Commentary Magazine


Topic: technology

Income Inequality and the Buffett Rule

In his post this morning on Liberals, Conservatives, and Tax Fairness, Peter Wehner writes,

Liberals are correct about this: income inequality has increased over recent decades. The task of conservatives is to give a full and fair picture of income gaps in America, to explain what is behind it, and to point out the injustice of the left’s remedies and the degree to which their proposals represent a radical departure from America’s ideals.

I could hardly agree more, and agree that his excellent article in National Affairs, “How to Think About Inequality,” is a great place to start.

I would add one more reason why income inequality has grown in recent decades, and it’s not a small one: technology. Whenever a major new technology develops, it causes a marked and sudden inflorescence of new fortunes that greatly exceed the old fortunes. This happened with railroads (Vanderbilt, Gould, Harriman, Hill, etc.), steel (Carnegie, Phipps, Frick, Schwab, etc.), automobiles (Ford, Dodge, Sloan, Kettering, Mott, etc.), petroleum (Rockefeller, Flagler, Archbold, etc.) For each of those megafortunes, there were hundreds of others whose possessors were merely very rich, not Forbes-400 rich.

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In his post this morning on Liberals, Conservatives, and Tax Fairness, Peter Wehner writes,

Liberals are correct about this: income inequality has increased over recent decades. The task of conservatives is to give a full and fair picture of income gaps in America, to explain what is behind it, and to point out the injustice of the left’s remedies and the degree to which their proposals represent a radical departure from America’s ideals.

I could hardly agree more, and agree that his excellent article in National Affairs, “How to Think About Inequality,” is a great place to start.

I would add one more reason why income inequality has grown in recent decades, and it’s not a small one: technology. Whenever a major new technology develops, it causes a marked and sudden inflorescence of new fortunes that greatly exceed the old fortunes. This happened with railroads (Vanderbilt, Gould, Harriman, Hill, etc.), steel (Carnegie, Phipps, Frick, Schwab, etc.), automobiles (Ford, Dodge, Sloan, Kettering, Mott, etc.), petroleum (Rockefeller, Flagler, Archbold, etc.) For each of those megafortunes, there were hundreds of others whose possessors were merely very rich, not Forbes-400 rich.

The microprocessor is the most profound technology since the steam engine and has, therefore, created an inflorescence of fortunes such as has never been seen before. Of the 400 people on the Forbes List for 2011, no fewer than 48 of them are categorized as having fortunes based on “technology.” Many other fortunes on the list, such as those of the Walton family, which founded Walmart, would not have been possible without the microprocessor. And again, for every one of these billion dollar new fortunes, there are dozens of multi-million dollar ones and million dollar ones. The wealth creation caused by the microprocessor is astonishing.

And these new fortunes can arise with amazing speed. Instagram, which developed a photo-sharing technology, was founded in October 2010, and was bought this month for $1 billion. The buyer was Facebook, which was founded in 2004. Facebook’s principal stockholder, Mark Zuckerberg, who is all of 27 years old, is worth $17.5 billion, according to Forbes. He will be a lot richer still when Facebook’s IPO launches soon.

This process, inevitably, causes income inequality to widen. To suppress the process, i.e., to prevent the creation of these great new fortunes, would be to suppress wealth creation itself, economic idiocy of the highest order. No one is one dime the poorer because the likes of Bill Gates, Mark Zuckerberg, and Michael Dell have become multi-billionaires in the last few years. We are all richer thanks to them. (That includes me, who is writing this on a brand new Dell computer that works great. Thanks, Mike!)

And while we should certainly take the issue of income equality seriously, I’m not at all sure we should take President Obama’s remedy du jour—the Buffett Rule—seriously at all. It’s nothing but an attempt to double the tax on capital gains in the name of “fairness,” the most subjective term in the American political vocabulary. I like John Hinderaker’s suggestion on Powerline:

So how about if the GOP responds to any legislation incorporating the Buffett Rule by seeing the Democrats their demagoguery and raising them with a couple of demagogic proposals of their own, in the form of proposed amendments? The Republicans could say, sure, we’ll go along with the Buffett Rule if you Democrats will agree to the Reynolds Tax, a 50 percent surtax on the increased incomes of former government officials when they move into the private sector, working for the same companies they once regulated. Or Republicans could offer an amendment incorporating the Clooney Rule, based on the fact that actors and actresses are such advocates of higher taxes: a new, 80 percent tax rate on all income in excess of $1 million earned by acting in any film or theatrical production. Or they could counter with the K Street Rule, an 80 percent tax on all income in excess of $1 million earned by lobbying. Or the Ambulance Chaser Tax, an 80 percent levy on all lawyer contingent fee income in excess of 10 percent of a recovery. (That one would provoke howling from coast to coast, from one of the Democrats’ prime constituencies.)

Conservatives should treat the Buffett Rule with the contempt it deserves.

 

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