"Angels can fly because they take themselves lightly." – G. K. Chesterton

Posts tagged ‘taxes’

Do the rich takes risks?

During the recent debt ceiling brouhaha, I stumbled across this post, written by a Republican arguing against even a minor tax hike for the rich.  The argument is not unique.  I’d imagine that everyone  has heard a variation on the same argument, but this one is particularly succinct, so I’ll quote it before I tear it to pieces.

The problem cannot be fixed by “taxing the rich more” because (1) there is not nearly enough money there to fix the problem, and even more importantly, (2) unless there is at least some incentive for people to financially benefit in proportion to their good ideas, there is no motivation to take the risks involved in bringing new and better products and services to market. After all, most of those attempts fail, and people who want more of what “the rich” have, are not willing to share in the failures of those who tried and failed.

Now I’m sure any reasonably adept Democrat could devise a response to this without much trouble.  For instance, they might point out that no one proposes fixing the problem solely by taxing the rich.  Obama’s ‘Grand Bargain’ offered a solution consisting of 83% spending cuts and 17% tax increases.  That’s not very much of a tax increase.  Considering that the wealthiest ten percent of Americans make $3,856,000,000,000 per year, which is more than the entire federal budget, I think they could afford to pay a small sliver of the costs.  But that’s a detail-oriented approach.  I want to take a larger and more philosophical approach by asking the question: do the rich take risks at all?

First we must define “risk”. I shall define it as “putting oneself into a situation where chance and unknown factors affect the outcome, with a possibility of suffering considerable losses.” By this definition, as I see it, the rich basically never take risks, while the poor take risks constantly and the middle class frequently.

Imagine Joe Schmoe has a net worth of ten thousand dollars. Thus he is poor. Now suppose he finds a new job, but he must spend four thousand dollars on a used car to get him to work each day. This is a high risk investment. The car may break down, the job may not work out, are in various other ways he may lose the money. If that happens, he’ll have lost much of his net worth and a great deal of purchasing power.

Now imagine that Jane Bane has a net worth of one hundred thousand dollars. She is middle class. She decides to spend forty thousand dollars going to college and earning a degree, which she hopes will let her get a better job. This is risky, since the job isn’t guaranteed. However, I would argued that it’s less risky than what Joe Schmoe did, because even if the college degree doesn’t pay off, Jane’s loss won’t cut into her ability to buy necessities as much as Joe’s would.

Now imagine that John Dewey has recently retired from his profitable career at the law firm of Dewey, Cheatum, and Howe.  He has a net worth of one hundred million dollars, which makes him rich. He invests forty million dollars in a start-up company. The worst that can happen is the company going belly-up and his investment disappearing. In that case, he’ll have a net worth of sixty million dollars. With that sixty million dollars, he can still buy anything that a reasonable person could want to buy and have plenty left over. Hence he’s not really taking any risks with that investment.

So the bottom line is that it’s not the rich who take risks.  Even if a rich person invests a good-sized chunk of his savings, he’s not risking a drop in comfort or lifestyle.  A poor person is, on the other hand.  If anything, we should cut taxes on the poor so that they have more motivation to take risks.

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