Budget & Tax

Anti-Capitalism in the Twenty-First Century

July 2, 2014

Mike Brake

The political left is aflutter over Capital in the Twenty-First Century, a book by French economist Thomas Piketty, who argues that the much-maligned wealth gap between the haves and have-nots is largely the result of higher returns from capital investment rather than from ordinary wage earnings. His remedy for the gap, not surprisingly, seems to be more confiscatory taxation of the “rich” with further wealth redistribution via government fiat.

This must delight some of our American politicians, including the current occupant of the White House, who have made much in recent months over what they term “income inequality.” Of course, they’ve been busily addressing this supposed crisis. Food stamp enrollment rose 70 percent in the first four years of the Obama administration, record numbers are receiving disability payments, and even before the left took to the streets to protest the supposedly nefarious wealthy “one percent,” the administration was moving to boost the top marginal income tax rate to nearly 40 percent.

Piketty plays into this mindset. His contention is that income inequality has grown because the rich (who he believes mostly inherited their money) can reap bigger returns by investing a million bucks in stocks and other instruments than a ditch digger can by investing his sweat in an eight-hour day.

Which of course is true. Free economies set the value of investments based on their potential returns and the risks involved. Million-dollar investors are inevitably going to earn (and risk) more than workers, but what Piketty forgets is that the workers also benefit from those investments, if only in the influx of capital that created their jobs in the first place.

Piketty (and presumably many within the corridors of power who are intensely vexed over income inequality) think this is just awful and needs fixing.

The problem with all of this is that it is not just wrong, it is counter to what most Americans know instinctively to be true: that most wealth is earned, honorably so, and that when it is it makes things better for everyone.

What makes one rich? What makes one poor? The Thomas Pikettys of this world believe that income status and success in life are primarily things that just sort of happen to you, like catching a cold. To them, most rich people, living large on the excessive returns from their invested (often inherited) wealth, are little more than parasites, while the poor are essentially victims of an unfair slicing of the economic pie.

Well now. Is this a realistic way to view the world?

First of all, without that much-maligned one (or five or 10) percent at the top of the wealth scale, much of the government so beloved of statists would be unavailable. The top five percent of earners in America today pay almost 60 percent of all federal income taxes. The top 10 percent pay more than 70 percent of those taxes, while the bottom half in income contribute just over two percent of federal tax revenues.

Those with wealth are also the foundation of much charitable giving. Few cities would have orchestras, museums, or even homeless shelters without the freely given largesse of the successful and prosperous. And ironically, it is those from the supposedly hard-hearted red states who give the most.

Chronicles of Philanthropy magazine annually ranks the most generous states, based on tax returns and the levels of charitable giving they record. The most recent accounting ranks Utah, Mississippi, Alabama, Tennessee, and South Carolina as the most charitable states.

Who gave the least? From 46th to 50th they were Rhode Island, Massachusetts, Vermont, Maine, and New Hampshire, all blue to deep blue states where policymakers are often seen wagging their fingers at the supposedly miserly rich.

By the way, the often-maligned Koch brothers, targets of Sen. Harry Reid’s ire for backing free-market causes, donated $600 million in one decade to such causes as cancer research and education.

So are the rich, as Piketty claims, mostly silver spoon beneficiaries of lucky genes, born to vast wealth and destined to fatten on their underserved capital?

Forbes annually ranks the 400 wealthiest among us. In any given year, well over half of them can be fairly described as self-made, rather than lucky inheritors of wealth.

On the most recent list, Bill Gates, who famously started Microsoft in a garage, remains number one. Larry Ellison of Oracle, another bootstraps story, is third. Yes, there are Waltons in the top 10, but they are also famously charitable. And despite the loathing of the left, Walmart continues to employ about two million people. Not a bad way to inject one’s capital into the economy.

Further negating the Piketty thesis of a permanent upper class waxing fat and sassy on the backs of the poor are many studies that show we continue to enjoy a remarkable level of social and wealth mobility.

Mark Rank and Thomas Hirschl recently published the results of their exhaustive study of wealth in America. They found what most of us know to be true from our own experiences and observations.

They found that fully 12 percent of Americans would at one time or another find themselves in the coveted top one percent in income for at least one year. Thirty-nine percent were able to make it into the top five percent for at least a period of time, while 56 percent would hit the top 10 list.

Conversely, 54 percent would find themselves at or below the poverty line at some point, if only through a brief run of lousy luck. Lots of us bounce up and down throughout life. The rich are not a selected few living behind moats.

Nor are the doors of business independence closed to the ambitious, as Piketty would suggest. The Global Entrepreneurship Institute studied startup businesses in America in 2011. They found that 10 percent of Americans were involved in some form of independently run businesses. In most cases their capital was not inherited wealth, but simple old-fashioned sweat. Sixty-three percent of business founders had their roots in the middle class, 26 percent in the working class. Five percent classified themselves as poor, and just six percent hailed from wealthy backgrounds.

The simple truth is that wealth is most often earned, even in Obama’s America. Being economically comfortable, wealthy, or even poor is most often the result of things you do, not of things that happen by accident.

Drugs, booze, crime, and sloth are almost certain to make, and keep, one poor. Work, marriage, and education usually result in the reverse.

Work, of course, is central to wealth creation. The American Enterprise Institute found that families in the bottom quintile of income had just 0.45 workers per family, while those in the top quintile averaged 2.04 employed people per household.

Education is equally obvious; those with medical, law, engineering, science, or advanced degrees earn multiples of those with high school educations or less. Again, these are things they did to place themselves in a position to out-earn others.

An extensive Heritage Foundation study of the impact of marriage on income and wealth was even more conclusive. “Marriage,” the report said, “remains America’s strongest anti-poverty weapon.”

More than 37 percent of children in single-parent homes are classified as poor; just under seven percent of those in two-parent households experience poverty. Worse still, single-parent upbringings are exponentially more likely to steer kids into crime, drugs, dropping out, and other negative behaviors, all recipes for extending the poverty cycle into future generations.

So things you do or do not do most often help determine your economic fate. Being rich or poor is not the inevitable, or even likely, result of forces outside your control. The loathed one percent often got there by hard work and smart self-management. The bottom five or 10 or even 20 percent are most often mired there because of behavioral issues, not fate. They may be victims, but to find the victimizer they should look in the mirror, not at others.

Unfortunately, the Piketty thesis will likely continue to drive much of what passes for public policy in an administration where it is obviously more important to enroll vast numbers in poverty-perpetuating social programs than to encourage work and innovation and the creation of wealth that is honorably earned and just as honorably shared.

Mike Brake is a journalist and writer who has recently authored a centennial history of Putnam City Schools. He served as chief writer for Gov. Frank Keating and for then-Lt. Gov. and Congresswoman Mary Fallin, and has also served as an adjunct instructor at OSU-OKC.

Piketty’s Questionable Data

According to Heritage Foundation researcher Salim Furth, “Thomas Piketty made some questionable choices in adjusting and presenting the data that underlies his bestselling economics tome.”

To read Dr. Furth’s analysis, visit tinyurl.com/kt3xbh2.