The Concept of the Redistribution of Wealth as a Means of Spreading It Is Flawed By Nature, Society Needs to Shift Its Attention To The Increasing Individuals' Ability To Earn a Greater Portion of The New Wealth Created.
The concept and philosophy of governments attempting to redistribute wealth through taxes and other means is evident in many countries around the world, but does it work?
Not only is the philosophy of taxing certain individuals significantly higher than others a fundamental intrusion, but it is not an effective means of distributing wealth throughout society in the long term. There are numerous reasons why these types of policies simply don't achieve the goal they set out to accomplish. These types of policies also create many "unintended" negative consequences on businesses and individuals. The idea behind these policies are to ensure everyone has a reasonable standard of living, which of course I agree with as an idea but disproportional taxation is not a viable means of achieving the goal.
Why is the redistribution of wealth through taxation so ineffective?
One of the biggest reasons that these types of policies are so ineffective is because there could simply never be enough revenue collected through taxation to actually give individuals receiving the "distribution" enough money to have the ability to improve their financial status. By this I mean that providing government assistance or other means of distribution on a continual basis will never give the recipients enough resources and motivation to actively improve their financial status. While individuals receiving the assistance are able to improve their standard of living in the short term, these types of programs act as a deterrent for individuals to actively try to improve their financial status. I'm not referring to programs and government assistance that benefit workers who are legitimately unable to work, but rather the programs that specifically attempt to redistribute wealth. These types of programs simply offer individuals a temporary relief, but have a negative impact on these individuals lives in the long term. Offering individuals resources, rather than enabling them to earn resources themselves is a destructive cycle.
Businesses and Individuals receiving the highest taxation rates will always find ways to avoid paying them.
A recent example of this was Apple and their European sales and operation. Because many countries in Europe have very high corporation tax rates, Apple chose to establish their European headquarters in Ireland, and ended up paying around 1% in tax. A few months ago the European Commission found Apple guilty of a form of tax evasion and illegal practices, and Apple was ordered to pay nearly 14.5 billion dollars to the European Commission. Although the strategy that Apple took eventually turned on them, it still shows what length companies will go to to reduce their taxes.
There is over 2 trillion dollars in "stranded" capital held abroad by US firms..
There is currently over 2 trillion dollars held by major US firms "stranded" overseas, because if these firms "brought" the currency back into the country they would be faced with over a 30% tax rate. This statistic alone validates the fact that individuals will find methods of evading high taxation rates, and are often very efficient and good at doing so because they have so much at stake. The true effect of these types of policies are highlighted by this fact, how is a high taxation on the wealthy effective if the government is only able to tax a sliver of their true wealth? Businesses simply cannot or will not pay the entirety of these types of policies because doing so would make them less competitive. When corporations are faced with a 35% tax rate, the amount that they are able and willing to pay their employees drops significantly. This translates into the employees taking home significantly less money only to be faced with an increase in prices across the board on all products. If the taxation system was redesigned correctly, individuals would take home more money and the price on all goods and services would be significantly reduced. This would enable a level of competition that has never been seen before, and would lead to a vast reduction in prices of goods across the economy.
Disproportionately high tax rates on the rich act as a disincentive for individuals and entrepreneurs to innovate.
What these types of tax policies are really saying is that if you work hard and succeed in starting a business or other revenue stream, then you will be met with a taxation rate of upwards of 50% after its said and done. Whenever small firms are starting out every bit of capital is absolutely vital to them, but when they lose a sizable portion of their minimal revenue to taxes it makes it even more difficult for these firms to get off the ground. There are numerous programs that attempt to help small businesses in terms of tax rates, but these firms are still negatively affected by the taxation they encounter.
If the goal of these types of programs were to succeed and collect enough tax revenue to distribute it to individuals in sizable quantities, then there would almost certainly be a halt of innovation and advancement in the upcoming years. If individuals truly have the ability to sustain on nothing besides government assistance, then their motivation to pursue their dreams and reach for financial freedom is significantly lower than it would otherwise be. I know that things are changing because of aspects such as automation which will have a significant impact on the job market in the near future, but governments giving their citizens an "allowance" needed to sustain would likely turn into a modern form of slavery in the long term.
How do we influence the distribution of new wealth generated?
The most effective and promising way to achieve a greater distribution of wealth throughout society is to give individuals the means and resources is to give individuals more control and ability to have a chance to recieve a greater portion of the new wealth generated. Even platforms such as Steemit gives individuals more control and ability to generate wealth and resources independently. The traditional mass institutions and middlemen throughout society suck up a great amount of the wealth created, which is the main contributing factor to the massive income disparity that is current present.
Whether you are a seller on eBay or Amazon or run a website and receive ad revenue through googles ad service, the intermediaries involved suck up a large amount of the wealth created by these transactions or actions. One of the reasons that has really made me so excited about Steemit is the aspect that it eliminated much of these intermediaries and gives individuals the true ability to receive resources based on the content and value that they create. The idea of removing intermediaries and reducing the influence of centralized institutions can be applied to many industries throughout society, and the benefits would be evident to a much larger majority of individuals.
Intermediaries and centralized middlemen not only suck up much of the new wealth generated, but they also use their new wealth in a different way than individuals likely would.
I will use the example of a "midlevel" seller on Amazon, who sells 2 million dollars a year in inventory on the platform. Amazon takes 8-15% per sale immediately, but lets assume that Amazon only takes a 10% fee for this example. This translates into the individual only receiving a total of 1.8 million dollars in revenue from their sales. For simplicity let's assume that this seller is a single individual and encountered the costs and expenses of 1.5 million dollars from his sales over the year. This leaves the seller with a profit of 300,000 dollars, and for simplicity let's assume there is no tax rate. The seller has various fixed costs, such as their mortgage, food, car and gas expenses, ect, which let's assume equal out to be 150,000 dollars annually. That leaves the seller with $150,000 of disposable income, one third of which is kept for discretionary spending and two thirds of it is put into savings by the individual. This means that the individual will contribute 50,000 dollars to the economy in the form of consumption, and add an additional 100,000 dollars to the investment market. This level of spending in the economy by the seller adds many positive benefits for individuals throughout the whole economy.
What about Amazon executives?
Now let's think of what Amazon does with their revenue. Again for simplicity sake let's assume that Amazon has a annual revenue of 1 billion dollars. After Amazon pays its expenses such as, salaries, electricity, healthcare, and its infrastructure, let's assume that the companies profits for the year were 300 million dollars after taxes. Let's assume that there are 10 individuals on the board of the company who all have an equal stake, and then there is the CEO who holds 1/3 of the stake in the company. This would translate into the CEO bringing home an income of 100 million dollars, and each of the board members receiving an income of 20 million dollars. The CEO also has fixed costs like the seller does, but even if he chooses to live extremely lavishly his annual fixed costs would likely not exceed 10 million dollar or 10% of his total income.
The CEO decides to keep 5 million dollars for discretionary spending, and invests the remaining 85 million dollars into the investment sector. While the CEO is putting a greater quantity of money into the economy than the seller, it is a drastically lower percentage of his total income. Each of the board members would likely spend their income in a similar way, with typically around 80% of their income going into the investment sector. So while the executives who are reaping the most benefits from the platform do put a large quantity of money back into the economy, it is a drastically smaller percentage compared to how individuals would likely spend their income.
What if there was a decrease in the fees charged by Amazon?
Going back to the example of the seller, if the seller was able to maintain all 2 million dollars that they earned, instead of seeing a 300,000 dollar profit, they would see a half of million dollars in profit. Assuming that the individuals fixed costs remain the same at 150,000 dollars, this leaves the individual with 350,000 dollars in discretionary income. Let's assume that the individual decides to save a little more than 2/3 like they did previously, and decides to put 250,000 dollars away into savings and use $100,000 for discretionary spending throughout the year. Although the percentage of their discretionary spending reduced, the amount of money spent on discretionary spending doubled.
The greater the income, the less put back into the economy.
What this example really shows is that individuals only spend so much on fixed costs and discretionary spending, and as income increases the percentage of income that is invested or saved drastically increases. Individuals can only spend so much money on houses, cars, ect. even if they make millions of dollars annually. Individuals that have massive incomes put a miniscule percentage of their overall income directly back into the economy, simply because they can only buy and spend so much. Whenever more of the revenue created is able to go directly to the hands of the individuals rather than intermediaries, the portion of the new wealth created that goes back into the economy soars. The true way to give individuals true power in determining their financial fate is through giving them more control over the revenue and value that they create. Intermediaries are such an ingrained part of society that it will likely be very difficult to move away from them, but once that movement occurs the benefits for individuals throughout society are exponential.
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So many fallacies, too little time.
Spending doesn't put anything into the economy, it takes resources OUT OF the economy and BURNS them.
Savings consumes no resources and takes MONEY out of circulation redistributing the purchasing power to those who want to consume (speculative investors and consumers)
Investing takes resources out of the economy in an effort to produce higher-value resources. On average this results in an increase in the quantity and quality of resources in the economy in the future.
The supper rich consume a much smaller percentage of their resources than the poor. If they save their money then they will maintain an equal slice of a larger pie, if they invest their money wisely then they will enjoy a larger slice of a larger pie, and if they invest poorly then they get a smaller slice of a smaller pie.
Attempts to maximize consumption on non-investment assets are the fastest way to accelerate poverty.
The money invested by the super rich make more money simply on interest and their returns on their capital than all of the "poor" individuals income. The idea behind the post was that through giving individuals more direct access to e opportunities to generate and keep more income.
Investment is absolutely necessary for driving innovation. The topic of this post was specifically simply to point out that instead of trying to redistribute the wealth of the super rich, long term wealth distribution can only be obtained when a greater percentage of individuals have the ability to generate a larger percentage of the new wealth created.
How does spending burn resources? I'm just curious as to what you mean by that. Of course it removes resources from the market but it's not as if the money paid for that good just disappears. The money used for spending finds its way into another individual's income, savings, and investment. Thanks for the reply
By their profits it should be visible that they are productive and if anything the tax burden should be lower. I just like to point out that if the theory goes that raising taxes on alcohol and cigarettes discourages their use, then raising taxes on income discourages labor.
ah thats a great analogy. It is verifiable that when corporate tax goes up, incomes go down and prices rise. The higher tax rates reduce incentives and motivation innovation and entrepreneurship .