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.