Who Pitches In?

by Don Boudreaux on March 10, 2009

in Inequality, Myths and Fallacies

Here's a letter that I sent recently to the Washington Post:

Dear Editor:

Supporting
Pres. Obama's efforts to "redistribute" incomes, E.J. Dionne quotes an
administration official: "'Over the past two or three decades, the top
1 percent of Americans have experienced a dramatic increase from 10
percent to more than 20 percent in the share of national income that's
accruing to them,' said Peter Orszag, Obama's budget director.  Now, he
said, was their time 'to pitch in a bit more'" ("The Re-Redistributor,"
March 2).

This "Progressive" mindset poisons sound thinking.

First,
in market economies incomes aren't "distributed"; they're produced and
earned.  Second, persons whose earnings rise disproportionately more
than those of other persons generally achieve this outcome by
increasing their production disproportionately more than other persons
increase theirs; the fact that someone's income rises means that he or
she already is pitching in more.  Third, the share of federal
individual income-tax revenues paid by America's top one-percent of
income earners has recently been on the rise
.  In 2006 (the latest year
for which data are available) this tiny group of Americans paid a
whopping – and all-time high – 39.9 percent of such taxes.

Sincerely,
Donald J. Boudreaux

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{ 49 comments }

Crusader March 10, 2009 at 2:32 pm

Don – are those high compensation packages "earned" when it's really about the "good ole boy" network just rewarding its own regardless of performance? I think we have a market failure here.

Ike March 10, 2009 at 2:39 pm

Don…

Usually the arguments about redistribution and fairness go out the window when you start quoting numbers that matter.

If the Progressives are really serious about funding their agenda, then they ought to be serious about maximizing the volume of dollars that come into the public treasury.

Their eagerness to enflame class envy betrays the real motive:

It's NOT about how much there is to fund social programs…

It's NOT about a moral imperative that the wealthier pay more…

It's ALL about the inequitable distribution of income (and their insistence that income is EVER distributed or capricious, instead of intentionally earned.)

John Dewey March 10, 2009 at 2:49 pm

crusader: "are those high compensation packages "earned" when it's really about the "good ole boy" network just rewarding its own regardless of performance?"

Do you personally know any of the high earners in this nation, Crusader? Have you ever even met a high-ranking executive of a multi-billion dollar corporation? Do you have any clue how hard they work or how talented they are? Any idea how much they risked to get where they are? Do you really think these folks were entrusted with billions of dollars of responsibility because they "knew the right people"?

I have written speeches for, presented multi-million dollar proposals to, and justified division budgets to highly-compensated executives at the most successful transportation companies in the world. My wife's uncle was vice-chairman of one of the Baby Bells. I know these men. They damn well did earn their compensation.

Econophile March 10, 2009 at 2:54 pm

I would add also that this "top 1 percent" comprises an ever-changing mix of individuals. This fact is routinely overlooked, as it is not consistent with the so-called Progressives' bizarre and misguided intrigue with "class struggle"–there must be some immutable, archetypal greedy villain in the narrative…

Caliban Darklock March 10, 2009 at 3:00 pm

Actually, incomes ARE distributed. When my company earns money, I get that money and distribute it to my employees and contractors. While the conventional expectation is that this money will be distributed according to an individual's contribution, the bald fact is that the distribution is arbitrary. There is no law, nor CAN there be any law, to dictate that I distribute funds in any way other than at my sole discretion.

The idea that your pay is tied to your performance is, ultimately, a polite fiction. We maintain it so you will continue working in a crap job for crap pay much longer, hoping your performance will be noticed and rewarded. But if you don't have some sort of performance clause in writing with a signature on it, that's not going to happen.

My company's standard contract includes such a clause. I came out of the trenches, and I know what it's like, and if you work your arse off for the client you deserve to be paid accordingly. So I put it in writing, just like everyone who ever employed me should have and didn't.

Plac Ebo March 10, 2009 at 3:03 pm

Crusader is on to something here. The system is seriously distorted in favor of the very wealthy. It's inconsistent of Donald Boudreaux to explain how our market economy works to reward the more productive, while at the same time many of his writings complain that our market economy doesn't work due to government regulations and other interference.

geoih March 10, 2009 at 3:17 pm

Quote from Caliban Darklock: "Actually, incomes ARE distributed. When my company earns money, I get that money and distribute it to my employees and contractors."

And I'll bet if you get it wrong (i.e., don't reward your high performers, or treat them the same as the slackers), then the high performers go looking for someplace better to work.

A manager who doesn't reward excellence ends up with a shop full of mediocrity (to match the manager).

Henri Hein March 10, 2009 at 3:18 pm

Not to disagree with the above, but Public Choice teaches us that well-connected rent-seekers can increase their income at the expense of the population at large. It is not far fetched to imagine that many in the top 1% are well-connected and are rent-seekers.

It can be both personally and rhetorically helpful to turn the Orszag argument around like thus: "If we want to address this, we need to end [corporate subsidies]" (replace [corporate subsidies] with whatever rent-seeking policy you wish to attack).

Many of us don't care what the top 1% makes, but those that do care are not going to be easily persuaded. However, you can turn that fear into a support to curb rent-seeking.

Manfred March 10, 2009 at 3:20 pm

I would add one more comment to Professor Boudreaux's arguments.
Dionne makes the case as if these rich people are ALL THE SAME PEOPLE. This is simply not true.
The US has a huge turnover in the higher income segment, so that the "rich" of three decades ago, are not the same as the ones today.
In other countries, this is not necessarily the case. Old money is the new money, same people, but not here in America.

Oil Shock March 10, 2009 at 3:20 pm

Plac Ebo and Crusader are onto something. Absent regulations to favor the well connected, these well connected will not be compensated so exorbitantly. Professor would need to write about what the compensations will look like in a true free market with low barriers to entry. Profit margins will be miniscule and hence the compensations for top executives. Consumer choice and prices will favor the consumers.

TrUmPiT March 10, 2009 at 3:28 pm

The good news: I just won $100,000,000 in the California lottery. The bad new: I have a brain tumor that is driving me crazy, literally. My doctor gave me 3 months to live if I do nothing and perhaps 1 year if I undergo chemotherapy and painful radiation treatments. Fortunely, with $100,000,000 in the bank, I can afford the best treatments available, unless I choose to go to Tijuana for uncoventional ozone therapy. But demetia is setting in so I better decide quickly what to do. Do you have any advise for me? I need advise on what to do with the $100,000,000 plus accruing interest as I have no heirs to speak of to give it to. I have two dogs but they are 15 years old and probably don't have much time left to enjoy all that loot. I don't believe in charity so that's out. I don't believe in handouts, governmental or individual, so that's out. I don't want the government to get it by default either. I guess I'll have to find a way to spend it quickly. Is there a $100,000,000 exquisite blue emerald-cut diamond out there for sale? I can enjoy looking at that for a few months. Good idea. But then I intend to smash it with a hammer just before I'm about to die. I'm like that you know; If I'm not here to enjoy my diamond, then I don't want anybody else to. Tough shit, turtles. I made mine, no go make yours. No f**king humongous diamond for you! No way, no how…

Econophile March 10, 2009 at 3:32 pm

Plac Ebo,

I think you might be misunderstanding the arguments: The "economy" is no longer a "market economy" when there are government regulations, so a "market economy with government regulation" is nonexistent

Also, who are "the very wealthy"? And can we pleaassee distinguish between wealth and income?! The "system" does reward productivity with income, but it makes no sense to say that it rewards wealth with income.

Kevin March 10, 2009 at 3:33 pm

I'm with Econophile. I was reading Don's post waiting for the concept of income mobility and how people who made money in the past aren't necessarily the people who will make money in the future and how people who had low incomes in the past might be the "rich" who have to pay for all this. It wasn't there.

muirgeo March 10, 2009 at 3:48 pm

"First, in market economies incomes aren't "distributed"; they're produced and earned. "

That presumes Wall Street is set up as a market economy.

"Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; the fact that someone's income rises means that he or she already is pitching in more."

So people who made billions selling CDO's contributed more to productivity? Wow and some people actually believe such non-sense.

" Third, the share of federal individual income-tax revenues paid by America's top one-percent of income earners has recently been on the rise. "

Wow and if this isn't nails on a chalk board of an argument justifying extreme wealth. How great it would be if these guys didn't have to pay so much tax because all that extra income they made was actually going to raise truly productive Americans wages and thus their contributions to taxes.

I know of not 1 person who would gladly pay an extra $1000 dollars in taxes if it meant their gross income was $4,000 more.

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done"

J.M Keynes

Paul Zrimsek March 10, 2009 at 3:48 pm

The bad new: I have a brain tumor that is driving me crazy, literally.

Thanks for clearing that up. I'd been wondering.

muirgeo March 10, 2009 at 3:50 pm

From a logical,moral, ethical, practical, political, rational, economic and ideologic stand point you guys are fighting a losing battle.

"The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." __-Adam Smith,

Oil Shock March 10, 2009 at 3:55 pm

But Muirgeo, I thought you had fired the invisible hand about a year ago.

Oil Shock March 10, 2009 at 3:57 pm

“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory." – John Maynard Keynes, his foreword to the German edition of his book General Theory (1936)

MnM March 10, 2009 at 3:57 pm

"That presumes Wall Street is set up as a market economy."

And this presumes that Wall Street is the economy. Pay attention.

"justifying extreme wealth"

Wealth needs to be justified?

vikingvista March 10, 2009 at 3:59 pm

"There is no law, nor CAN there be any law, to dictate that I distribute funds in any way other than at my sole discretion."

It's called the law of supply and demand. If you compensate your employees far below what other employers are offering them, you will lose them.

But as a test of the validity of your "arbitrariness" theory, why not reduce the salaries of your employees to $1/year. Since it is arbitrary, it shouldn't make any difference, except make you quite a bit wealthier.

brotio March 10, 2009 at 3:59 pm

Trumpit,

I have a 1975 Ford Pinto that I'll gladly sell to you for $100,000,000.

If that doesn't interest you, how about the underwear that Steven Soderbergh was wearing during the climax of 'Che'?

Make up your mind quickly on that one, though. Mierduck may out-bid you for it.

Cheers March 10, 2009 at 4:00 pm

"Plac Ebo and Crusader are onto something. Absent regulations to favor the well connected, these well connected will not be compensated so exorbitantly. Professor would need to write about what the compensations will look like in a true free market with low barriers to entry. Profit margins will be minuscule and hence the compensations for top executives. Consumer choice and prices will favor the consumers."

No, they're not onto something. All they did was spout an emotional argument based on conjecture without even the slightest stated basis. I will be the first to agree that there are rent-seeking political action by capitalists, and that investors should be looking at the actions and cross-pollination of boards in greater detail. But making a bunch of vague ex-post generalizations with incomplete information is totally unproductive.

A true free market with low barriers will NOT have minuscule margins or low compensations. Choices and prices will NOT necessarily favor the consumer.

Margins are determined by differentiation and inimitability of product. They're also determined by natural barriers to entry that still exist in free markets, as well as firm efficiency. Compensations in a free market are determined by a combination of value provided, negotiating ability and information distribution. Consumer choice and prices are determined by the elasticity of the product, natural barriers to entry and the natural response time of the market.

vikingvista March 10, 2009 at 4:06 pm

"it's really about the "good ole boy" network"

If that were true, why would you care? I'd much prefer a system where other private individuals are allowed to misspend their own money than one where a third party (the state) has the authority to forcefully misspend MY money.

I suggest that if you don't like how the majority shareholders of a company are voting, that you don't buy stock in that company. Then you have no reason to complain, as it is literally none of your business.

brotio March 10, 2009 at 4:08 pm

It's funny.

Mierduck is in here cheering on J.M. Keynes. Just like President Bush did!

Mierduck is also on his third thread since failing to produce any evidence that our hosts joined him in cheering on the former president.

quack… quack… quack…

Oil Shock March 10, 2009 at 4:09 pm

Cheers,

Most of the high profit margin industries are protected by IP Law, and there is nothing natural about the IP Law.

Cheers March 10, 2009 at 4:22 pm

Oil Shock,

I do apologize for perhaps being too harsh. We just have so much non-sequitor and ad-hominem already that I may be getting a little touchy about it.

I do tend to agree though… The forces around (and ultimately the system of) IP law has actually recently become one of my biggest pet peeves. It would be interesting to see a couple articles or an econtalk on the subject…

I'll have to check the archives to see if Russ beat me to it.

vikingvista March 10, 2009 at 4:57 pm

"aren't necessarily the people who will make money in the future and how people who had low incomes in the past might be the "rich" who have to pay for all this"

And it makes a lie of the Left's justice argument. I'm told by Obama that I am going to pay for my excesses of the past 8 years. Trouble with that argument is, until about a year ago my income averaged about $43K/yr. So for the Left to make the economic justice argument, they have to admit that they oppose due process.

And of course when you look at the history of leftist governments the world over, they are frequently characterized by a contempt of due process, and the supremacy of arbitrary justice. The reason–you can't prove an offense that doesn't exist. There is no reason to expect that people acting freely, peacefully, and voluntarily in an open society will all achieve equal wealth or even result in some fixed distribution of wealth (distribution here is in the statistical sense, not the sense implying the act of distributing).

The solutions to this declared "inequity" of a free society all involve corrupting the free society with some kind of force or coercion. Even those who disingenuously argue that we live in an unfree society that results in these "inequities" never offer as a solution an act that will reduce government coercion and increase individual freedom. In fact they always demand just the opposite–even more brute force. So what the left reveals with their "justice" argument is their contempt for free society and their contempt for equal treatment under the law.

And as sanctimonious as their posturing, the motives that underly the actors in such a destructive and corrupt brute force system are no different than the antisocial motives of their much less successful cousins–the lowly street criminals.

I'll stop there lest another one of my posts is deleted.

Crusader March 10, 2009 at 5:30 pm

Actually it IS the people's business about these huge compensation packages, since so many of them are getting TARP money!

Superheater March 10, 2009 at 6:18 pm

I reject the label "progressive". Its another of those positive euphemism the left uses to paper over the effects of its theft and demogoguery in order to project noble motives. Call them what they are: political thieves.

Hey Crusader- Is it the "people's business" how much professional athletes, coaches & owners get? THey receive huge subsidies in the form of municipally financed stadiums. How about hospitals; they receive not only public assistance payments, but receive grants, loans and other subsidies? How about the entertainment industry? They can snap their fingers and have "Steamboat Willie"'s IP shelflife extended. Good grief man think with your head, not with that pablum you've sucked up from the intellectual pollution called the popular culture.

CRC March 10, 2009 at 6:24 pm

I would add that the phrase "pitching in" typically (though perhaps not formally) implies a VOLUNTARY action.

I seriously doubt this discussion is about getting the top 1% to voluntarily give up more of their income to the progressive's desire for expanded government.

Instead this language is simply cover for the forced "volunteerism" the left seems so fond off.

Poisoning sound thinking indeed.

Sam Grove March 10, 2009 at 6:33 pm

It doesn't matter how much you tax the rich, the BURDEN of taxation will always be borne by those who labor to create value.

Always.

Martin Brock March 10, 2009 at 6:46 pm

First, in market economies incomes aren't "distributed"; they're produced and earned.

So we clearly do not have a market economy in the U.S., because Henry Paulson distributed hundreds of billions of dollars to his friends in the banking business over the last few months alone, paying dollars on the penny for assets at the same time that Warren Buffet, who loudly championed Paulson's bailout, bought similar assets for pennies on the dollar. I heard that from the chair of an independent TARP oversight board only yesterday.

The U.S. economy is very heavy on rents in reality, not the heaviest on Earth but still very, very heavy.

Second, persons whose earnings rise disproportionately more than those of other persons generally achieve this outcome by increasing their production disproportionately more than other persons increase theirs; …

So if we had a market economy of the sort you imagine, I guess this statement would be relevant.

… the fact that someone's income rises means that he or she already is pitching in more.

In your theoretical utopia, I suppose it does. In reality, it can just as easily mean that he or she is entitled to more rent.

Third, the share of federal individual income-tax revenues paid by America's top one-percent of income earners has recently been on the rise.

I'm not happy that federal revenue from any source is on the rise, because federal politicians, bureaucrats and contractors are the biggest rent seekers of all; however, I do support a progressive consumption tax, because this tax, by design, lowers federal income tax revenue and leaves authority over capital organization more decentralized; however, a progressive consumption tax does not simply conflate all "income" with "productivity" while ignoring entitlement to rents.

Distinguishing marginal productivity from entitlement to rent is not always easy or practical, but ignoring the distinction is not more practical as a matter of public policy. I should start advocating a "marginal consumption tax" instead, just because so many people get so bent out of shape when I say "progressive". Never mind that I'm only proposing what Adam Smith proposed centuries ago, while fathering classically liberal economics.

In 2006 (the latest year for which data are available) this tiny group of Americans paid a whopping – and all-time high – 39.9 percent of such taxes.

I can only hope that banking executives awarding themselves multi-million dollar bonuses out of the TARP booty pay a bit more next year. After all, they "earned" it by cleverly gaming the banking system all these years.

If I could realistically expect the tax code to make this sort of distinction, I would favor it, but I can't. A marginal consumption tax at least requires the banking lords to reinvest rather than build additions to their castles, and it does the productive little harm.

After all, no one needs a personal castle at all. The very wealthy often enjoy building their businesses for its sake. It's an end in itself and a very admirable one.

vikingvista March 10, 2009 at 7:12 pm

Crusader–

"since so many of them are getting TARP money!"

You are so right. But the pro-liberty solution to this is not to advocate more looting and shackles on free citizens (not that you personally are, but certainly others), but instead to forever end TARP and TARP-like programs.

Incidentally, CEO's from several large banks (e.g. TCF and US Bank in Minneapolis) have publicly stated that they did not want, do not want, and have no need for TARP funds. Multiple executives have now come out revealing an apparent conspiracy where Paulson made receipt of TARP funds MANDATORY for all the participating banks. This was apparently an effort to keep the truly insolvent banks from being stigmatized. It is a conspiracy, since it was supposed to be kept secret from the public, in an effort to deliberately deceive the public.

So what you have is well-run solvent banks being forced by one branch of the Federal government to take funds, only to later be excoriated by another branch of the government, as well as the public–and to have the rules of TARP changed on them by a new administration.

You can't blame the banks if they have had no choice. Once again the victimizer is the state.

muirgeo March 10, 2009 at 7:19 pm

How stupid do you son of a bitches have to be not to see the problems with extreme wealth inequality? Notice anything significant happening each time inequality goes extreme? Is it that fricking hard for you dopes to see? Extreme inequality doesn't even benifit the wealthiest. WE ALL LOSE!

The richest men in the world live in countries of extreme inequality those being Mexico, Russia and Brazil… well and here. Those aren't countries I care to emulate.

This is all about a bunch of self centered short sighted jerks who use government services everyday of their lives and then complain about paying their taxes. If only you could just keep all of your money and not have to pitch in…. It's damn childish. Grow up or move to fricking country where there are no taxes you cheapskates.. but of course you won't have the guts to do so… you'll just stay in your nanny state environment and complain about it knowing there is nothing better like pitiful children.

Ewwh..wow….Nice tripleshot expresso….but anyway…

MWG March 10, 2009 at 7:29 pm

"Grow up or move to fricking country where there are no taxes you cheapskates."
-Muirdog

Actually, US citizens are subject to US tax laws no matter where they live. Yea, it's one of a handful where this is the case.

Oil Shock March 10, 2009 at 7:33 pm

Muirgeo, How dare you come here and call everyone jerks. Is that how you treat everybody who walks in to your hospital? Do you ask the patients or their parents political affiliations before you treat them?

All latin American nations have always been flirting with socialism or communism, and russia is no different. THe cases you sighted are precisely the examples of nations that experimented with large scale socialism. I have a hard time believing that you are a "licensed" physician, when you can't put simple thoughts together. That goes to show you the efficacy of government sponsored "licenses".

Randy March 10, 2009 at 7:33 pm

Muirgeo,

"Grow up or move to fricking country where there are no taxes you cheapskates…"

Yeah? Why don't you try and make me you arrogant, thieving, progressive punk. Go ahead. Cross the line.

Crusader March 10, 2009 at 7:35 pm

Martin – people love building castles.

Oil Shock March 10, 2009 at 7:36 pm

This is all about a bunch of selfless far sighted individuals who are forced use low quality government "services" everyday of their lives and then not allowed to complain about the "government services" or the government extortion.

Crusader March 10, 2009 at 7:38 pm

Oil Shock – those 3rd world hell holes haven't tried "true Communism" yet!

vikingvista March 10, 2009 at 7:49 pm

muirgeo–

I would rather be free and poor than controlled and rich.

But fortunately the correlation goes strongly the opposite way. You really need to use at least an ounce of skepticism before you allow someone's statistics to convince you.

For instance, don't you see anything wrong with simultaneously advocating income tax progressivity to "fix" income inequality, AND using pre-tax income as a measure of that inequality? You do realize that a progressive income tax can be expected to worsen pre-tax income inequality, don't you?

Of course that second plot was long ago discredited. Minor assumptions of start and end dates of administrations can reverse the correlation.

Why are you so eager to believe that freedom is unfair and wealth destructive?

Oil Shock March 10, 2009 at 7:53 pm

viking,

Socialism is a jealousy disease. They would rather have everybody equally miserable than some people doing a little better than others.

Crusader March 10, 2009 at 7:58 pm

If Obama wanted to appeal to his left-wing base, but not hurt the economy too much he'd make the threshold for raising income tax at no less then $1 million. That way it doesn't hurt small businesses.

Martin Brock March 10, 2009 at 8:00 pm

Martin – people love building castles.

People love screwing, but they don't really need to screw 24 hours a day, so entitling a few people to screw 24 hours a day, just because they love it, seems counterproductive.

MnM March 10, 2009 at 8:03 pm

Okay, now I'm a little mad.

"If only you could just keep all of your money and not have to pitch in…. It's damn childish."

Your trolling is damn childish.

"Grow up or move to fricking country where there are no taxes you cheapskates."

Grow up and examine the actual arguments placed in front of you, you nutless wonder. We aren't arguing for "no taxes".

"but of course you won't have the guts to do so."

Ironic, considering you don't have the balls to argue with anyone but straw-men.

Martin Brock March 10, 2009 at 8:04 pm

Screwing isn't the best analogy, because screwing doesn't channel vast resources toward the exclusive use of a few as castle building does. Screwing 24 hours a day is still counterproductive though, so let's not entitle many people to do that either.

Oil Shock March 10, 2009 at 8:07 pm

Martin,

do you have the stamina for screwing 24/7 ?

Crusader March 10, 2009 at 8:08 pm

Oil – the true believers would be quite happy in a Communist system. Even if they are material poor, their spirit will be high! That is until the inevitable Stalinist purge takes out the Revolutionary group.

Martin Brock March 10, 2009 at 8:11 pm

do you have the stamina for screwing 24/7 ?

Tragically … no.

I could probably order lots of people to build me a castle all day if properly entitled though.

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