Jacob Goodfellow
3/26/12
Andrew Apsley
Writing 150
The Economic Effects of Redistribution of Wealth
Over the last 200 years America has been the world’s forerunner in economic prosperity. One of the many contributing factors to America’s economic success has been its capitalistic economic system. The American economic system is such that an individual with almost nothing has the opportunity through their hard work and determination to rise from the lower class to the upper class. This is a rare case of economic mobility that almost every country in the world lacks. As a result of this there has been a huge immigration into the United States in the last 200 years because of the realized economic opportunity the American capitalist system offers. Because of incentives for entrepreneurs, this same system facilitates the growth of new businesses creating capital and jobs. The entrepreneurial spirit of America has led to one of the largest and most wealthy middle classes the earth has ever seen. Today the future of the great American economy is in question. Many fear a declined economy and a fall from being a leader in the world’s economy. One of the main contributors to the economic downturn for the United States has been the push of the last century for more income equality. The idea for income equality is rooted in the fact that all men are created equal and should be given a fair chance in this life. The push for income equality and redistribution of wealth in the United States has weakened the capitalistic economic system pushing it toward a more socialized system in turn hurting the United States economy and subsequently the world’s economy.
In order to understand why the United States has been so prosperous economically one must understand the principles that the economy was founded on. The founding father created a nation that was founded on the idea of unalienable rights given to man by God. These rights included life, liberty, and the pursuit of happiness. The early American economic system reflects the belief in these rights. A Laissez-faire system (hands off) was set up meaning that there would be minimal government intervention in the economy. The system gave individuals the opportunity to create wealth and help the economy grow by protecting their rights to economic freedom. An American economic culture of hard work and the “American dream” developed as a result. This dream spread throughout the world making America the most economically appealing country for immigrants. The founding fathers included in the Constitution that congress had the power to impose "Taxes, Duties, Imposts and Excises," The same article also requires that, "Duties, Imposts and Excises shall be uniform throughout the United States."
The idea of an income tax was first flirted with during the War of 1812 and later the first wartime income tax was passed after the Civil War. The purpose of the tax was to fund the war efforts. In 1894 the first peacetime income tax was passed and a year later declared unconstitutional. Later in 1913 Congress passed the 16th amendment allowing the government to tax income. Income was taxed very little initially, around 7%, and then that number rose quickly to as high as 94% during World War 2 for those in the highest tax bracket. Today the highest tax bracket percentage is taxed at 35% for income over $388,351. Income taxes were originally introduced as a way for the government to fund war activity and run the country. As time has gone on the idea of taxing the rich to help the poor has become more prevalent. Today there is a push to raise the tax burden on the upper class in order to have more money available to support the lower class of Americans. The main idea is tax the rich and give to the poor.
The American dream that was created by the early American laissez-faire economic system has been suffocated by the idea of redistribution of wealth. Much of America’s prosperity has been created by individuals who were willing to take high personal economic risks for the chance of high economic returns. With a push toward redistribution of wealth the potential economic returns of taking economic risk have been lowered. Creating an economic system where an individual is more reluctant to take on risk in order to become wealthy. When an individual becomes wealthier they are able to contribute more to the overall economy in the form of more consumption of goods, the creation of jobs, and an increase in investments.
One of the main reasons Americans support the practice of redistribution of wealth is the idea that we as a society have an obligation to take care of the poor. The welfare system in the United States started during the Great Depression, as did many other wealth reformation laws. The general idea of the welfare system was “to provide short-term cash assistance and steer people quickly into jobs." Today the welfare system has evolved to a lifestyle for a large number of Americans. Negating the original intentions of the system to provide “short term” assistance and to “steer people quickly into jobs”. This has been caused by the decrease of economic incentives for those on welfare to find work. The welfare system provides a comfortable enough lifestyle for those living on it that they have no incentive to find work and lose the “free money”. Therefore the main flaw in the system is that there is no real system of accountability for those on welfare to find a job. This system imposes a dead-weight loss on society. Hard working individuals that are contributing to the economic prosperity of the United States pay to support those who do not contribute to the economic well being of society. The welfare system also cuts the amount of labor available to firms by taking a large number of labors that are able to work and giving them an incentive to not work. As a consequence of this once skilled laborers who go on welfare soon lose skills that once made them marketable employees in a competitive market. While the welfare system in principle is the ethical thing to do to provide for the poor, it in turn ends up hurting the United States economy and in turn American citizens.
One naturally asks when the shortcomings of the welfare system as exposed is, who then will take care of the needs of the poor? Before the introduction of the American welfare system did the poor just die? No they didn’t. Before the introduction of welfare in the United States, private organizations provided for the needs of the poor. There are numerous example of this in American history. (Include examples). But with the introduction of the welfare the private organizations like churches and other community organizations lost incentives to help the poor. There was no need for their services because the government took over their job. So there was a fundamental shift in the ideas toward helping the poor. Before welfare individuals would donate money to different charitable organizations out of desire to help the poor. After welfare the government would take money from individuals without their consent to help the poor. Although the same end goal is achieved the mental effects on individuals is more harmful than good. Government control of welfare leads individuals to be more reluctant to donate to and support charity organizations because there is less of a need for their services in today’s world.
The affects of redistribution of wealth are felt on all levels of the economy. The most basic unit of business in our economy is that of the entrepreneur. Entrepreneurs provide an essential role to our economy. They could be described as the new fuel that keeps the economy burning. They spark innovation and creation leading to a more efficient and competitive future. Entrepreneurs are risk takers. They are individuals that are not satisfied with their current economic standing and hope to make a shift toward a more prosperous future. When an individual evaluates the possible rewards for risking their economic wellbeing to create a business a number of factors are taken into account. The amount of work the entrepreneurial endeavor will take, the immediate financial risk to themselves and dependents, the future economics returns of such an endeavor and so on. If the risks outweigh the rewards than individuals do not branch out and create new businesses. The income tax system and corporate tax system decreases the rewards of starting a new business venture. It cuts the economic gains an individual will experience as a result of entrepreneurial behavior. Stopping entrepreneurial growth limits the amount of jobs created in the economy, it hinders the amount of capital used as investments, and it stifles innovation and competition, which leads to lower prices. In aggregate the economy suffers because of the government’s intentions to provide a more economically fair lifestyle to all.
With the current income tax system as an individual makes more money they are taxed in a higher percent bracket. This system is set up in a way that those who earn the most money are penalized the most economically. Lets examine the contribution of the wealthy to our economy. If you look at the economic productivity of Sam Walton for example, the founder of Wal-Mart you see that his contributions to the economy have been enormous. Currently Wal-Mart employs 1.4 million people in the United States. The company reported sales of $400 billion last year with almost half of those sales being domestic. Sam Walton created a company that provides income for 1.4 million Americans that also allows them to purchase almost $200 billion of low cost goods. A system of wealth redistribution would economically punish individuals like Sam Walton for being wealthy. A common mistake for Americans is to view the wealthy as being harmful to the US economy by amassing so much wealth. We forget that they became wealthy by creating business empires that in turn provided many times more economic growth to the United States than harm done by the upper class hording wealth.
Another aspect of income tax and redistribution of wealth that Americans are reluctant to discuss is the inherit injustice of the system. It is a system that is designed to provide economic equality to all Americans by punishing them unequally. We as Americans enjoy a large number of services provided to us by our government. This includes things such as free public schools, roads and high ways, and protection from foreign countries to name a few. It would seem unreasonable to say that a wealthy individual benefits more from the government’s contribution of the road and highway system than a poorer individual. But our current tax system taxes everyone in a way that suggests that wealthy individuals somehow are able to benefit more from the services provided by the government.
After establishing the idea that redistribution of wealth hurts the economy of the United States it is easy to see its effect on the world’s economy. The best illustration of this principle can be seen from examining the economic crisis of 2007. Because of the failure of the mortgage market in the US, the world was pushed into an economic crisis. The United States contains about 40% of the investment capital in the world. Because of globalization and the United State’s involvement in so many other world economies there is always great fall out from US economic crisis’ in the world economy. When the American economy is held back by the hindrance of the wealthy the world’s economy is also held back. Redistribution of wealth also gives individuals in other countries a competitive advantage over those in the United States. This can be seen by the recent trend of Americans moving business operations and capital to foreign markets. While this is beneficial for economic growth in other countries, it moves economic growth that could happen in the United States to other parts of the world.
If our current system of redistribution of wealth is hurting the economy then how can we support those who need economic health while at the same time providing a fair environment conducive to economic growth? Proponents of a flat tax system believe that it is the solution to the economic difficulties brought on by the current system. A flat tax system would solve the problem of our current unfair system in a number of ways. All income would be taxed at the same rate, including investment income. Deductions would be allowed for the necessities of life, which would include but not be limited to: home expenses, food, clothing, transportation, etc. There would be a standard dollar amount of allowed deductions from the before mentioned categories. With this system the poor and rich would only be taxed on their income above basic living costs. The result would be that the poor would only have a small percentage of their income taxed and the rich would have a large percentage of their income taxed. This system also gives the wealthy a greater economic incentive to invest more capital in the economy leading to more economic growth. The wealthy will not be penalized for becoming rich and providing jobs for others. With such a system in place the tax system would be fairer for people of all income levels.
Reform to our current system must also account for a drastic change in the current welfare system. If the government were to turn control of welfare back to private organizations such as charities and churches there would be sufficient support to help the poor. This shift would also be in the best interest of the poor because many private organizations have more strict standards for receiving welfare. It would decrease government dependency and increase charitable contributions throughout the United States.
From our economic analysis of the effect of redistribution of wealth on the United States economy it is easy to see that economically it is a harmful policy. But one must be able to look at the moral side of the policy as well as the economic side because if we were to live in a world ruled by economics it would be far from perfect. When we take into account the negative effects the welfare system has on individuals being supported by it by the emotion and physical dependence it creates it seems to not be the right direction. The current welfare system also hurts charitable organizations like churches by undermining the work they do to help the poor. When we examined the effects of the income tax system on the entrepreneurial class we see that it punishes them for stimulating our economy. The income tax system also punishes the wealthy for desiring to increase their wealth which leaders to more economic growth. A shift toward a more fair and equal tax system as well as the privatization of welfare would lead to a more robust and prosperous economy. It would incentivize individuals not only to work hard and help the economy expand, it would also help us regain desire to help our fellow man.
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