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Wealth, poverty, and progressive taxation April 4, 2009

Posted by dorigo in news, politics.
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A note left by a colleague in his facebook page:

I just can’t get these numbers out of my head: The 500 richest people on earth earn more than the bottom 416 million.

That’s 416 million – not 416 thousand, or 4.16 million, but 416,000,000 – much more than the entire population of the United States.

So if some ideologue decided to even out wealth distribution between these two extremes, each of those top 500 earners would see their net worth reduced by a factor of a million! They would lose 99.9999% of their wealth, while the bottom 416 million people would see their assets double.

I’m used to large and small numbers, from my work, but this amazes me. The numbers come from an opinion by Nicholas D. Kristof published in the International Hearald Tribune yesterday, 3-April-2009, and he cites the U.N.

And my reaction:

Hi M., that is indeed striking -and disgusting, in a way. I would not ask the 500 richest people to share all their wealth. If they just gave away half of what they have, 416 million people would still get a 50% increase of their means. That would be a little bit less ideologic and maybe only decent!
Probably the only way about this is not to intervene in a rotten situation, but change the rules. Progressive taxation is the way. The economic situation in the world lends itself to strong intervention, and I think what they G20 decided this week is a step in the right direction, but still a bit too shy.

Comments

1. Luboš Motl - April 4, 2009

I don’t think that your communist comrade is used to large numbers in science. For example, the empty regions of the Universe have the volume that is 10^{180} times larger than the Planck volume, the size of the smallest evaporating black holes.

The human population is very far from the proper diversity of incomes that is seen in Nature. I am convinced that as the human progress will continue, the breadth of the orders of magnitude in differences like this one will increase, too. People like you, fanatical communists, love to talk about diversity. But when it comes to the diversity of orders of magnitude in the incomes, you suddenly become blind.

Redistribution only has bad consequences and no good ones. Destroying the rich people and the de-accumulation of the capital helps nobody, not even the poor ones – except for those who only want to redistribute because they are jealous, but these should be eliminated entirely.

2. Massimo Morelli - April 4, 2009

Luboš, I suggest you to read the Paul Krugman’s Book “The Conscience of a Liberal” that vigorously advocates redistribution. Krugman, to the best of my knowledge does not appear to be a “fanatical communist” and should know a thing or two in economics.

3. Luboš Motl - April 4, 2009

Thanks for your recommendation, Massimo. However, I am not sure whether I would agree with your description of Krugman.

4. Daniel de França MTd2 - April 4, 2009

Hi tommaso,

I guess any redistribution would not last not for long. The income is calculated of the poorest is calculated in an yearly basis, whereas of the richest is a fixed quantity, that is, the assets. The situation is much worse if you consider that most of those assets are just of speculative value, market value, so if you just try to convert that in real money, it will just increase the quantity of money available and cause inflation.

I guess in the end, that would not work very well. A better way out is to consider whole countries in the process, and then, so that it is possible even quantity of money, by redistributing the gross quantity earned through productive work, that is, redistribuiting the salary of the wealthier nations. So, as an analogy of the 50% redistribuition, not only the richest people would share the money, but also the middle class of rich country, like Tommaso Dorigo, would have to share 50% of their gross income, that is, not counting the already paid taxes, for the sake of the poorest.

So, if an european of a given coutry, has their gross salary decreased by ~30%-40%, add to that 50%, and that would end up reducing the liquid income by ~3-6 times. It would sustain the poorest, but it would, for example, deflate the economy of the richest countries to 3rd world values.

5. Anonymous - April 4, 2009

Argument about 500 richest people is not good.

First, almost all rich people do not have that much _cash_ – they usually derive their wealth from corporate shares and other forms of capital.

Trying to divide their wealth is not going to do much good.

What can be done? Well, there’s just no single answer.

6. Amos - April 4, 2009

The other problem with the argument is the 415 million poorest…

Those people are that poor because they (a) live in places where the economies don’t function because the governments are unstable, totalitarian, or otherwise dysfunctional, and/or (b) have cultures that are antithetical to development.

You can’t redistribute to the first group, but if they had effective government, they would quickly grow themselves out of their poverty on their own anyway. And even if you did redistribute to the second group, you’d have to do the same thing again a year later, because what you distributed to them would be consumed rather than invested.

7. carlbrannen - April 4, 2009

Most of the world appears to be poor because of their own crappy government’s policies. Giving them money fixes things temporarily, but as soon as it’s gone, they slide back to where they were.

Communism was given a fair trial in many countries. It didn’t work. The first world built thousands of wells to solve water problems in Africa. No one repaired them and they fell into disservice. Billions of dollars wasted. I don’t know but if space aliens had landed and installed wells in Medieval Europe the same thing would have happened. Maybe change has to come from within the culture.

Having interacted with the very wealthy and the very poor in the US, I have some observations. Wealthy people are quite stupid. They invest in the silliest notions. Most of their ideas are simple imitations of each other. That’s how the real estate collapse happened, they all did the same thing like a pack of monkeys. In other words, rich people are just like physicists and other humans. But it’s handy to have rich people because if you want money to build something, you can get it from them. If everyone were middle class, a lot of useful things wouldn’t happen because it is too difficult to get a whole group of people to agree to do something; communicating the message is impossible.

And my experiences with the poor has led me to conclude that giving them large amounts of money is like pissing into a colander. It runs out faster than you can drink beer. Back when all my friends were engineers and other educated people I couldn’t understand how it was that Hollywood stars and politicians got into so much trouble with drugs and alcohol.

Now that I am exposed more to the working classes I understand completely. This is what happens when most people get a little money. Giving them more just means more laziness, more partying and more of a health disaster when they finally come into the hospital to have that festering needle injection site looked at.

This is an ugly planet and it is populated by ugly people. It is just barely able to provide the existence it does to the people living on it. Government is the least efficient method of moving money around because, at best, it is based on the contrary and horribly inefficient concept of justice obtained by naked force.

The essence of conservatism is to avoid making sudden drastic changes to government policy. If your country is one of the more pleasant places to live, you might consider the possibility that making radical changes to its structure might not be for the best. It’s a lot easier to turn a 1st rate country into a 5th rate than vice versa.

And finally, people have very short perspectives. The planet as a whole has become steadily more pleasant for humans to live on. This process has been going on for several thousand years and it has continued to go on over my life time. Literacy, average lifetime, wealth, is improving all over the planet. Countries that were dirt poor when I was young are now industrial powerhouses. Billions of people who did not have a hope of voting for politicians (useless though that may be, there are worse alternatives) now live in democracies. Countries that once did not hesitate to kill millions in attempts to conquer whole continents are now pacifist and appear to be permanently that way.

8. Daniel de França MTd2 - April 4, 2009

Carl,

Despite your several strawmen arguments, such as justifying “lazyness” of the poor with “I couldn’t understand how it was that Hollywood stars and politicians got into so much trouble with drugs and alcohol.”, I will ask you for examples of this one: “It’s a lot easier to turn a 1st rate country into a 5th rate than vice versa.”. I bet you cannot do better than giving anectodal evidence.

And please, there was never a fair attempt at communism, unless you can really explain me what you mean by “fair”.

But I do agree with you that there must be a cultural change of a sizable part toward a scientific and techonlogical of the population before an attempt at communism. After that, procede to the arrest of the big properties ALL fascists (generaly called conservatives, by themselves) of the world and ownage by the people.

9. Daniel de França MTd2 - April 4, 2009

And this is not an attack to coservatism, only. Liberal and conservatives are too much alike, like a snake with 2 heads.

10. Michael Schmitt - April 4, 2009

The original comment quoted by Tommaso was in no way an advocacy of communism or even the sudden and radical redistribution of wealth. That’s why I used the word “ideologue” – to indicate that such an idea would be crazy.

For me, the numbers spell a moral problem, not just an economic or political one. Yes, there will always be more ambitious people living in more advanced and powerful states, and they will amass more wealth (however defined) and spur development and possibly even support the development of an enlightened society (that is far from obvious, however). And there will be despots who destroy their own economies, culture and people – sometimes strings of despots.

But there are many decent, thoughtful, productive people, like Tommaso and Karl among others posting comments here, who will have no opportunity to make their contributions to their societies and their communities, as a result of this economic “downturn.” I find that truly tragic, and a much graver issue that bonuses paid to incompetent captains of industry.

11. Haelfix - April 4, 2009

The idea of redistribution is hopelessly static. It sort of implicitly assumes a zero sum game, where you have slices of ‘the pie’.

So rather than focusing on growing the poor and middle class (or in fact everybody) it just narrowly takes a slice of time and makes the point there. European countries have stagnated their economies for decades b/c of this idea, and its fundamentally silly and populist.

I much prefer a society where advancement is easily possible via hard work (social mobility) rather than arbitrarily redistributing everything to achieve 50-50 (or whatever philosophical portion that sounds good).

So yea, I prefer a meritocracy. People who are the best and work the hardest should proportionally make more than those who don’t. Unfortunately thats not quite what happens in the real world (it doesnt matter if you are the greatest high school teacher on the planet, you will never make the same amount as the worst Ibanker). So I prefer on rectifying the conditions that makes that possible, rather than blanked redistribution schemes that end up hurting the economy and efficiency.

12. Haelfix - April 4, 2009

Consider a man like Bill Gates. 50 billion dollars (or whatever it is atm). His net worth is over a 100,000 times that of an average poor person. But then again his contributions to society are probably within an order of magnitude of that ratio. His work and brainchild has helped create tens of thousands of jobs, improved communications, economic efficiency by leaps and bounds and on and on. In short, he’s earned that money by pretty much any reasonable standard.

So that sort of thing doesn’t bother me. Less appealing of course are the billionares who got there via less altruistic and beneficial means.

13. Michael Schmitt - April 5, 2009

Hi Haelfix,

I can’t accept that wealth is a valid measure of one’s contribution to society.

How many Nelson Mandelas is Bill Gates worth?

How many Mandelas is George W. Bush with?

14. Michael Schmitt - April 5, 2009

Hi Haelfix,

I can’t accept that wealth is a valid measure of one’s contribution to society.

How many Nelson Mandelas is Bill Gates worth?

How many Mandelas is George W. Bush worth?

15. Haelfix - April 5, 2009

One of the original precepts of capitalism was to actually do just that. It should pay to be a great political figure like Mandela and in an ideal thought experiment you could probably devise a method for that to actually work (many politicians, including Mandela, actually end up with a good amount of wealth by the end, some deservedly, others not).

Its imperfect of course, but how else are you going to measure contribution to society without adding a fallible human element (take for instance Bush vs Mandela, how do you even quantify that). At least the market is impartial and always keeps people working for more.

But I still think you could make a pretty good case that Bill Gates is worth 1000 random *average* joes in his contribution to humankind.

On an economic scale alone I think that conclusion follows, especially given his work on charity and so forth.

16. dorigo - April 5, 2009

Hi all,

I take it as good news that the topic of this post has led to some debate. Of course we are all aware there is a problem in the way economy works in our world, and we only differ in how to put patches to the system’s leaks.

Of course taking money from the rich and redistributing it to the poorest is not a solution: it is a hyperbole. It serves one purpose, though: it allows one to size up the extent of the problem, which is ultimately one of inequalities, and how large we accept them to be in a civil society.

But Lubos #1, I disagree that one should be so tranchant to say that redistribution is bad. Every country redistributes wealth, by taxing income. How, otherwise, can we build infrastructures, provide a schooling system, hospitals, and administration to our countries ?

The problem, to me, is whether rich countries should invest in the poor ones, by agreeing that a minimum of those infrastructures and basic needs are to be provided everywhere. I think this could be considered an investment, in the potential of mankind. Of course, we must fight famine and sanitary emergencies – but unless we go a step forward the situation will only get worse.

So Haelfix #11, redistribution is a matter of investment, not a static idea of fighting inequalities. And I am with Michael in finding your enthusiastic evaluation of the contribution of the wealthiest to mankind. Gates does too little, and the 499 unnamed who follow him do virtually zero. But the problem is not theirs to solve. Sorry to say it, but to me having riches does not qualify you as a big contributor to mankind.

Cheers all,
T.

17. Haelfix - April 5, 2009

Hi Tommaso,

Good so you agree its a matter of investment, I completely agree. I personally think it would be wiser to invest with Bill Gates rather than the accumulation of 1000 average people, but lets agree to disagree on that point.

“Sorry to say it, but to me having riches does not qualify you as a big contributor to mankind.”

Fair enough, certainly true in many individual cases, but do you agree with the premise that on average there is a correlation with the amount of work you do, and the amount of money you make? There will be outliers all over the plot, but I believe the relationship should still be pretty tight statistically and at least be a monotonically increasing function.

Now if you agree with that, do you also agree that the amount of work you do is going to be correlated (again statistically) with whatever it is exactly that you contribute to mankind (whether good or evil)?

18. Marty - April 6, 2009

Hi Tommaso,

From a humanistic perspective, I’m certainly sympathetic to the idea that the wealthiest nations should do what they can to improve the situation of the poorer nations. Finding a good way to do that can be tricky and is fraught with potential unintended consequences.

As others have noted, many of the poorest countries have poorly functioning and corrupt governments. How does one go about trying to bring up the standard of living of the citizenry? It is too easy for the government officials and “favored ones” to siphon off or divert aid to pad their own bank accounts (and key officials are probably already relatively rich enough to have given them a path to power, unless it was at the point of a gun). To state the obvious, why would a rich country want to give aid to a country with a corrupt government unless it was certain that the aid would benefit the common people rather than a select few? And why would a corrupt government want to accede to demands of outside donors if they thought it wouldn’t benefit them directly, and might even reduce their power by making them accountable to organizations they don’t control? I expect such problems have gotten in the way of helping a lot of the poorest people on the planet.

The potential for unintended consequences is, in my mind, even more disturbing over the mid to long term. If the world economy and developed nations are increasingly struggling with how to accommodate large emerging economies like China and India, I shudder in imagining what it would be like if the rest of the world’s population were trying to bring themselves up to a standard of living comparable to that of the Western nations. I’m thinking about allocation of energy sources (whose consumption would dramatically increase without a comparable increase in reserves), some key metals (often occurring in only certain places; and starting new mines is expensive and time consuming), availability of wood products, and so on.

If most of the world is competing for one key but scarce resource, then significant conflicts will inevitably arise. If most of the world is competing for many key but scarce resources, then eventual armed conflict and destruction of competing economies seems extremely likely.

Then there are long term impacts of destruction of the environment to support massive development (are there any important exceptions to the pattern of a developing nation destroying the environment first and trying to fix the damage later, if at all?). Does the continued existence of the weakest non-speaking inhabitants of the Earth matter at all? (Am thinking of plants and animals that are evolutionary unprepared for the consequences of greatly expanded human development.) If worries about global warming are significant now, then how will those worries change if consumption and growth (and waste) of the undeveloped and underdeveloped nations brought them up to a Western standards?

It isn’t at all clear to that the overall effect would be positive from transferring significant wealth from the richest to poorest nations. It is even less clear that any positive result would be sustainable (I wonder if even the full development of China and India will lead to instability). Many unintended consequences can result when well meaning individuals and nations try to force big changes…

19. dorigo - April 6, 2009

Haelfix, here we part. I believe that in many if not most cases, the fortunes of the very richest men in the world has been amassed through violence, violation of rules, crime, oppression, and exploitation.

There are virtuous cases, true. But those cases are the outliers of our society, the 5-sigma tail of a distribution of wealth amassed through hard work and ingenuity. They are a minority, and they do not make trends and are not easily categorizable, because they are the tail of a distribution.

Marty, the challenge of the XXIst century is truly the one of sustainability. The XXth century saw an exponential growth, and we all know this is bound to break somewhere.

If the wealthy countries want to try and lead the path toward a sustainable economy and a rational use of the scarce resources of this planet they have to act migthily and quickly, or they will be submerged by the pressure from developing countries, with dire consequences like those you list.

What is your recipe, it is not clear to me. Not clear what is mine either, but I believe that the path to sustainability is to realize we have been living on too much for too long.

Cheers,
T.

20. unit - April 6, 2009

So the 500 richest people in the world probably pay more taxes than the bottom 416 million. As the recently published data point out, in Italy the top 10% pay more taxes than the bottom 50%. Since I’m in the top 10% contributors (1%, actually) paying A LOT of taxes (more than 60%), and since I do redistribute my net income buying things and services, I really don’t understand your argument. Also, if I had to pay more taxes I would probably have less interest in expand my business remaining small and wasting a lot of oppurtunities and jobs. A lot of italian entrepreneurs follow this way and I think you know about the result.

21. Alexziller - April 12, 2009

interesting debate.

I think one should distinguish between 2 kind of superich people: the ones who beside beeing opprtunist, have made some substantial and effective contribution to benefit mankind. Most of them are innovators. I would call them tecnocrat superrich. I mean people like Larry Page, Serjey Brin, Steve Jobs, Ingvar Kamprad, Steven Spielberg, Bill Gates (no matter if they have stolen ideas, what counts is the “practical benefit” to mankind in terms of the number of people possibly beeing benefited by their work). The second kind are the pure opportunists who just became superreach by taking advantages of random “lucky” situations of the complex socioeconomical system without much effort and without innovation (financial opportunism, illegal or barely legal tricks, inheritance).
I don’t know if the second ones are unavoidable, probably yes.
As far as capitalism is a dynamic system and somehow correlates with merit and allows freedom, I am fine with it and I can even tolerate the opportunists as necessary part of it.
My main concern is actually that nowadays capitalism generally does not correlate with high level culture&education and with respect to this I have the feeling that “past superwealthy people” (-> aristocracy) were better.
As for redistribution, I agree on it in the form of internal redistribution within a country -> taxes, especially on inheritance as necessary to guarantee the same boundary conditions for socio-economical climbing to the non-lazy part of the non-rich people on that country.

Best, Alex


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