Innate Talents vs Hard Work

From a recent e-mail to my son, David:

Dear David,

From you 9/10/2004 e-mail:

Looking at the CAGW [Citizens Against Government Waste] numbers derived from the IRS, starting in 2005 Catherine [David's fiancee] and I will be in the 5 percentage of the population that is paying 53.3% of total federal individual income taxes. That means, I am paying 1066 percent more than the median member of the population. Am I getting 1066% increase in government services - no.

This is a corrupt way of looking at tax payments. If we apply Kant's test by taking this to the limit, we can divide the total federal budget by the total population and find that each man, woman and child should pay $5,600 a year as their equal share for financing the government. Clearly, a family of four earning $22,000 a year would have nothing to live on, and in fact, after their entire income was confiscated, would still owe the government an additional $400. So any notion that tax payments have anything what-so-ever to do with services provided is a false one.

The main principle of the progressive tax system is that those who benefit most from our free market economy pay a proportionally higher share of the taxes to maintain it.

There is another important factor in a progressive tax system that goes largely undiscussed. In the free market system, an employee is compensated bases on the economic value that the employee can provide the employer. The employee adds this value to a product or service that the employer then sells at a profit which is the employer's compensation for being in business in the first place.

This value derives from two main factors, the employees innate abilities enhanced by education and training, and the employees willingness to work hard at the job.

We know that innate abilities are subject to wide variation. IQ, for example, is distributed on a bell shaped curve where 100 is the mean. For those that have an IQ of 120 and above, there are the same number who have IQ's of 80 and below. IQ is classically defined as the ability to learn. The higher one's IQ the greater one can benefit from education and training.

As you point out, education and training increase an employee's value and thus the compensation received. Yet each persons ability to learn from education and training is limited by their innate IQ. Certainly you noticed that some cadets did better in their studies than others who worked equally hard simply because they were more intelligent to start with.

So we have a workforce with wide variations in their economic value related to the education and training they received based on their innate intelligence and other lesser factors, and their compensation varies accordingly. So we have a person with an IQ of 80 who is functionally illiterate, as are 17% of the adult population here in Rhea County, who works 12 hours a day as a security guard and part time janitor in order to support his family, who earns $20,000 a year and has no health insurance. Then we have the young executive whose IQ of 120 allowed him to get a college education, who puts in 60 hours a week to run a successful business who makes $120,000 a year and provides health insurance for himself and his employees.

They both work equally hard, but the one who was able to benefit more from his God given talents makes six times as much as the other because that's how a free market system rates their economic value.

A laissez faire approach would say nothing about this, let the free market determine these wages. A society which sees the moral value of work would question the justice of having two people who work equally hard, yet one earns $100,000 more than the other just because he was born with more talents.

To reinforce the value society places on work, and to compensate for variations in inborn talents over which a person has no control, we have decided that the head of family making $20,000 a year will pay no income taxes, while the head of family making $120,000 a year will pay, after deductions and child tax credits, etc., say, $20,000. This still leaves the latter with five times the money as the former based solely on his IQ advantage.

A recent article in USA Today indicated that the compensation for executives in the Fortune 500 companies now exceeds that of their lowest paid workers by a ratio of more than 300 to 1. Even if the government took a third of this in taxes, they would still be making 200 times as much as their lowest wage earners. Returning the highest tax rate to the pre 2000 level would still leave them with 177 times the net income as their lowest wage earners. Squeezing blood from a stone? I don't think so.

Racial Discrimination in the 1950's

Jon,

I enjoy your blog and comments on others.

I have to comment on your "Does economic discrimination deprive liberty? And what about its rationality?" post due to the fantasy land nature of your argument.

When I was a teen in the late fifty's, I asked my father why he didn't hire a Black to clerk in the retail store associated with his wholesale paper business. He said that if he did, he would lose half his customers.

This was in Northern New Jersey in a suburb that included many second and third generation emigrants who's parents had been successful after arriving in New York City. This was about as multicultural a group as one could imagine, well off and well educated for the most part. There was no government sanctioned segregation of any kind. There were Blacks in grammar school and high school and so on. We all got along fine.

Yet I could see my father's point.

So your suggestions that discrimination in employment could lead to a delay in hiring, overtime pay in the mean time, or paying more or having to do with someone less qualified are all trivial economic concerns when the alternative is losing half your customers.

When all businessmen react the same way, the economic effect on Blacks can be horrific. Yet no businessman could be the first to go against this reality, no matter how abhorrent they found it, because of the economic consequences to their business.

When the government initiated it's anti-segregation laws in the mid 1960's and applied them to businesses engaged in interstate commerce, which included virtually all businesses, it eliminated the economic disadvantage one company would have if it were the only one to hire Blacks by making this requirement universal.

How long would it be in a laissez-faire, market driven system, free from government interference before the first Black waitress was hired to serve at a South Carolina drug store food counter? We'd still be waiting.

Best regards, Bill

The Problem with Budget Deficits

In 1980, when faced with ever increasing deficits, President GHW Bush supported a deficit reduction plan which included modest tax increases on those with the highest incomes and spending reductions in equal proportions. Still, in his last year in office, the deficit reached $280 billion. When President Reagan took office, the highest tax rate was 70%. Bush's plan reduced some of the previous cuts and made it 35%, which is still half of what it was 20 years before.

President Clinton's deficit reduction bill continued this effort using the same approach of equal parts spending reductions and tax increases including a rate increase to 39.5% on the 2% of our highest income earners. While it's true that those who have this rate applied to a million dollars in income are paying $395,000 in taxes, a $45,000 increase from before, it also means that they have $605,000 left over to spend as they wish. This is 15 times the median income of all working Americans.

As the government demand for borrowed money fell, interest rates eased leaving entrepreneurs with a greater supply for investment in new businesses and the hiring of more workers. The Clinton bill also increased the earned income tax credit, one of President Reagan's ideas, which put more money in the hands of 8 million working families, parents who were likely to spend most of this money, thus boosting the economy. This led to the greatest economic expansion in post WWII history while at the same time increasing government revenues, further reducing the need for government borrowing, which led to even lower interest rates, and so on. President Bush started out with historically low interest rates and a $163 billion budget surplus.

This might have given us a grace period to address three huge long term problems.

1. The national debt peaked at over $5.9 trillion with an annual interest expense of $238 billion. The last country to carry such a large debt was Tsarist Russia. With nearly 30% of this debt being held by foreigners and foreign countries including $132 billion by Communist China, this limits our foreign policy options and effects our national security.

2. Medicare expenses continue to rise much faster than inflation which puts the solvency of the fund in jeopardy. The sooner we address this looming problem, the less drastic the solution will be.

3. The SSA has lent the general fund $1.8 trillion to finance it's operations. As the baby boomer generation retires over the next few decades, this surplus will diminish requiring the government to find these funds elsewhere. At some point the government will have to start paying back this debt so the SSA has the funds available to continue paying retiree benefits.

So what has the President done to ease these three areas of serious concern?

1. Pushed through tax cuts which will raise the national debt (public and SSA) to $8.6 trillion by 2014. This is ONLY if they aren't made permanent and the alternate minimum tax isn't adjusted. At current low interest rates, this would cost $344 billion in yearly interest charges. But in reverse of what happened in the 1990's, as government demands more money to finance this deficit spending, those who supply the funds will require higher interest payments to divert this money from other uses. Each per cent rise adds $86 billion to the yearly interest. In a global free market, the government has no control over these interest rates and is 100% obligated to pay whatever the global demand requires.

2. Added a drug benefit, two thirds of which goes directly to the drug companies, America's most profitable industry, with no designated source of financing, just add $536 billion to the deficit. The underlying financial difficulties, meanwhile, are left un-addressed.

3. Proposes personal retirement accounts which would reduce the amount of money collected by SS by 12.5% for those who sign up for it, costing the treasury up to $2 trillion as it continues to pay full benefits to retirees during the transition period. The underlying financial difficulties, meanwhile, are left un-addressed.

I really feel I made my patriotic contribution to our 12 year struggle to get our national budget in balance, by paying 4.3 cents more for a gallon of gas, for example. Yet, not the war, not homeland security, not the medicare drug benefit, not anyhing does the President think worthy to ask the American people to pay for. It all blithely goes on our national credit card for our children and grandchildren to concern themselves about. All the hard work to balance the budget has gone down the drain by the most irresponsible President in our country's history.

Compelling State Interest

Perhaps if we look at why marriage laws came about in the first place, we would have a better idea of who would qualify. What is the state interest, compelling or otherwise, to promote marriage through the incentives it provides? I would suggest these:

1. To promote a stable, lifelong, monogamous sexual relation between two people.

2. To provide protections for each member of the couple and their children.

A monogamous relationship ameliorates the ill effects both physical (STDs) and emotional (alienation, jealousy, instability) that infidelity can bring.

Protections include the financial and emotional support for the partner, if needed, but especially for the children.

Since marriage promotes monogamous sex, it can never be for more than two people. Since it involves sex, it cannot be for mere convenience, like two maiden aunts marrying for the legal privileges marriage provides. This doesn't cover incest, but that is prohibited for other compelling public interest reasons. Marriage is a legal contract, so the suggestion that people in this "anything goes" culture will soon be allowed to marry their pets is ludicrous .

So who can marry? Promoting monogamy between homosexual couples is as important as promoting it between heterosexual couples, perhaps more so. Those who complain about homosexual promiscuity should fully support gays and lesbians who are willing to commit to a monogamous relationship through marriage.

Four million children in this country are being raised by at least one gay or lesbian parent. Most are the result of previous heterosexual marriages that ended in divorce. Allowing a single gay or lesbian parent to marry his or her same sex partner would improve the emotional stability and financial security of these children just as the remarriage of a heterosexual divorcee does. I'm talking in generalities, of course. Don't come back with stories of ugly step-parents.

The children of gay and lesbian couples who become parents through adoption or artificial means deserve the same privileges and protections that marriage provides the children of married heterosexual couples. Treating children differently based on the sexual orientation of their parents seems like blatant unjustifiable discrimination to me.

If encouraging monogamous relationships and providing support and protection for children is the object of our marriage laws, then SSM should not just be allowed, but vigorously promoted.