How We May Seek to Improve Wealth Inequality

Wealth Inequality

Given how large the grass roots campaign against wealth inequality has grown, with two presidential candidates now in tow, if we’re going to improve this, we need to be careful.

We see all sorts of numbers out there telling us just how concentrated wealth is among the elite, the top 1%, the top 0.1%, the top 400 families in America, and so on. Among the concerns here is that this gap is widening, and this is the first thing that we need to address when seeking out solutions to this problem.

This is actually a normal phenomenon when the wealth of a country increases, and it’s not really that hard to understand why. We’ll use the stock market for illustration, although the same principle applies to wealth in general.

Over the last 10 years, stocks have tripled in value. The more wealth you have, the more you can leave in the market to grow, and the very wealthy can afford to leave pretty much all of it in there to continue to grow.

Meanwhile, the less wealthy are actually investing to supplement their future income, which they earn by riding on the back of the stock market, and in a real sense, on the backs of these wealthy people as well. We all want stocks to keep going up, and we’ll see our smaller positions increase in value as this happens, although this is also going to cause the fatter cats to see their wealth grow even more because they don’t need to spend it and can also contribute more of their income toward it.

The gap increases, and people get upset, but as it turns out, it’s actually pretty stupid to even look at this gap, and what we need to be doing instead is looking at the way that those less wealthy are seeing their wealth trend. When capital grows, of course the people who have more will experience more growth, but if we’re worried about the relatively paltry amount that most people have, this is what we need to look at, how they may improve their savings.

In terms of stock investing, everyone is making better returns when we have bull markets like this, and the rich getting richer is actually a good thing because this also helps us to get richer as well, although on a smaller scale.

If we get too upset or envious and want to knock these wealthy people down a few notches, we need to be aware that doing this will end up knocking us all down a few notches as well, and we can ill afford that. This doesn’t reduce the gap at all and in fact makes it bigger, because we’ll pay a bigger price proportionately than they will because we can ill afford to lower our wealth.

There’s only one way to actually improve this situation, and it’s not top-down, it’s bottom-up. We’ll always have a big wealth gap because this is the nature of capitalism, as opposed to communism which seeks to knock everyone down and this can be achieved even though it leads to things like people lacking the basic essentials for life. This seeks to help the poor by making everyone poor, something that Russia and China has come to learn, even though it took a very long time for the lesson to be learned.

Communism is the ultimate top-down approach to inequality, which just ends up hurting everyone. Capitalism at least doesn’t prevent the wealth creation that we see when those who have capital put it to work, what we call the trickle-down effect, and a lot more trickles down than we realize.

When we look to impinge a lot on the wealthy, this ends up making its way all the way to the bottom, and ends up reducing everyone’s wealth essentially. This is not the solution and actually just makes the problem worse.

Bringing Everyone Down Makes Things Worse Not Better

People look to the ultra-rich, with their many homes, jets, boats, and other extravagant possessions and compare this to the worst off of us or the average person who has little or no wealth, and see how wide the gap is. They may think that all we need to do is to take some of this excess from the wealthy and this will make things better somehow.

We already do quite a bit of this, as we have no problem taxing wealthy people more and have them paying a disproportionate share, and there’s even some real question as far as whether we already overdo this to the extent that this does more harm than good.

We do know that the average person as well as the ultra-rich are hurt by higher taxes, as this contracts the economy, leads to less jobs and a lesser fate among the populace overall, and we only have to look to the Great Depression to see how bad things can get when the wealthy suffer big losses.

This is not a matter of our wanting to help those in need, which is a separate issue, it is more about what we are prepared to do in order to raise money to pay for this. We’re in a tough spot already when it comes to tax revenue, as we don’t collect anywhere near enough as what we spend already, and there just aren’t any good ways to raise more without harming the economy too much.

Tapping into the great wealth held by so few people can appear to be very tempting, but if we approach this out of ignorance, without considering what the effect of these new taxes will have on the economy, we can do much more harm than good and harm everyone while we’re at it, not just the rich.

Aside from wealth inequality being a natural and even a desirable phenomenon, we still should want to raise up the fortunes of the less wealthy, even though this at best would be very challenging. The root of this problem lies in how little ordinary people save, and if you’re going to build wealth, you have to save, because this doesn’t come out of thin air unless you win the lottery or get a big inheritance.

If we spend all the money we make, or almost all of it, we just aren’t going to have very much to show for our labor, we just won’t have much capital to grow. We want and need capital to grow generally, even if we don’t have any, because this benefits us economically, but if we can’t save ourselves, we just won’t have much skin in the game.

Americans are famous for their desire to spend, and this is more of a cultural thing than anything. Some cultures save with a passion and tend to have much higher wealth to income ratios. They may earn less than we do but have a lot more saved because they are a lot more motivated to do so, for better or worse.

We Need to Hoist People Up, Not Knock Some People Down

If the government wants to get involved in promoting higher levels of wealth among its people generally, and not just for the top percent, it needs to work on trying to help bring the wealth of the other 99% up, not just try to knock down the top 1%. Unless we learn this lesson, we are headed for real trouble and will end up reducing everyone wealth.

Getting people to save more is a huge challenge these days, with all of the influences out there to make us part with our money. Many people live hand to mouth, and many more spend more than they should instead of looking to build more wealth, even amounts that will be needed later in life to subsist.

The government could do more to encourage people to save perhaps, although there’s only so much you can do with looking to turn people more away from being spendaholics, which is a hard habit to kick.

We still should be doing more here though, and not have people spending themselves broke continually and being upset about their fates. The lessons that we need to be teaching people boil down to taking more responsibility for their own lives and realizing that they are their biggest obstacle to even building a little wealth.

Aside from education, there are some other things that the government could be doing to help people save. We can’t give them money directly but we could certainly look to cut back on how much of this saved money needs to be given back to the government, including even making saved money tax exempt.

That would be a pretty dramatic solution and it would certainly be felt fiscally, but there is always a price to be paid if you want to do something this ambitious, and raising the level of wealth among ordinary people is a very ambitious project indeed.

We need to make sure that the benefits here are also transparent enough to produce the desired effect, and the best way to do this is to have tax paid on saved income be refunded. Getting a bigger refund will then reinforce the benefits of saving, and getting a smaller one will also serve to inspire us to save more and do better next year.

We will want to put limits on this of course, to ensure that the tax break is only applied to those who we wish to help, which would not include those already wealthy enough to not warrant any of this.

We could even seek to offset this reduction in tax collected with a modest increase in tax rates for the wealthy, although we need to be careful not to harm the economy too much by overdoing this, and settle for amounts that do not produce substantial reductions in economic growth.

We definitely don’t want to be increasing the tax on companies to make up for this, or for any other reason, as this tax gets passed on directly to everyone and will just make things cost more and knock everyone down a peg, which is not what we are shooting for here and is actually quite counterproductive.

This is a well-known effect in economics and our politicians should be required to at least a good understanding of economics before they grab their clubs and look to use them to pound on corporations. If we seek more equality, we need to lower corporate tax rates because this sort of tax serves to actually widen the gap. While everyone pays this tax and pays the same rate, this is not what we are looking to do here. We want to have the wealthy paying more and the less wealthy less or none, and the less well-off actually pay a disproportionately high portion of their income toward corporate tax, meaning that this widens and not narrows the wealth gap.

If we live in a fairy tale world that never involves costs of production being passed on to consumers, corporate taxation might seem like a nice thing, making these wealthy corporations pay more. Eliminating all corporate taxation would do quite a bit to equalize things in itself, and allow us to better tax people according to their ability to pay.

Sales taxes do the same thing, and this is a money grab by governments that also subject everyone to the same tax. The homeless pay the same rate as Warren Buffett. Sure, they make a lot less, but if we really care about the less well off, we should be looking to have others pay more of their share, which progressive income tax does and corporate and consumption taxes fail to do.

This doesn’t mean that we should get rid of consumption taxes, but we need to confine this to more discretionary goods and perhaps even filter by income, where people making under a certain amount become exempt. This would take some work but we do have the technology today to make this happen.

If we are open to extreme solutions, while this savings tax break as well as reducing the tax burden on those with little or no wealth would be pretty extreme compared to what we are doing now to promote this, which is very little comparatively, this would at least be targeted to achieve the desired objective and not be designed to reduce everyone’s wealth, which is never an acceptable outcome and is contrary to our objective in fact.

The savings rebate idea could be tailored according to our capacity to bear the reduction in our tax base, where we could start at the bottom and then include as many people in the program as we could afford to, and this would make a real difference to the wealth level of many at the very least.

Getting people to save and reducing overall consumer spending tends to contract the economy if overdone, and this actually is a bigger worry than reducing the tax base, as this in itself will reduce it as well as cause pain for everyone if taken too far.

With the right mix though, a general tax break for saving provided to those who we want to see build more wealth may not be all that bad of an idea, and would at least present a constructive option to help address this level of inequality.

This is not about looking to constrain greed like headhunting the rich wishes to do, it really is about benefiting the rank and file more, but we need to make sure that the changes we propose actually do benefit them and not harm them further. We certainly could be doing more to help them, but we should certainly not wish to make their fates worse, which can happen when we’re long on anger and short on sensibility.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.