America needs a president who prioritises growth over redistribution

The problem with redistribution is that if we become obsessed with who gets what sized slice of our shrinking wealth cake we might forget to just go and bake a bigger one altogether

What's so funny, Obama?
John Phelan
On 31 January 2012 10:10

I’m not a Mitt Romney supporter. He’s certainly less objectionable than other Republican contenders like Rick Santorum or Newt Gingrich but it’s hard to get enthusiastic about a guy when, as the joke goes, he’s managed to be on both sides of every big issue in recent years.

Indeed, if I was asked to name the most impressive thing about Romney his luxuriant hair would be close to the top of the list. But the last week or so I’ve felt a little sorry for him. Yes, I’m feeling a little sorry for one of the richest 0.006 percent of Americans.   

In the run up to the South Carolina primary a desperate Gingrich brought up the tax status of front runner Romney. Immediately the pressure was on for Romney to release his tax records. When he did the press screamed “Wealthy Romney reveals 14 percent taxes” What better example of greed?

Except it wasn’t actually true. Ever since billionaire investor Warren Buffett claimed that his tax rate was lower than that of his secretary there has been much debate about the ‘effective tax rate’ faced by the rich. But this ‘effective’ tax rate is made up of apples and oranges. As such it is a meaningless concept.

Romney, like Buffett, pays the top rate of income tax on his salary income, 35 percent. But, like Buffett, Romney derives much of his total income from capital gains, the profits made by investments, which are taxed at 15 percent.  

The two types of income, wages for labour (yes, working for Bain Capital classes as labour for tax purposes) and income from investments, are very different. When you labour you are guaranteed your salary come what may. Even if your employer goes bust you are a preferential creditor; any wages owing to you will be paid out of whatever is raised by asset sales before other creditors see a penny.

Investment income is different; as the small print says, investments can go down as well as up. The risk of not receiving a return or income from your investment is much greater than for labour. It follows that if any investment is to be undertaken at all the reward must be high. Not only that, but the investment income that Romney pays 15 percent tax on comes from the profits of companies which have already paid 35 percent in Corporation Tax.

This is why income from labour and income from investment are taxed differently; they are different things. To lump them together and call it an ‘effective’ tax rate is useless.

But there is a deeper point here. From the dawn of man there have only been two ways to increase your wealth. One approach is to supply a good or service which someone else is willing to trade you for, and with both parties benefiting from the transaction everyone’s wealth increases. This is wealth as a positive sum game.

The other is simply to take the wealth generated by someone else; one only gets better off as another gets worse off. This is wealth as a zero sum game.

The obsession with Romney paying ‘only’ $6.2 million in taxes last year (more than 97 percent of Americans) shows that the second approach is gaining popularity. To some extent this is the predictable outcome of economic stagnation. When wealth is growing you don’t worry so much that guy next door is richer than you because you will be richer tomorrow anyway. But when your wealth is shrinking or stagnating, the difference between you and the guy next door becomes a yawning chasm.

Historically the belief, which grows in times of economic hardship, that wealth is a zero sum game and can only be obtained by taking it off somebody else, has led to disaster. In the last century the Germans, Soviets, and Ugandans, to name just a few, all came to think that the Jews, the Kulaks or the Asians had wealth that rightly belong to them and that they would become rich if only they could get their hands on it.

Comparing rich Americans like Romney to those persecuted groups will sound a little shrill, even distasteful to many. But if we become obsessed with who gets what sized slice of our shrinking wealth cake we might forget to just go and bake a bigger one. What America and other countries need is not destructive zero sum envy but growth. And they need real growth, not the unsustainable debt based fantasy of recent years.

There are many who will tell you that further growth is impossible, that the planet is ‘maxed out’. They have been making this prediction since at least Thomas Malthus wrote his Essay on Population in 1798. These people consistently underestimate the one truly inexhaustible resource at humanity’s disposal; its ingenuity.

President Obama said recently that “This is the defining issue of our time” He is right but he is on the wrong side of it. His recent State of the Union speech was heavy on plans to divide wealth up, but lighter on ideas of where this wealth might come from in the first place. And wealth has to be generated before it can be redistributed.

We must hope that the politics of growth wins out over the politics of envy. With his background in community organising and politics, roles all about the spending of money generated by others, it is not surprising that Barack Obama prioritises redistribution. With his career turning round failing businesses Mitt Romney, however imperfectly, leans towards growth.

America needs a president who prioritises growth over redistribution so that the social balm of increasing wealth can work its magic; so that, as an earlier eloquent Democrat put it, a rising tide can lift all boats. 

John Phelan is a Contributing Editor for The Commentator and a Fellow at the Cobden Centre. He has also written for City AM and Conservative Home and he blogs at Manchester Liberal. Follow him on Twitter at @TheBoyPhelan

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