Capitalism and Income Redistribution

Many people think of the term ‘Capitalist’ as pejorative or abusive. This is a Marxist vestige; people think of a ‘capitalist’ as someone who only thinks of money and does not shy away from exploiting people.

But ‘capitalist’ – as in the sense that one exploits economics of scale by amassing capital is beneficial to both producer and consumer. E.g. it is cheaper for one factory to make 1 million laptops than for four factories to make 250k laptops each. The more that is produced in one place – through amassed capital – the cheaper and better for all parties. There is no modern society that does not harness this principle. Even Venezuela, Soviet Russia, etc. were ‘capitalist’ in the sense that they relied on massed capital.

Capitalism and Income Redistribution

People often think favorably of Income Redistribution. But they typically don’t think of the following:

(1) People don’t spend their money on the same thing. I.e. give a poor person a little more money, and they will use it to buy more stuff. Give a rich person a little more money, and they are more likely to invest it (because they already have all their basic needs covered). Investment is better than consumption for society in the long run. That is why Ronald Reagan (and G.W. Bush) tried to give special tax cuts for the rich. It worked moderately OK under Regan, but worse under Bush, because. While the rich did invest under Bush, they invested in jobs overseas that were more competitive than American jobs. From the time of Reagan, and to the time of G.W. Bush, globalization had taken place.

However, in terms of fairness, one should be against all special tax cuts for both rich and poor. The ideal taxation would be for everyone to pay a flat percentage of their income in taxes, e.g. 25%. This way, the rich will still pay more, but there will be fewer conflicts and fewer state-created “winners and losers” in society.

(2) Redistribution: Redistribution is destructive. I.e. if the government takes 1$ from you and gives it to poor Betty down the street, this is not free. The government, banks, etc. all have to expend resources to tax you, transfer the money, control that poor Betty is really eligible for receive aid, etc.

So redistribution doesn’t just move money around. It moves money around but destroys some of that money in the process, as the money is sucked into un-gainful activities, i.e. bureaucracy. Now of course you can still think that destroying some value is acceptable save people from starvation or dying of disease, etc. – most people certainly do – but redistribution will always cause some value to be lost as explained above.

The question is then how much value you think it is acceptable to lose in order to have a more egalitarian society. Most people tend to think it is acceptable in critical matters, but once you’re just redistributing in order to feel good about “doing something for the poor” it becomes very important to factor in that you are also destroying value that could potentially benefit the poor (because the rich will have more money to invest and develop new products).

There is a very good book about this: Economics in One Lesson.

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