Is $1,000 dropped into the middle of Long Island City the same as $1,000 dropped on 79th & Madison in Manhattan? To some, the answer is yes. A dollar is a dollar after all.
Economic Context Affects Value
New York Times columnist Andrew Ross Sorkin might disagree given his views on taxes. He thinks the rich don't pay enough. Since that's his position, $1,000 in Long Island City is of much greater use than the same amount on the Upper East Side simply because someone in Manhattan’s East 70s probably has a lot of money already, and wouldn’t spend it. A Long Island City resident is not only more likely to need the money, this person would quickly “stimulate” the economy by spending it right away.
In truth, $1,000 on the upper east side is much more economically stimulative precisely because the "found" money is least likely to be spent. In other words, the economics of taxing the rich are backward. This broad misread of simple economics within the commentariat in no way aids the common man. In Sorkin's case, he might agree about the greater worth of $1,000 in the East '70s if he spent quite a bit more time closely watching the habits of the superrich he seeks to characterize on Showtime’s popular show, Billions.
Not all money is created equal. $20 billion in tax cuts for the lower class will be spent, but $20 billion in cuts for the upper class will be invested.
For background, Sorkin penned a column last week for the Times in which he wrote of what “everyone” knows to be true: the tax system is “broken." Sorkin is certain that the estate tax exclusion is “too high,” and that the latter is a problem because "wealthy Americans can pass much of their riches to their heirs without paying capital gains.” Sorkin’s solutions are all about ratcheting up tax rates foisted on the richest of the rich. Getting into specifics, Sorkin wants to boost the bite of the estate tax, raise capital gains taxes, treat “carried interest” income like regular income, increase funding for the IRS so that it can be more aggressive in taxing away the wealth of rich people, but he's also eager to not overshoot on all this since the Times writer is certain that “nobody” wants to “dissuade charitable giving.”
No Real Difference between Capital Gains and Income Tax
People who presume to speak for “everyone” are on their own, remarkable. After that, unbeknownst to Sorkin is that there are in fact people who are very skeptical about charitable giving, and not because they hate the poor or sick. Some view a billionaire parceling out funds to charities as a swim lane violation every bit as egregious as a business page columnist attempting to allocate funds a fraction as effectively as the billionaire subjects of his columns and shows. The skills aren’t necessarily transferrable. So while people should be free to do with their money as they wish (too bad “everyone,” including Sorkin, doesn’t agree with the latter), it’s seemingly lost on Sorkin that the act of becoming incredibly rich is nearly always evidence of an individual vastly improving the lives of others. This includes investors whose capital allocations make these wondrous entrepreneurial endeavors possible.
That’s why it’s passing strange that Sorkin would find the tax treatment of “carried interest” so reprehensible. For one, there’s really no difference between the two. Per the Congressional Research Service, the average effective earned income tax rate is 25 percent. This is relevant in consideration of Sorkin’s claim about the carried interest “loophole." In reality, the long-term capital gains rate is 23.8 percent when we factor in the Affordable Care Act surcharge. In short, and contrary to Sorkin’s insinuation, there’s no real difference between income and capital gains tax rates.
Sorkin wants to penalize the abstinence that powers economic growth. Yes, investment is the driver of growth. Always.
Furthermore, he misses what “everyone” should know, that "carried interest" and capital gains income is not income. Each is what the intrepid take in after delaying consumption in favor of making investments that often have high odds of low to negative returns. Basically, Sorkin wants to penalize the abstinence that powers economic growth. Yes, investment is the driver of growth. Always.
All this rates extra attention in consideration of Sorkin's admiration for charitable giving. Figure that if he loves charity, he must really love job opportunities for those who lack them. And that’s the beauty of investment. Indeed, “everyone” at least should know that companies and jobs are always and everywhere an effect of investment. In that case, most “everyone” should be against the penalization of successful investment. Important here is that a tax on capital gains and/or carried interest is a tax on investment. Crucial is that “income” from either is once again far from a certainty, so it’s wholly illogical to treat what’s not income as income. The penalty for those willing to put capital to work should be zero.
Abundance Increases Investment
The problem for Sorkin is that he thinks major concentrations of wealth are bad. This explains his desire to greatly reduce the $11.2 million estate tax exclusion. Here Sorkin would simply be wise to watch more closely the difference between the rich and the rest of us. It's not that the rich spend more.
What makes the rich crucial to progress is that they quite simply cannot spend it all. That they can’t means that, short of stuffing their wealth under mattresses, they must invest what's not taken. And that’s the beauty of keeping taxes on them as low as possible. That's why $1,000 found on 79th and Madison is so much more valuable. It has the greatest odds of being invested.
The rich are not like the rest us in that they invest the copious sums left over after taxes.
Stated simply, not all money is created equal. While $20 billion in tax cuts for middle earners will be spent, $20 billion in cuts for those who already have life's necessities and luxuries covered will almost, as a rule, be allocated toward today's and tomorrow's companies. There’s your growth, there’s your broad job opportunity, and since Sorkin is so confident that “nobody wants to dissuade charitable giving,” there’s your extra charity.
It's said that New York Times elites are too far from the common man, that their vantage point is too often one of Manhattan and Greenwich. The critics get it backwards. In Sorkin’s case, he’s got the ultimate access to the richest of the rich, but he’s maybe not learning enough from those he has access to. With a better eye, he’d see that the rich are not like the rest us in that they invest the copious sums left over after taxes.
And the world is much, much better because they do. This can’t be forgotten when it comes to tax policy. Andrew Ross Sorkin needs to spend much more time in Greenwich and Manhattan.
This post is republished with permission from Real Clear Markets.
John Tamny
John Tamny is Director of the Center for Economic Freedom at FreedomWorks, a senior economic adviser to Toreador Research & Trading, and editor of RealClearMarkets.