Originally posted May 21, 2015.
Dave Hammer’s Wealth Creation Postulate
“If through one’s individual endeavors, that person becomes wealthy, such person creates a bigger economic pie from which we all benefit.”
It is not so important that someone’s share of the wealth of an entire economy gets bigger when that person earns a good fortune; because in the creation of such wealth, the well-being of all constituents of the economy are benefited. The pie gets bigger. The benefits to all include one or more of the following: everyone else’s share of the federal and state tax revenue decreases, factories are built with jobs being created, new products are produced, charitable contributions rise, total economic demand increases, international trade improves, and so on. Plus, there is a multiplier effect on much of this.
To paraphrase Churchill, socialism is more about jealousy and spreading the misery than it is about spreading the wealth. Liberals want the top 5% to share their wealth with America’s other 95%. Did you know that the average American family has a higher income than 95% of the rest of the world’s families? Why don’t the liberals, therefore, want to share the wealth of the average American family with the rest of the world?
Bill Gates (who gets a “pass” from the liberals) may be worth $80 billion. But, the other Microsoft shareholders made several times that amount collectively, increasing our national wealth accordingly. There are well over a 125,000 jobs at that company alone. Now think about all the other companies and millions of jobs that have been created because of Microsoft. The economy has become more productive. A major charitable foundation has been created. The government has collected more taxes.
Yet, there are millions of smaller entrepreneurs who, in total, benefit the economy in the same way. So why the class warfare? Churchill said it’s jealousy. But, what if the middle-class knew the whole story? A worker who retires at 65 with a $25,000 annual pension has an unrecorded asset of $500,000; whereas the entrepreneur who wants the same size pension has to create savings (a recorded amount of wealth) of $500,000 at today’s interest rates. The self-employed buy their own insurance, pay for their own business travel, and pay a self-employment tax of over twice the rate at which the average worker pays to Social Security and Medicare with no greater benefits. If medical costs are based on ability-to-pay, then why not other necessities like fuel and automobiles? We already have food stamps, so someday maybe there will be car stamps, clothing stamps, water and electricity stamps, gasoline stamps, etc.
Does the average person understand the Alternative Minimum Tax? Above-average earners, get no deductions from income other than charitable contributions and home mortgage interest. They get no deduction even for real estate taxes or state/local income or sales taxes; and the very first dollar earned above the standard deduction is taxed at 28%. Their investment income reduces the standard deduction. It is possible for moderately wealthy people to pay more income tax than they receive in compensation from their jobs if they have sizeable savings (which they may need to be able to retire).
The current system does not adequately reward creativity, ingenuity, willingness-to-take-risk or savings/investment. The liberals say the wealthy need to pay their fair share, without knowing how much even the moderately-wealthy are taxed already. The current system rewards borrowers, not savers. It encourages a person to buy a bigger home than they can afford and to spend like there was no tomorrow.
Dave Hammer, CFA
Also from Dave Hammer, Hambone’s Boogie: