Some politicians love to jump on the TAX THE RICH bandwagon to fight income inequality. They want to redistribute the wealth, but beware! It's your wealth they want to redistribute.
We all know politicians are a bunch of hypocrites. They spout about climate change at conferences they took private jets to attend. They talk about income inequality, but none of them live it in their personal lives. Take the 2020 presidential candidates, for example. Nearly all were millionaires, with two even being billionaires. Yet, not one of them gave away more than 5% of their income to charity - often lagging average Americans in the same tax brackets.
There are two ways to address income inequality: 1) either bring those at the top down to the level of those at the bottom, or 2) lift the ones at the bottom to the level of those at the top.
Politicians are all about the first approach. Instead of viewing taxes as revenue necessary to fund government functions such as self-defense and infrastructure, taxes are considered a tool to redistribute wealth. I'm not sure that's what our founding fathers intended. The problem with politicians is that many of them never started or owned a business. Many were academics, lawyers, and for some, politics is all they've ever known. People who have never owned a business don't understand the sacrifices and struggles to be successful business owners. That's why it's easy to paint business owners as exploiters of the poor - getting rich at the expense of those less fortunate. It's easy for politicians to tell business owners that "they didn't build that" - meaning their own businesses. They want to take credit for what you built, and they want to accuse you of stepping on the poor on the way to the top.
What politicians don't get is that it's the business owners who create the jobs for the poor. They don't get that if you punish the rich, it's the poor who will pay the price. What happened when Seattle imposed a $15 minimum wage on businesses downtown? Low-margin businesses like restaurants moved out. Who paid the price? Workers who lost their jobs.
Punishing the rich will not make the poor better off. It will only confine them to the status quo. That's because the rich will always be wealthy. They will always find a way to make money no matter how much you tax them. They'll reallocate their capital to more efficient uses.
There are habits ingrained in the rich that set them apart from the poor, and contrary to popular political belief; it's not because they exploited the poor.
Redistributing wealth to the poor will not lift the poor because it doesn't change their habits. The poor are poor because of habits, and no amount of redistribution will change those habits. Education, opening up opportunities, on the other hand, will go a lot further in teaching the poor the proper habits to become rich than simply handing them money.
A 2016 article in theguardian.com profiled one Nobel Laureate in Economics who would agree that punishing the rich is not the way to lifting the poor. The report profiles Christopher Pissarides, professor of economics at the London School of Economics, who told the World Economic Forum annual meeting in 2015 in Davos, Switzerland, that citizens worldwide suffer extreme inequality, but punishing people on high incomes is not the answer. "I don't think taxing high incomes and simply taking the money and passing it on as transfers to lower incomes can work in today's open globalized world," Pissarides, who won the Nobel prize for economics in 2010, said in a briefing on income inequality.
According to Pissarides, governments should combat inequality by using their tax revenues to create jobs rather than redistribute money from the rich to the poor. Redistribution takes away the incentive for lower-skilled people to acquire skills and go into the labor market; he argued and created disincentives for higher earners to stay in the country, work hard and look for new ventures to make money.
Pissarides was entirely on point. You punish the rich; they'll go somewhere else to get rich while taking jobs away from the poor. The poor aren't better off. On the other hand, if you educate the poor and give them jobs and opportunities to lift themselves up, that seems like the only practical way to address income inequality.
Here are the differences in habits between the rich and the poor and why helping the poor adapt the rich habits will go a lot further in advancing their stations in life than just giving them handouts.
- The rich save—the poor spend.
- The rich never spend more than they make. The poor spend more than they make by acquiring debt.
- The rich trade money for time by seeking out passive income opportunities that make them money while they sleep. The poor will always trade time for money if they don't find alternative passive income sources.
- The rich think long-term - saving and planning for their financial futures. The poor think short-term - many never planning beyond the next paycheck.
- The rich make investment decisions based on data, projections, and economic fundamentals. The poor speculate - treating the stock market like a casino.
- The rich don't follow the crowds. They don't let emotions and what's hip or trending on social media influence their investment decisions. The poor are easily swayed and follow the crowds - often driven by FOMO (the fear of missing out).
Wouldn't it be more effective to lift the poor up by educating them on how they can be rich instead of continually bombarding them to message that being rich is bad? Why would they ever want to be rich? There's no incentive too. That's why punishing the rich will only take away from the poor, who will pay the price when the rich take their jobs elsewhere.
Habits are why the rich always get richer, and the poor always get the status quo.
From Andrew Lanoie -4 Peaks Capital
March 17, 2021