In my experience, the most common barb levied at the Democratic Party’s desire to tax the income of the wealthiest two percent of Americans at a higher rate, as well as maintaining and increasing the capital gains and estate taxes is that such efforts are socialistic attempts to take hard-earned money from the successful to give to those who are lazy and unsuccessful. While I believe that I thoroughly debunked the argument regarding higher income taxes, as well as the supposed laziness of the poor, I am focusing on the capital gains and estate taxes in this venture into the murky waters of economic theory.
If there is a default argument against the welfare state, it is the fact that the funding comes from the wealthy who will, in the majority of cases, never need the benefits provided by the various programs. Should one seek a verbalization of this principle, the titan of modern laissez-faire conservatism, Thomas Sowell, will happily oblige. Sowell, considered to be the foremost neoliberalist economist alive today, is a fierce opponent of virtually every facet of this welfare state. As conservatives love to throw out quotes by Sowell, so shall I. Take the two following quotes, which I will address: “One of the sad signs of our times is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain” and “The cold fact is that most income is not distributed; It is earned."
As typical of proponent of neoliberalism, the “producers” Sowell says are demonized are by and large the wealthy business owners who operate companies. However, I am not convinced that these people are universally producers. There is no denying that some of these individuals, such as Bill Gates, Henry Ford, and Steve Jobs, did, in fact, start their companies and operate them. Those who followed a similar trajectory as Gates and company merit the label “producers” for they produced the original product, funding, and marketing which later evolved into a successful company. Going forward, those individuals who fall into this category will be labeled “producing executives.”
In contrast to these producing executives stand the individuals I shall call “operating executives.” These executives are those who did not start the company or corporation for which they work. Naturally, the vast majority of current executives fall into this category. In addition, the producing executives can slip into this category should they become complacent during their tenure and delegate the creative tasks to others while they concentrate on administrative duties. This is not to demean administrators, but simply to state that they no longer produce any tangible benefit for their company.
Sowell claims both of these species of executives are demonized equally, as he offers no similar distinction as the one I put forth. Such a claim, however, as with all broad generalizations, is too all-inclusive. There is scant evidence supporting the claim that producing executives are demonized; in fact, they are, to borrow from Sowell’s own wording, the individuals who our society “canonizes.” His intense anti-Semitism aside, Henry Ford is lauded as one of America’s greatest citizens; Apple practically operates as a cult centered on Jobs. Instead, almost universally, those executives who receive the scorn Sowell refers to are operating executives. But even with this clarification, the range far exceeds the reality. The majority of operating executives exist outside the day-to-day perception of Americans, save for those who read Forbes or BusinessWeek regularly.
Americans often are rather discriminating with their scorn. Outside perhaps the Occupy movement, which seems to oppose the majority of operating executives, the American populace has only “demonized” those operating executives who played a significant role in the financial crisis which set off the recession of 2008-2009. The operating executives of Goldman Sachs, AIG, Lehman Brothers, and other banks and investment firms who awarded themselves with million dollar bonuses despite the economic cataclysm they caused are the executives Americans have focused their collective scorn upon.
With the discussion of the “demonization” of executives settled, I now turn to whether or not it is morally right to tax their income at a higher rate than at the present. This may seem like the same discussion which took place in my earlier post “Socialism or National Duty?”, but it takes a more philosophical turn. Typically conservatives will oppose higher taxes on both types of executives, as such taxation takes too much of their hard-earned income. However, unless one is a producing executive, there can be little assertion that executive income is hard-earned. It is true that some operating executives can save their companies through administrative means, but the majority of operating executives simply tend to an already successful ship.
Operating executives merely oversee the business, serving as a guiding hand to keep the company on a track into the future. This role is no doubt important, but the relative value of the guiding hand of executives becomes questionable when compared to the lower level employees. This is most easily seen in businesses which rely on sales to survive. Who wields more influence over the success of a car company, the operating executives who make business decisions, or the salesmen who actually convince consumers to purchase the product? The relationship is no doubt symbiotic, but symbiosis does not require the two organisms to possess equal power over each other. To provide another example, outside the world of business, one can look at the military. The soldiers on the ground and the generals in the command centers are undeniably connected on the most intimate level, but superior troops succeed despite subpar generals more than superior generals succeed despite commanding subpar troops.
Using these positions, one can turn the conservative opinion that socialism is taxing those vital to success of a nation to benefit those who coast off of them on its head. If the low level employees – the salesmen – are the lifeblood of a company, the operating executives who do not provide product-related input are the individuals coasting off the success of others at the expense of those hard working individuals. Operating executives award themselves with very high salaries for simply overseeing the hard work of those individuals who earn wages based on time worked or by commission.
Thus, we turn to the second quote provided by Sowell which states that “income is not distributed: It is earned.” The definition of “distribution” with regards to income refers to the process by which a nation’s Gross Domestic Product (roughly the total income of all citizens of a given nation) is distributed amongst the population of a country. Sowell’s quote refutes this definition by implying that income is based purely on merit; individuals earn relative to the importance and effort their work entails. However, if one is to believe the viewpoint I laid out in the preceding paragraphs, then Sowell’s claim is faulty. If income is purely earned based on importance and hard work, those employees I believe are more important than operating executives would command a larger portion of the economic sum in our nation. But since this is not the case, with operating and producing executives owning a vastly superior share of wealth than the wage employees, the divvying up of economic shares must be distributive in nature.
I would like to make the claim that my argument here is not Marxist in nature. I do not deny the overall importance of operating executives, instead simply questioning their relative importance when compared with the employees who are the true engines of a company’s success. Nor do I necessarily believe that the employees should own and operate the company themselves in a cooperative sense, or that the employees should be paid more than the executives. Instead, I simply hope to point out that wealthy who often contest welfare practices by claiming that they allow individuals to gain based on the hard work of others are in fact the ones benefiting from the work of others. While the case concerning executives is important, I believe this argument can be seen in a clearer light regarding two taxes the wealthy often try to eliminate: the capital gains tax and the estate tax.
Let us begin with the capital gains tax, which taxes the income generated by the possession and sale of stocks, bonds, and other securities. Stocks are the best example for my argument, so we shall discuss them. For those readers who are unaware, the stock market inherently operates in a rather artificial manner. Each stock represents a share of ownership in the company, but by and large the share is miniscule. Take Disney for example. At this writing (11:07 a.m. Eastern Time on Tuesday, the 6th of November) over a million and a half shares of stock in Disney have been moved since the markets opened today. That number refers only to shares which have been bought and sold, but the majority of shares in Disney, as well as virtually every company, reside in individual portfolios, thus out of the market. Due to the fact that each share of stock represents a degree of ownership in the company, those who own stocks are “nominal executives.” This distinction is, for obvious reasons, the weakest of the three executive breeds, carrying negligible influence over the day-to-day affairs of the corporation.
Companies originally sell stock (“going public”) in order to gain revenue, although this is a one-time venture. The company only makes money when a share is bought in the initial offering, not in the subsequent trading. To continue with our example of Disney, if I was to purchase $10,000 worth of shares in Disney, the company would not receive a dime. Once a company releases shares into the market, they become no different than items purchased at any store. When I buy a Nikon digital camera directly from the company itself, Nikon receives the full profit. But should I decide to sell the camera a few months later to my neighbor, I receive all the profit while Nikon gets nothing. The stock market is the same way, operating almost as a gigantic flea market of buying and selling ownership shares.
Further, these shares enjoy a slight disconnection from the company itself, in terms of value. While generally the price of a company’s stock and the general status of the company are related, the prices of stocks are based mostly on perception than on reality. Again let us return to Disney. Disney is one of the largest and most powerful corporations in the world, as it owns ESPN, ABC, Marvel, LucasFilms, and of course all the Disney associated ventures (Disney Channel, Radio Disney, the Disney-theme parks), as well as vast foreign media holdings. Disney is often regarded as one of the “Big 8” corporations which own almost the entirety of the global media. Yet despite the strength of this goliath, Disney’s shares are currently (11:26 a.m. Eastern Time, Tuesday the 6th of November) trading at $50.29 a share. This price is not horrible, but compared to Google ($679.80 a share), FedEx ($93.21 a share), and Netflix ($76.68 a share) the price is curiously low. Disney is certainly a more successful company than FedEx and Netflix, and much more valuable strictly in terms of assets held.
This disconnect is explained by the speculative nature of the stock market. The price of stocks is decided by investors through the method of perception, supply, and demand. If investors believe that a company is about to make a large profit, they will move to obtain more shares of ownership in said company, increasing demand for the relatively stable supply available. Thus, if Disney is rumored to be preparing to release something like a tablet computer which comes loaded with every Disney animated movie (a purely imaginary item I believe would be highly anticipated), the price of Disney stock would skyrocket in anticipation. But should the release be pushed back due to technically glitches and when the product comes out, it is marred by even further bugs, Disney’s stock would take a huge hit. This does not mean that Disney would become a significantly weaker company, or even that the value of the company would experience any meaningful change.
With that brief description of the stock market complete, we turn to the matter at hand, which is the capital gains tax. Capital gains taxes come in two forms, short-term and long-term. Short-term refers to holding which the individual holds for less than a year before he or she sells it. The income generated by these short-term investments is taxed at the same rate which conventional income is taxed. Long-term holdings are those possessed for more than a year before they are sold. Currently, the tax rate on this form of capital gains, the variety I will focus on, is 15% for most individuals, although those in the lowest two tax brackets do not have to pay a capital gains tax. Before anybody jumps to conclusions, the lowest two tax brackets refer to those married households which earn less than $70,000 a year and those individuals who earn less than $34,500 a year. It is unlikely that such individuals possess a high enough volume of stocks to warrant taxing their capital gains.
While the value of stocks, as mentioned earlier, is not directly tethered to the daily activities of the company, there is still a connection, however weak. Since the value of stocks can be determined, at least in part, by the successes of the company, those nominal executives benefit despite putting nothing into the system. Should the stock of Disney double due to a successful quarter the nominal executives who choose that moment to sell their stock will receive a financial windfall, taxed at a very low rate. But what did these individuals do to earn that money? Conservatives will say that those who do not put in any work should not benefit from the work of others, but in what way is the stock market different? It simply is not. Nominal executives’ claim to benefit does not stand up to the very same logic many conservatives use to justify gutting the welfare state.
Since these nominal executives did nothing to earn the income generated by successful selling of stocks, it stands to reason that said income can be taxed at nearly any rate which would still leave the nominal executive with some benefit. I am not seeking to eliminate the stock market by any means, but the tax rate for capital gains can justifiably be raised to 50% or higher, since there was no labor put into the generation of this income.
The estate tax is not as complicated and thus will not take as long to discuss. The concept of the estate tax (deemed the “death tax” by the same propaganda machine which cranked out “death panels” and “Obama’s apology tour”) states that the estate, or inheritance, left by an individual to his or her family can be taxed if it exceeds a certain value. Currently, that value is set at five million dollars, although a bill currently floating between House committees would lower the bar even further to one million dollars. The current rate of taxation for estates valued over five million dollars is 55%.
What eludes me is how conservatives do not see the passing down of estates as socialism; because logically speaking it is. If my father was worth fifty million dollars and when he passed away, he left fifteen million dollars to each of me and my three siblings, what have we done to earn this money? We are simply benefiting from something we did not have to work to achieve; no matter how hard I may attempt to do so, I cannot will myself to earn Bill Gates’ estate. Those who benefit from the passing down of estates are purely in the right place at the right time, so to speak. Just as with the stock market, I am not seeking to eliminate the passing-down of estates, simply rationalizing a taxation of estates.
The reality of the situation is that regardless of whether or not operating executive income, capital gains income, and income from inheritance constitute socialist practices of rewarding individuals for the work of others, conservatives will never be convinced. After all, surely this piece is just an attempt to demonize those whom grace our society while asking nothing but everything in return, right?