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Democrats' Fairness Program Won't Work

This column was written by John Tamny



A fall campaign pledge of the Democrats was to "make our economy fairer." And if by "fair" they intend to make us marginally less productive, but more "equal" in terms of lower economic opportunity, their plan is eminently workable.

At the heart of the Democrats' fairness program is the desire to reduce the wealth gap between the rich and poor. According to a front-page story in last Tuesday's Wall Street Journal, "the gap between winners and losers in the American economy has widened over the last 20 years." But this might seem odd given the events of the latest campaign season.

The 10 biggest fortunes in the U.S. are public fortunes in the sense that they are due to the rise of public-company stock owned by the 10 richest people in the country. What's odd is that given the chance to reform Social Security and give Americans the option to direct their FICA dollars into private accounts that would include public-company stocks, the Democrats passed, instead using their opposition to bludgeon reformist Republicans at the ballot box.

It's mostly lost on Democrats that access to the stock market is the best and fairest equalizer of wealth. They also don't get the fact that other than Warren Buffett, none of the 10 richest members of the 2006 Forbes 400 could claim that distinction when the magazine first began tracking the rich in 1982. "Rich" is thankfully a fluid adjective in the U.S., and so long as it is, hand wringing over gaps in wealth is foolhardy and counterproductive.

First up on the Democrats' equality agenda is a hike in the minimum wage. The Democrats implicitly acknowledge a relationship between job losses and artificial wage increases in only pushing for a 38 percent increment in the minimum wage to $7.15 an hour. Indeed, if they really believe their own rhetoric about the innocuous nature of forced wage hikes, why not raise the wage to $10 or $15 an hour?

In truth, the Democrats apparently know what we all instinctively understand about economic activity occurring on the margin. A 38 percent wage hike wouldn't kill too many jobs precisely because most workers already make more than the minimum wage. Unfortunately, for an agenda that is bent on helping the less fortunate, any wage floor means that the marginal, least-qualified worker will be left behind by legislation that raises the cost of labor.

A similar dynamic is at work with the Democrats' tax agenda. While many Democrats would be happy to see the 2003 tax cuts expire in the name of equality, none would dare argue for the pre-Reagan top rate of 70 percent. At the core, Democrats acknowledge what supply-siders have been saying all along about taxes: The marginal incentive to work and produce is reduced when each dollar of income is taxed more.

The "seen" in any tax equation is the willingness of people to work despite penalties on their production. So while it's fair to say higher taxes won't totally collapse economic activity, it's also true that workers on the margin will choose leisure over productive activity as their taxes rise. (Witness France.) The wealth gap might shrink if the Bush tax cuts expire, but it will do so at the expense of GDP. How the latter helps the downtrodden constituency within the Democratic Party is one of life's mysteries.

The Journal article noted that another "favorite Democratic target is the lower tax rate — a maximum of 15% — on capital gains and dividends." This one is particularly interesting given the desire of former Clinton economic adviser Gene Sperling to create "universal 401(k)" plans.

Leaving aside the question of where Sperling and other Democrats were when Republicans sought to create the ultimate "universal 401(k)" through voluntary Social Security accounts, it should be remembered that taxes on capital gains and dividends are taxes on investment. As taxes increase on both, the marginal incentive to risk capital on investment is reduced. In short, the Democrats would introduce a forced savings plan with one hand, all while reducing the attractiveness of the assets within those savings plans with the other.

The late columnist Warren Brookes once wrote that envy "is the single most impoverishing attitude of thought." Sadly, the Democratic economic agenda is rooted in envy and zero-sum thinking; it's a philosophy that falsely suggests one man's success is another man's failure.

Brookes also noted that "We are all blessed by the genius of relatively few." Rather than use their legislative majority to harm the "rich," the Democrats should embrace the genius of the pro-growth minority. While the wealth gap will surely grow, we'll all be better off as a result.

By John Tamny
Reprinted with permission from National Review Online

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