The Questions Of Wealth, Opportunity and Taxes

Two ideas dominate American thinking today on the subject of wealth and opportunity. First is the tried-and-true method of rewarding excellence in a relatively free economy. The second idea is to redistribute wealth from rich people to the middle class and poor people.

In the first case, when we reward excellence, we tell those who produce a good product at a competitive price that they can keep the bulk of what they earn. Over the years, Americans with good ideas (but often from a poor background) have shown persistence and used energy to invent a multitude of products. Swedish immigrant Gideon Sundback invented the zipper; Scottish immigrant Andrew Carnegie adopted innovations in making steel and ended up producing iron rails cheaper than anyone else in the world; John D. Rockefeller, son of a quack medicine peddler, figured out more uses for oil–and how to refine it more cheaply than anyone else–and soon Americans could light their homes with kerosene for about one cent an hour. Rockefeller, whose Standard Oil Company had a stunning 60 percent market share of the world’s oil sales, became the richest man in the world–and he decided to use much of his wealth to find cures for diseases and help fund colleges. I describe some of these accomplishments in The Myth of the Robber Barons.

The second idea–that wealth needs redistributing from rich to poor–sounds good superficially (we do like to help people do well in life), but it has the effect of taking away incentives to risk investments or start businesses. Also, it gives those who receive government checks few incentives to break out of poverty and earn incomes for themselves–perhaps even, like Star Parker, starting businesses of their own. Wealth is not generated by taking it from the creators by force and giving it to those who haven’t earned it.

If rewarding excellence is so superior to forcibly redistributing wealth, then why do we see so many politicians talking about redistribution? The answer is not that these politicians care for the poor or middle class; instead, they care for the votes of poor and middle class people. The top one percent of Americans currently pay almost 40 percent of all federal income taxes. What that means is that by irritating a mere one percent of the voters, politicians can grab fists full of dollars and hand them out to voting groups all over the country. President Franklin Roosevelt accelerated this process in a big way during the 1930s–and had four electoral victories to show for it. The problem is that redistributing wealth creates and perpetuates recessions. The Great Depression of the 1930s is an example of this. Rich people protect what money is left them rather than investing to create more.

The lesson: Let people keep more of what they earn and they will invest in businesses (or create inventions) that will lift the American economy out of our current recession.