Criticizing billionaires has become a popular cultural trend, based on anti-rich sentiment that was recently exacerbated by a ProPublica report that leaked the tax returns of the 25 wealthiest Americans. The report’s findings were interesting but not particularly surprising, mostly confirming the long-held speculation that the ultra-rich don’t pay taxes proportional to their levels of wealth and frequently use legal avenues to shield their earnings from the government’s fingertips.
Is a system that allows individuals to become so extravagantly wealthy inherently immoral? And once someone becomes wealthy, how do we make sure they are paying their “fair share”?
Imagine a golden-brown cherry pie, just removed from the oven and now cooling on a windowsill. Were you to take and eat one slice of this imaginary pie, you would be denying that slice to any other individual desiring it while simultaneously diminishing the amount of pie available for others to take. This is an example of a zero-sum game: it is impossible to gain something without someone else losing it.
If the free market operated according to this reality, then the existence of billionaires might indeed be immoral. America’s ultra-rich would be stealing a vastly disproportionate amount of the pie for themselves, all while denying others the ability to pursue similar material prosperity.
Fortunately, markets that allow individuals to freely interact and engage in economic activity can be far more inclusive than the zero-sum cherry pie. The economic ‘pie’ is constantly growing as new markets and job opportunities become available through the efforts of businessmen and women who are compelled to innovate in their search for profit by the free-market mechanisms of competition and unimpeded entry and exit within the marketplace.
And not only is the pie growing, but even the slices we ourselves indulge and enjoy are simultaneously shared by others. To be clear, a dollar owned by one individual cannot simultaneously be owned by another. But because free-market mechanisms allow individuals to freely invest their money into the projects of others, we are thereby creating jobs and stimulating economic activity in all that we do. Money owned by one individual can promote innovation in other sectors and thereby become wealth-creating all at the same time.
The ProPublica report analyzes the taxes billionaires pay by comparing the amount of taxes paid to the estimated growth in wealth for the 25 richest Americans. They call this measurement their “true tax rate.” When examined in this way, the taxes paid appear alarmingly low. Warren Buffet’s “true tax rate,” for example, is 0.1%.
This definition of the “true tax rate” is misleading; it misrepresents the way in which the tax system operates, and conflates wealth (often kept in the form of unrealized gains from investment) with income or realized capital gains. Thus, it posits that these billionaires should be taxed on their wealth, not just their income. This line of thought takes for granted that the government would pursue and provide more opportunity with this money than individuals in the marketplace can, a highly unlikely proposition.
When left in the hands of individuals, money is often to promote even more economic growth by expanding business operations, investing in market activities, and providing goods and services at a cheaper and more efficient rate, subsequently improving living standards not just for rich individuals but also for the general population.
There is no doubt that the ultra-rich have engaged in shady and immoral business practices. Recently, Amazon was revealed to engage in a “Churn-and-Burn” system of hiring and firing. Practices like these should be exposed and allowed to die off in a sea of public scorn. Likewise, if the success of these businesses is the result of crony capitalism – collusion between government and enterprise – then the executives at the heads of these organizations should certainly be subject to moral, and potentially legal, scrutiny. But success achieved by innovation and adept navigation of free-market mechanisms is not necessarily evil and to frame it as such is at best, misguided, and at worst, willfully ignorant.
As economist Henry Hazlitt puts it:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
It is easy to see the immediate disparity in levels of wealth and to diagnose it as a problem with the system; it is hard to recognize the long-term benefits of allowing free markets to function without undue restriction. If we want to practice good economics, we need to be cautious in casting moral judgement on others and diligent in ensuring we look to the good that often lies beyond our primary impulses.