Freeman

THE CALLING

Giving Back

What part of "mutual benefit" is so hard to understand?

AUGUST 11, 2011 by STEVEN HORWITZ

Over the course of the recent debt-ceiling debate, one argument made in favor of raising taxes on the rich was that they ought to be “giving back.” It wasn’t always clear to whom they were supposed to be giving back, but the argument is that since “society” has made it possible for them to become rich, they should “give back” by paying higher rates of taxation to support government programs.

There are quite a few problems with this argument, not the least of which is that the total share of the tax burden shouldered by the rich is actually very high. The top 10 percent of households paid about 70 percent of total taxes in 2008. According to the nonpartisan Tax Foundation, in 2008 the top 1 percent of households paid 38 percent of all federal income taxes even though they earned 20 percent of total adjusted gross income. (That’s a higher percentage than 30 years ago, when the top tax bracket was double what it is now). In addition, the average rate the rich actually pay is still notably higher than all the income groups below them. The top 1 percent pay 23 percent on average, and the top 10 percent pay 19 percent. So by those measures, the rich already do “give back” plenty.

Taking, Not Giving

However, I want to focus on two different problems. First, note the phrase “give back.” Whatever one thinks should be the optimal rate of taxation on the wealthy, using the phrase “give” is highly misleading. When one “gives” something, it is voluntary. Taxation, whatever else is true, is not a citizen giving; it’s a government taking. Again, even if one thinks the rich should be taxed more, referring to it as “giving back” is at best inaccurate and at worst dishonest.

The bigger problem with the rhetoric of “giving back” is that it is shows a misunderstanding of the fundamental process by which wealth is generated. In particular it ignores the mutually beneficial nature of exchange and assumes that those who have become rich did so by “taking” from others. The only reason one would “give back” is that one has “taken” something inappropriately from others. The “back” in “give back” assumes that the thing in question rightfully belongs to someone else.

Thank You. No, Thank You

In a free market, of course, people don’t get rich by taking from others. They do so by providing goods and services that others wish to purchase because they value those things more highly than the money they are asked to pay. That is, the rich offer opportunities for mutually beneficial trades. This is why, as I noted last week, so many market transactions end with both parties saying “thank you.”

So the language of “giving back” is wrong-headed. Those who get rich in a free market have already “given” us plenty – the goods and services we accepted in exchange for the money that made them rich. When my son’s car died recently and he was stranded two hours from home, the existence of cell phones dramatically reduced the complications and costs of his predicament and made it much easier for me to get him. To say that the stockholders and executives at Verizon and Motorola must now “give back” is absurd: They have given me far more than I have given them. Yes, I along with millions of others have made them rich, but they have given us a product that has provided far more value than we’ve given up.

The same can be said of everything from food at the grocery store or local restaurant, to financial services at the bank, to the computer I’m typing this on that has enriched Bill Gates beyond his wildest dreams. It’s not “society” that makes rich people rich; it’s you and I — and in return we have a cornucopia of stuff that has made our lives better, easier, safer, and longer. Expecting more from the rich is nothing but class envy, a call for punishment of the successful.

ABOUT

STEVEN HORWITZ

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

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