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Cuts that aid investors aid others later | ||
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By DAVID MOON, Moon Capital
Management Do you think the economy is more like a pie or a bakery? Your answer to this question reveals more than just your philosophical leanings about economics or pastries. It reveals your innermost beliefs about achievement, responsibility and self-determination. A week ago in this paper, syndicated columnist, Molly Ivins presented a detailed analysis of the president's tax proposals and who would be the recipients of each type of tax reduction. She noted that the top one percent of all investors pocketed 42 percent of the stock market gains between 1989 and 1987. The top ten percent took 86 percent of the gains. (She uses the word 'took.' I prefer 'earned.' She does not share statistics on the 'taking of losses' during the last three years.) Anything the government does to reduce the tax burden for the "investing class" (whatever that is) would, in Ms. Ivins' opinion, favor this very small group of people. She cited statistics claiming the elimination of personal income taxes on dividends would benefit those making less than $10,000 a year by only $6 a year. Folks making more than more than $1 million a year would see their tax bills reduced $45,098. (I repeat her statistics without verification.) Ms. Ivins' suggests the government should allocate more of its resources to those who are most needy - not the wealthy. (She neglects to mention that government has no resources of its own.) She is obviously a member of the "economy is a pie" camp. The more of pie you get, the less of it there is for me. What would happen if the federal government implemented a 90 percent federal tax rate on all earnings (personal and business) above $100,000? It would wreak havoc in the economy. Government revenues might grow at first, but eventually economic output would shrink. The entire pie would get smaller. This would be akin to trying to run a bakery while simultaneously setting the building on fire. Eventually the bakery would grind to a halt, consumed by flames. The flames of taxation are just as potentially destructive. (The word "potentially" is critical.) If a bakery has an additional $100,000 profit one year, it might reduce its prices and pass the benefit on to its customers. In some circumstances, that might be an appropriate use of the profits. But the machinery that runs the bakery - the mixers, ovens and the people - if the engine of the business isn't well maintained, everyone suffers. The customers might initially seem better off with a one-time reduction in the price of baked goods. But if the bakery can increase its efficiency to the point it can produce more pies with the same amount of inputs, its marginal costs decrease. This will benefit everyone, even though the only recipient of the $100,000 may have been the oven repairman. You do not have to receive cash to benefit from it. When companies keep the engines of their businesses running efficiently, the greatest number of people benefit. You can criticize Wal-Mart for ruining the family retail store or for being a blight in our communities. But I live 1,000 yards from a Wal-Mart and the parking lot is almost always full. Tax cuts or outright welfare payments will never permanently and significantly improve the economic plight of someone earning $10,000 a year. What if we gave that person a tax free check for $5,000? They would still struggle. If that person needs as much as $20,000 a year to live, they are only going to get there and stay there by earning that money. Rather than give them a pittance that has little marginal impact and zero macro impact, why not work to create an environment where that person is completely self-sufficient? Why give a person a crumb if we have an opportunity to make the pie larger? David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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