We had an interesting discussion below, three of us, and it devolved, as it usually does, into a discussion of the nature of wealth creation. In the end I defaulted to Abraham Lincoln, who famously said
Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if Labor had not first existed. Labor is superior to capital, and deserves much the higher consideration.”
I believe that labor is the source of all wealth, though I am told by fancypants conservatives that the concept is trite and long discredited, perhaps even Marxist. (Did Lincoln read Marx?) But it’s pretty much bedrock – everything we have is the result of someone’s labor. The fact that I own stock means that I tap into a pool of wealth creation. The mere fact that I purchased the stock means nothing.
But I don’t want to discount the contributions of forms of labor that achieve greater benefit for all of us – I regard creativity as the highest form of labor. The fact that Steve Jobs made a small computer in his garage, or that Henry Ford devised a way to make cars more efficiently opened up new horizons for workers, made necessities of luxuries, and opened up new commercial potential. These men gave us jobs and made life better for everyone. Creative geniuses are amply rewarded, and should be.
Administrative skill is also a form of labor that reaps higher benefits. Those who are able to recruit and discipline management personnel to create organizational efficiency are highly rewarded in our society. But they are not creating wealth – they are merely harnessing the creative engine. Nonetheless, we need them and should reward them. But all too often, administrative ‘creativity’ is nothing more than arbitrage – putting a Chinese worker at a lower wage in the place of an American, allowing investors to pocket the difference. That type of managerial activity deserves no reward, in fact, ought to be penalized.
Ordinary workers who create wealth by working eight hour shifts are low on the scale, and the lowest skilled jobs are poorly rewarded – in fact, would be a form of slavery were it not for minimum wage laws. (Slaves, after all, did receive food and housing in return for their labor.) But these jobs, even as they depend on the creative skills of those who design the machines they operate and the managerial skills of people above them, are still wealth creation engines. In fact, in theory anyway, every working person is paid less than the sum of the wealth created by his labors, otherwise our economy would collapse. What business can survive by paying more for labor than labor pays in return?
Where does this leave investors? Do we need them? Surely we do need them, to allocate wealth among various endeavors – as one sector of our economy falters, investors will move their resources to another, or as a new invention comes along that harnesses human energy in new wealth creation, investors rush to benefit thereby and put seed capital in the new industry. In short, we need investors as a resource allocation tool. But conservative economists have reversed the natural order of affairs, and will tell us that by the mere act of investing in an activity, that investors are creating wealth. Nonsense – they are organizing it, harnessing it, and if lucky, harvesting it. If unlucky, they lose everything.
For that reason, prior to 1981 or so, investment income – dividends, interest, and (off-again on-again) capital gains were taxed at higher rates than income from labor. It was called “passive” income, meaning that the wealth (fruits of someone else’s labor) would flow to the owner of capital regardless of whether he was actively involved or not. No matter that Andrew Carnegie was on a cruise in the Caribbean, his wealth flowed in without a hitch. Congress therefore saw no harm in taxing this type of income at higher rates than that from the sweat of the brow.
Perhaps the greatest achievement of the conservative revolution in this country has been to change our basic attitude about the nature of wealth creation. Where once labor was taxed at lower rates than passive income, we have reversed course now. Dividends and capital gains, the primary source of income for our wealthy classes, are now taxed at a top rate of 15%, while labor is taxed as high as 43%. (Why other forms of passive income like interest, rents and royalties were not given preferential treatment as well is a mystery to me. It’s probably in our future.) And the means by which this reversal in tax policy was achieved was by implanting a meme in our thought processes. Conservatives have sold the idea that the mere act of investment is a wealth creation activity, while payments of wages is a drain on our health. It’s bizzaro world.
The postwar period in America, from 1945 to the early 1980’s, was perhaps the most egalitarian in our history, as more people participated in the rewards of our wealth creation engine than ever before. I grew up in a small post-war stucco tract house – hard to imagine, but I was privileged by earlier American standards. We had strong unions, and higher wages rippled out from those unions, and even lowly factory workers made good salaries. But since Ronald Reagan, there has been a change of course – inequality is on the rise, and has been since he took office. Unions are at a low ebb, and forming a union in the United States is is probalby as hard as forming a business in the old Soviet Union.
It’s a game – it’s about harvesting wealth as it is created. Unions capture wealth created by labor for workers before it moves up. Conservatives, though they don’t openly say so, believe in trickle down theory – the idea that wealth is created at the top and flows in the other direction. They believe we are feeding the sparrows though the cow. But reality is more like a system of percolation – wealth is created by labor at many levels, highly intelligent labor, and the grunt variety, and works its way up. It is finally harvested by investors, who take credit for making it in the first place.
I’m not a Marxist – I don’t see a world without investors. We need them, but should not overvalue their function. Right now, as a result of our system of campaign finance, they have control of politicians, and our wealth allocation system is being skewed in their favor. As a result, we have created a society with a leisure class building ever-larger mansions and driving Hummers, while more and more of us are barely hanging on at the bottom. All the while, the safety net for those at the bottom is under attack. We are not even allowed to make a health care system that benefits all of us.
It helps to understand the basic makeup of our economic system and the reason for our well being. Then we can put investors in their place, and tax them accordingly. We need them, but they need us far, far more.
Piece of Mindful 
Sometimes Mark, I think you only see things in black and white, when really there’s thousands shades of gray.
Abe lived in a black and white world, every one was poor, except for a few industrailists, plantation owners, copper kings. These barons owned every thing, stores, housing, politicans. Looking thru Abe’s eyes it was easy to to see the importance of labor. If you wanted a train track, hire Chinese, if you wanted your fields cultivated, hire field workers, if you wanted mines, hire miners. Low skilled labor was required to achieve any thing on a large scale, the seeds of resentment are sown.
Then enter the age of hydralics, machines that did the work of twenty, labor takes a hit, but later rebounds by investing in capital when they start buying their own machines.
Combine all of this with the higher percentage of home ownership, stock options for all employess who work for major companies, forces the line between investers and workers to become blurred.
My point last post was this, a large majority of all workers have vested intrests in investments. The Walmart janitor, the Stillwater miner, the farmer with thousands of dollars of equipment, the plumber with a backhoe. All of these see the tax advantages owning or investing gives them. I don’t see how you can attack the major invester without effecting the average one.
But more importantely Mark, what would be the results of higher taxation on nonworking capitalists? You of all people should know this, avoidance. Wealth always remains or returns to its rightful owner.
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I’m talking about progressive taxation, which would not affect workers who happen to have their 401K’s invested in stocks. But you and I both know that the vast majority of stocks and bonds in this country is owned by the top 10 or 15% of us.
Nothing you said refutes that fact that labor is the source of all wealth. Machines merely make it possible for fewer people to do more labor, but will never replace the fact that human effort and creativity is at the base of it all.
As Lincoln said, labor is the source of capital. That has not changed. Your notion that those who accumulate capital deserve better tax treatment than those who produce it is wrong-headed and sycophantic.
Tax everyone the same, tax progressively. What could be simpler?
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I say the worker and the owner/investor situation is symbiotic. They need each other to succeed.
The point you need to see is the reaction you will get from punitive tax rates. Those rich people didn’t get that way by being stupid. When tax rates went way up on luxury yachts, they simply didn’t sell any. The working guy who builds yachts was the loser.
Higher rates for the rich? Of course. Confiscatory 70% rates? Get real! Penalize success and reward failure?
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You seem to catch only about 25-30% of the information that goes by you.
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Mark, I’m not going to take up this argument just now as I’m too damn busy to give it the fisking it deserves but I think you misrepresent Lincoln’s words (which is easily done.) Lincoln, I think, was referring to Locke’s Second Treatise on Civil Government and the inalienable right of man to keep the fruits of his labor with no presumptive obligation to support other’s capital with such. It’s certain that Lincoln read – and admired – Locke.
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Leave it to you to take some simple and straightforward words and try to twist them into some crooked right wing tinker toys. The man said what he said very plainly. What you just threw at me was pompous bullshit.
And I’ll leae it with the concept I could not get across to Swede – there is no reason to give preferential treatment to investment income over earned income. Treat it all the same, my own preference being progressively, which I think is easily defensible.
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Leave it to you to dismiss historical context and meaning. What is pompous bullshit is your unwillingness to understand and think you’re right in your ignorance. Just like your take on economics that ignorance is understanding. No wonder I don’t comment here much anymore.
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As much as I comment over at your place. I encounter many types here, some of overreaching stupidity, some merely caught up in current trends that say that wealth is our nanny, that any attempt to block its accumulation is self-destructive. But history tells a different story. The greatest expansion of wealth and equality in history followed institution of policies that are exactly opposite of what you advocate.
What to do? Most are simply ignorant of history, but you are not. Nor are you stupid, but you bring to us a distorted view of the past that is really nothing more than contempt for lower classes, almost self-loathing, if I understand your current economic situation well. You bring us what I think of as supreme, thoughtful, well-read stupidity. You tell us that black is white, and cite.
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When you say, “we need to understand thebasic makeup of our economic system”, I assume you fully understand the implications of raising the cap gains rate.
Martin Sosnoff, Chairman And Founder Of Atalanta/Sosnoff Capital, Said
Higher Tax Rates On Capital Gains And Dividends Will “Dampen The Stock
Market” And Reduce Investment Capital. “Higher tax rates for capital gains
and dividends are bound to dampen the stock market. The macro picture is
that the more you drive down after-tax rates of return, the less capital
you have available for reinvestment.” (Martin T. Sosnoff, Op-Ed,
“Blackstone And Taxes (Ours),” Forbes.Com, 6/29/07)
And what happens to cap gain collections when the rate is increased?
But The Wall Street Journal Notes That Higher Capital Gains Tax Rates
Result In A Decline In Tax Revenues. “For the past 40 years, capital gains
tax increases have been associated with a decline in tax revenues. Rate
cuts have generated more tax collections.” (Editorial, “A Capital Gains
Primer,” The Wall Street Journal, 10/15/07)
And finally who sufferes the most with increased cap gains?
— Taxpayers Age 55 With Capital Gains Derive About 22 Percent Of Their
Adjusted Gross Income From Capital Gains Income. (Scott A. Hodge, “Reliance
On Capital Gains And Dividend Income Tends To Rise With Age,” The Tax
Foundation, 12/14/05)
— Taxpayers Age 80 With Capital Gains Derive More Than 24 Percent Of
Their Adjusted Gross Income From Capital Gains Income. (Scott A. Hodge,
“Reliance On Capital Gains And Dividend Income Tends To Rise With Age,” The
Tax Foundation, 12/14/05)
Like I said before, targeting the wealthy always backfires and wounds the middle class.
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I’m going to try this once again – all income should be taxed the same. That would include a large exemption on the bottom where there is no tax at all, taking care of your 80 year olds. We don’t differ in believing that they should not be subject to high rates on low income. They would not be harmed by anything I advocate.
You keep referring to that tiny minority of ordinary income people who derive a small portion of their income from dividends and capital gains as the reason why the wealthiest people in the country should have lower tax rates than the rest of us. You’re a water carrier, nothing more. That you have come to identify your own interest with theirs is one of the most remarkable political accomplishments of the conservative era. Working class people fighting for the rights of the wealthy. Wow.
Yes, capital gains collections go up when rates are lowered. I don’t care. It’s not about tax collections, it’s about simple equity.
Yes, wealthy people think that raising their taxes will hurt all of us. That’s how the human mind works. We project – what’s good for me is the national interest.
If it is true that raising a tax dampens an activity, how do you justify levying our highest tax rates on labor?
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Ya know how I justify it Mark, you get who you vote for. More often than not, the people you decry, the workers with out any of these investments vehiciles, scurry to the polls in Nov. and overwhelmingly vote for the party who crafted, advertised and sold these tax inequalities.
And furthermore these politicians, who so craftly deflect any attention to their large estates, know full well they can always count on town criers like yourself screaming unfairness, to further their goal of controlling the masses.
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Swede – I’ve done many tax returns in my life, and when I was young and idealistic, I would take time at signing time to explain to them exactly how much tax they were really paying. With few exceptions, their attitude was “How much is my refund?”
It goes back to Nader’s words, roughly quoted, that if you don’t do politics, politicians will do you. Yes, I know that leaders in both parties are taking advantage of the ignorance of ordinary taxpayers. It’s the price of stupidity.
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I think it will take more just than campaign finance reform to reverse the current “conservative” trend. The elephant in the room is the two-party system itself. Since Reagan, both parties have consistently screwed workers and micro-business. Organized labor is trapped in the two-party dilemma. Big labor also followed Reagan’s (me first) lead by eating its lower seniority members for health and retirement benefits (on top of high wages) that can’t be sustained in a global economy. I thind labor ultimately needs its own political party.
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