In a Russian joke, there are two friendly farmers, Boris and Ivan. Both are prosperous, though Boris owns chickens and Ivan doesn’t. When a genie offers Ivan anything he desires, he ponders his wish and orders, “Kill Boris’s chickens!”
As Americans imbued with an entrepreneurial spirit, a tradition of social mobility and a sense of fairness and morality, we’re bemused by this joke. Why doesn’t Ivan aspire to own chickens himself, or cows? Doesn’t he realize he’s hurting everyone’s standard of living by depriving everybody of eggs and chicken-meat? Why deny opportunity to shopkeepers, butchers and restaurants — and all their employees?
By living in a zero-sum world where one can only profit at the expense of others, Ivan can’t comprehend (as Americans do) that a neighbor’s prosperity can enhance our lives, raise our standard of living and create economic opportunities for more people. Ingenious billionaires who developed the automobile, the laptop, Facebook and the iPhone were rewarded because they improved society’s standard of living. They didn’t claw fortunes out of society’s guts.
Unfortunately, this “beggar-thy-neighbor” mentality is evident again in the U.S. Economic distress creates fertile ground for “the politics of envy,” allowing opportunistic politicians to distract us from real problems by accusing wealthier Americans of not paying their “fair share” and by bashing selected (poll-tested) industries. However, the “soak-the-rich” narrative is dangerously divisive, socially corrosive, economically detrimental — and untrue.
In 2008 the Organization of Economic Cooperation and Development studied 24 leading economies and concluded “Taxation is most progressively distributed in the United States.” Here, the wealthiest 10 percent (individuals and small businesses) pay three-quarters of the income taxes, while half of Americans pay none and nearly 70 percent receive more government benefits than they’ve paid in.
Social justice doesn’t require such a progressive system, though it allows society to express compassion for its neediest. The question is at what point forced redistribution of income destroys individual initiative and becomes economically detrimental and socially unjust to all strata of society.
Given our economic straits, we’re there. According to IRS data, even if the government instituted a 100% tax on both corporate profits and incomes above $250,000 per year, it would only yield enough revenue to run the government for six months. That’s because government spending has swollen to 24 percent of GDP from 18 percent in 2000.
Despite these facts, politicians promote resentment to create sympathetic voting blocs, pointing to widening income gaps between rich and poor. However, Americans don’t begrudge our neighbor’s success; we crave it, relying on social mobility to achieve it. While acknowledging the need for a sturdy social safety net, we know instinctively what IRS data proves — the vast majority of “the poor” do not remain poor in America.
Like an elevator, Americans ride the income ladder, from one statistical category to another. Three-quarters of Americans whose incomes were in the bottom quintile in 1975 were also in the top 40 percent during the next 16 years, according to the Federal Reserve Bank of Dallas. Incomes of taxpayers in the bottom quintile in 1991 rose 91 percent by 2005, compared to those in the top quintile, whose incomes rose only 10 percent. Incomes of those in the top five percent actually declined by 26 percent. So much for the “rich getting richer and the poor getting poorer.”
Though tax rates (and loopholes) influence economic behavior, government revenues correlate more with economic growth. One hundred years of IRS data show that the wealthy avoid higher tax rates and supply less tax revenue when marginal rates are high. Irrespective of marginal rates (which since 1952 have ranged from 28 percent to 92 percent) government revenues have hovered around 18 percent of GDP. Additionally, when rates were lower, GDP growth was higher.
Therefore, America’s goal should be to generate economic growth, which will create more jobs, meaning more taxpayers and more government revenues to pay off our debt. This requires fiscal discipline and comprehensive tax reform, including globally competitive tax rates and the elimination of tax loopholes and subsidies for the politically favored. Australia, Canada and Sweden just instituted similar measures, resulting in material economic improvements. Why can’t America?
Without such measures, the dirty little secret is that the money to pay for our bloated government (and $14.3 trillion in debt) must also come from the middle class and future generations.
Abraham Lincoln encapsulated America’s notion of fairness when he said, “That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but … build one for himself.”
Ivan and those who practice class warfare could learn from Lincoln.
Melanie Sturm has 15 years of private equity investing experience, previous to which she specialized in project finance at International Finance Corporation and mergers & acquisitions at Morgan Stanley and Drexel Burnham Lambert. She has an MBA from INSEAD and undergraduate degrees in international relations and economics from Tufts University.