Archive for September, 2011

I hope you enjoy this guest article by Glen Graham.

In the real economy privately earned profit is a collaborative effort. The general public contributes to the earnings of the private sector.

In his recent op-ed in the New York Times, Warren Buffet argues that the rich do not pay enough taxes and that the current tax code is therefore unfair to lower income earners. Read the full article here.

Warren Buffett is a very rich man, so his call for higher taxes on himself is noteworthy. However, his article fails to address a basic point. The negative response that greeted Buffett’s article reveals that many well-educated people still have no idea how the real economy works. Many still think that calls for higher taxes on high income earners is simply a way to “screw the rich,” as a recent Washington Post article put it in response to Buffett’s op-ed.

The Washington Post article goes on to argue that “the government should be starved of income and be forced to spend money where it’s supposed to – defending the border, establishing a trusted currency, and protecting property rights.” Whenever the government tries to do anything else “everyone gets poorer.” Social welfare is really a way of stealing from the rich and giving it to the poor. Instead we need to make “people dream of getting disgustingly rich, and then let them go out there and do it. After that, we celebrate them so that more people get the idea of getting rich, too. It’s what makes Silicon Valley work. And everyone benefits, even the people who don’t end up rich.”

The aim of the Washington Post article — to highlight the plight of the rich, who must suffer the wrath of the poor and always remain in danger of getting screwed over by government — is truly ambitious. Look out oppressed rich people! The socialists want to steal your privately earned money; they want to make “everybody poorer.”

The argument is based on a fundamental misunderstanding of how the economy actually works. In the real economy privately earned profit is a collaborative effort. The general public contributes to the earnings of the private sector. Every year the public makes huge investments in infrastructure, research and development grants, university education, and various forms of subsidies to private business. This is public money for the benefit of private profit. This contribution is vital to the economy.

How the Public Sector Contributes to Private Business

For instance, private corporations cannot bear all the risks required to invest huge amounts of money in expensive new technology. This is why most recent innovations, such as the development of the internet over the last few decades, have taken place with government involvement.

Another example: Consider the amount of money future generations will have to spend on cleaning up the environment after years of neglect. Will the private sector coordinate and pay for this effort? No, this will be the responsibility of citizens working publicly to protect public goods – something no private entity would ever or could ever initiate on its own. Corporations exist for one reason only: to make money. They are not designed to protect or sustain shared goods.

We may not like our current economic system. But the fact is that the government shoulders the risks of private enterprise and invests in the public goods required for the economy to function well. We simply do not know what it would be like to run an economy as complex as ours without some public coordination and planning.

It’s Not Perfect, But It’s Fair

Governments are not inherently good; they make mistakes. Governments are often influenced by special interests and often make decisions based on political calculation (for instance, take a look at the influence of money on politics under the administration of Republican presidential candidate Rick Perry in Texas). However, in democratic societies the public at least has the opportunity to influence elected officials. The public has very little influence on the behavior of private corporations.

While our economy will continue to reward private initiative, the public must also share in the profits of the private sector. This is because the public contributes to its stability and success in the first place. Warren Buffet’s call for higher taxes is therefore a question of fairness, not a question of “screwing the rich.”

Your Two Cents

Discussions about economic and political systems bring out the passion in people. So share yours with us! Do you agree with Glen?


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