GovRant: Letting Down the Poor...

Y'all will know and understand that I am no socialist (nor unionist, nor pro-labour type). I am an arch-freemarketeer; someone who believes that there are precious few things that can be justifiably provided by government (and none should be produced by government).

Thati s not to say that I think there are no such things as public goods. Many things for which there are good "public goods" arguments (vaccinations, basic education) still cannot be done by government, on the basis that the inefficiency of government provision more than dissipates the likely benefit to society of correcting the inherent under-expansion under market provision. The one likely area where government can meddle to its heart's content and still (probably) add to aggregate welfare, is a basic progressive-taxation welfare system.

And yet on observable criteria, the system as practiced by America is actually getting things arse-about (as usual), as the excerpt below (from this story) points out. The poor are going backwards (their incomes are growing slower than the cost of living) while the welathy are making out like bandits.

Why would this be? I don't believe for a second that it's entirely due to superior investment (although that is a factor that comes ito play; the new wealthy don't get wealthy by accident, but rather through exploiting their human capital).

It's what happens once one becomes wealthy that makes the difference, I believe. That is, whether you then go about trying to "skew" the existing system towards your end of town - lobbying for preferential treatment as far as taxes are concerned.

I am no pal of the tax-man (and he is certainly not my friend), but I understand the reason for progressivity in taxation (in dollar terms if not in rate terms).

The entire basis of the progressive-tax system is predicated on the (sensible) idea of decreasing marginal utility of money - that a dollar taken from a billionaire is worth less in utility terms to the billionaire, because it cannot provide him with a significant increase in his overall utility.

Giving that dollar to someone who only has a dollar to begin with, provides a genuine improvement to overall social welfare - because the marginal utility of the purchases it enables to the $1 man more than offsets the decrease in utility suffered by the $1b man. It's one of the most intuitively plausible hypotheses in economics.

Once you get your head around that, the deeper question is "how fast does the marginal utility of money decline?" - because at the end of the day, you ought to betrying to equalise the utility of each marginal dollar taken from each income bracket.

So the question becomes "Does a billionaire suffer as much when he loses 10% of his income as a person on $40k?". If not, then the billionaire should be taxed more of his income (or the $40k should be taxed less), until the two are equilibrated. Obviously, the various income categories are populated with a range of people with differing marginal utilities of money, but the logic remains the same.

Equally important, is the fact that politicians are entrusted with the responsibility of "safeguarding" the progressivity element in the system - that they will not permit spurious arguments to undermine progressivity in order to generate a transfer of wealth upwards through the income deciles, when the underlying aim is supposed to be to create a transfer of income, downwards.

Let's get one thing straight - I don't think that all wealthy folks are prone to attempting to corrupt the process; it's just that the ones who are prepared to, have sufficient clout to get their agenda through (there's nothing a politican loves more than kissing a wealthy donor's arse). The remainder of the wealthy simply get a 'windfall gain'. (I believe that most wealthy people have a genuine desire to do good stuff - they are quite large providers of private charity, in both absolute dollar terms and in terms of the proportions of their incomes).

So the distorted system operating in the US is the progeny of just a few genuinely, psychopathically greedy arseholes (let's refer to them as "Cheney" or "deLay" psychotype, for whom the next dollar is as important as the first, and must be had even if it involves criminal corruption).

They are responsible for all the corruption, and the genuinely entrepreneurial (and philanthropic) wealthy - like Bill Gates, George Soros, Warren Buffet and others - simply ride the coat-tails (and in all likelihood, this results in them increaing their private philanthropy).

It still doesn't make it right, and it's yet another obvious reason why the "democratic" system needs to be changed; politicians can always get the middle class (who aspire to wealth but retire poor) to vote for tax cuts for the wealthy, simply because the middle class hope to be wealthy in the future, and thus see the tax cut as a future benefit to themselves.

Furthermore, the middle class will always vote themselves "welfare increases" - more expenditure on schools, hospitals, and so forth - as if government-provided things have no attendant "cost" simply because there's no expicit cheque written for them by the householder.

So you get a double-pinch on the budget (which, remember, should be about income transfers and the provision of public goods, and nothing more), which results in higher deficits, higher debt, and greater pressure on interest rates. And who suffers most when rates rise?

The poor (because their debt is overwhelmingly short-term high-rate debt - personal loans, credit cards and so on).

And now - after my little novel... the relevant excerpt. (from Stroke The Rich)

In 1970, the poorest third of Americans had more than 10 times as much income as the super rich, the top 1/100th of one percent. Back then the poor had more than 10 percent of all income and the super rich had one percent.

By 2000 the two groups were equal -- the 28,000 Americans at the top had as much income as the 96 million at the bottom. The poor's share of income fell by half while the super rich's share rose to more than 5 percent of all income.

Not only did the poorest third's share of income shrink, they actually had less money. The average 25-year-old man in 1970 made $2 per hour more, adjusted for inflation, than in 2000.

Over those three decades the bottom 99 percent of Americans had an average increase in total income of $2,710. That is an annual raise of less than $100 per year, the equivalent of a nickel an hour raise each year for 30 years. The super rich did fabulously better, their average incomes rising $20.3 million to an average of $24 million each.

Plot these figures on a chart and the results astound. If the increase for 99 percent of Americans is a bar 1-inch high, the bar for the super rich soars heavenward 625 feet.