws and regulations to see what can be pared down or outright stricken from the books.

There should be no “encouraging” or “discouraging” taxes. If we don’t want people to smoke, then propose a law to make it illegal. If it doesn’t pass, then don’t pile taxes onto cigarettes just because it’s easy. Taxing unpopular items is just a way to increase tax revenue without having hard conversations.

We should have clear discussions about what it costs to run government, and whether or not we agree with the programs being supported and the associated costs.

Piketty’s view is understandably European, or at least Continental. The government provides just about everything. Period. If you need it, then apply for it. There’s a hefty tax structure, and it’s necessary to pay for, well, everything that is provided.

The idea of vastly different economic outcomes might indeed seem grotesque in that world. The government decides what is best for individuals, and then sets benefits and regulates outcomes accordingly. Under that structure, maybe such high levels of taxation make sense.

But I’m personally making the choice not to live under that structure. I’d much rather live where I’m free to spend my earnings — or inheritance, if I had any — as I see fit, whether I build a school, swill wine, or both!

Mr. Piketty’s book and point of view are taking center stage because we’re in an economic cycle where labor is over-supplied. With so many people looking for work, or better-paying work, it puts employers in the driver’s seat and high earners in a harsh spotlight.

The tough part of the current situation is that it should last several more years, so the conversation will only get louder instead of fading away. The question is: Are people willing to trade their ability to use their future earnings as they see fit to have the government provide more of what the government provides today?

Maybe in France. It sounds like a non-starter here in the colonies.


Rodney

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Categories: Purchasing Power

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.