Thursday, October 27, 2011

A False Pro-1% Argument

So, I ran into someone on Twitter who posted this video of CEO Peter Schiff confronting pro-99% demonstrators at Occupy Wall Street. The only problem is, Schiff is holding (and hogging) the mic the whole time, often taking it away from people as they are in the middle of salient points, not addressing valid points yelled off-camera, and failing to account for any nuance in tax policy or the criticism of government complicity with corporate interests articulated by the pro-99% demonstrators.

Schiff fails to include several key points in his analysis:

(1) Earned income is not the sole basis for determining the final tax any individual ends up paying when his or her return is completed (any debate about the fairness of the tax code has to center around "effective tax rate", the percentage of income one winds up paying when income comes from various streams (sales of stock, dividend income, rental income, etc) and after various deductions have been taken (too many to list here). This is the crux of billionaire Warren Buffett's argument that he should pay a higher *effective* tax rate than his secretary, which he currently does not. Seeing Schiff blow off Buffett, who is clearly a more successful investor than Schiff, as if Buffett's opinion on this key economic matter is invalid, is both comical and sad.

(2) Any argument that a change in tax policy will affect job creation immediately fails when one looks at the job creation rate and the rate of entrepreneurial growth during times of higher tax rates for millionaires. If the tax rate was the sole determiner of economic incentive, every post-1913 American industrialist in the 20th Century would have sought their fortunes in some other country after the income tax was first established. Instead, the five decades after the income tax was established saw more expansion of American corporate wealth than the prior 137 years combined (even with the Great Depression in the middle of it!). The economic environment in this country: infrastructure (roads, fire, police), transparency (banking regulation, securities regulation), rule of law and availability of capital are unparalleled virtually anywhere else in the world. Changing the tax code alone will never cause any of this growth to grind to a halt and arguably won't affect any future entrepreneurial growth at all, in light of the entrepreneurial growth we experienced during the five decades following the ratification of the 16th Amendment (the foundation of the income tax as we understand it). The marginal tax rate for a single person earning over $550,000 in 1971 was 70%! If this didn't discourage future entrepreneurs like Bill Gates and Steve Jobs (who were old enough to remember that rate) from dreaming of being successful businessmen, what rate could?

I could spend the better part of a decade deconstructing Schiff's points, but I think I have gone far enough.

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