Remnant Review
Bill Gross is a very rich man. He manages Pimco, the world's largest bond fund.
As is true of most American multi-billionaires, he is a Keynesian. He believes in the economically creative power of the state. He has understood how the state affects the markets through raw power, and he has profited enormously.
In November, he wrote a long paragraph in favor of higher taxes on the rich. Because I am going to take apart his arguments one at a time, I have decided to reprint his paragraph as a whole. The reader deserves to understand the whole argument before I dissect it.
Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor. I often tell my wife Sue it's probably a Kennedy-esque type of phenomenon. Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very public Investment Outlooks that "dis" the success that provided me the soapbox in the first place. If your immediate reaction is to nod up and down, then give yourself some points in this intellectual tête-à-tête. Still, I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you've been privileged to make. In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent "1%" grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living. Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the '40s, '50s or '60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, "build that," you did not create that wave. You rode it. And now it's time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You'll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You'll just have to write a little bit smaller check. Scrooge McDuck would complain but then he's swimming in it, and can afford to duck paddle to a shallower end for a while. If you're in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing "capital" at lower rates than "labor" should now end.
Does this argument make economic sense? Only to Keynesians. Does it make moral sense? Only to people who have rewritten the commandment: "Thou shalt not steal, except by majority vote."
1. KENNEDY RECOMMENDED A TAX CUT
He begins with a personal confession.
Having benefited enormously via the leveraging of capital since the beginning of my career and having shared a decreasing percentage of my income thanks to Presidents Reagan and Bush 43 via lower government taxes, I now find my intellectual leanings shifting to the plight of labor. I often tell my wife Sue it's probably a Kennedy-esque type of phenomenon. Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very public Investment Outlooks that "dis" the success that provided me the soapbox in the first place.
Let us discuss the crucial Kennedy-esque phenomenon. In 1963, Kennedy, in his State of the Union address, announced his commitment to the most dramatic reduction in top bracket income taxation since the Republicans came into office four decades earlier. He wanted the top rate cut from 91% to 65%. Lyndon Johnson signed the law, which cut the top rate to 70%.
The top rate had been 73% in 1921. It was reduced in a series of steps to 25% in 1925. It was pushed up to 63% by Herbert Hoover in 1932 as an anti-depression measure. It failed. The economy tanked to its low in 1933. In 1936, FDR pushed it to 79%. It peaked at 94% in 1944. It was cut to 91% in 1946, where it remained until 1964. (Http://bit.ly/TaxRatesHistory)
2. THE POLITICS OF PLUNDER
Gross then confesses guilt.
Having gotten rich at the expense of labor, the guilt sets in and I begin to feel sorry for the less well-off, writing very public Investment Outlooks that "dis" the success that provided me the soapbox in the first place.
The key phrase is "at the expense of labor." How did he get rich at the expense of labor? And what constitutes "labor"? He does not say.
Income tax rates are lower for the average worker than they are for Gross. About 47% of workers pay no income taxes. They do pay Social Security taxes, as do their employers. But this total is under 15% of gross income. So, how does this create a zero-sum game, where one income class profits at the expense of another?
Classes are statistical and conceptual aggregates. Different groups profit in any society at varying rates. So do individuals. Productivity differs. Rewards differ. In a free market, customers decide which people to do business with. Customers retain their authority over the production process, because they decide who wins ("I'll buy it") and who loses ("Sorry, Charlie").
Taxing successful producers at higher rates is a direct interference by the state. It reduces the economic authority of customers. It substitutes the state's economic authority for the customer's economic authority. The state says this: "We are vetoing the decisions of customers as to who will be rewarded for customer-satisfying production. We extract more taxes from those producers whom customers prefer to do business with, in order to give an advantage to those producers whom customers regard as less beneficial to them."
The key question in determining who profits at the expense of whom is this: Does one group use political coercion to extract wealth at a greater rate from other groups than other groups profit from them? That is: Are the rules of the tax code structured to hurt specific groups? The answer is yes. That is inherent in all modern politics. There is no nation with a flat tax rate. The biblical principle of the tithe -- 10% of any increase in income for all members of a church -- is violated by every civil government. The poorer classes vote as a bloc to impose higher rates of taxation on those above them in income. This is the politics of this commandment: "Thou shalt not steal, except by majority vote."
This is what Gross recommends: graduated taxation, called "progressive" by political Progressives. He comes as a representative of the super-rich to promote higher taxes on the wealthy. He follows in the footsteps of two plutocrats: Herbert Hoover and Franklin Roosevelt.
Graduated taxation is the politics of plunder. It is theft by ballot box. It is a violation of the rule of law. It is a violation of equality before the law. It is different strokes for different folks. And it is universal.
If you accept the politics of plunder, Gross says, congratulate yourself. "If your immediate reaction is to nod up and down, then give yourself some points in this intellectual tête-à-tête." In contrast, I recommend that you accept a large load of guilt. You have accepted the Progressive principle that political power should be used to extract wealth from the wealthy.
By the way, has the universal triumph politically of the politics of plunder brought more economic equality or less? If you said "less," give yourself some points in this intellectual tête-à-tête. Or, as Professor Walter Williams likes to say, go to the head of the class.
Conclusion: the super-rich know how to milk the political system. If you want to reduce their ability to do this, reduce the power of politics in the economy. But Gross wants you to increase the power of politics. Or, as another skilled manipulator put it, "Don't throw me in the briar patch."
3. SUCCESS AS A STATE-GRANTED PRIVILEGE
He continues.
Still, I would ask the Scrooge McDucks of the world who so vehemently criticize what they consider to be counterproductive, even crippling taxation of the wealthy in the midst of historically high corporate profits and personal income, to consider this: Instead of approaching the tax reform argument from the standpoint of what an enormous percentage of the overall income taxes the top 1% pay, consider how much of the national income you've been privileged to make.
First, I have never heard of anyone in the top 1% speak of "crippling taxation of the wealthy." Gross is substituting rhetoric for logic here -- a traditional sign of a lack of evidence.
He tells his financial peers to consider their high income as a privilege. But who has granted this privilege? If the answer is "customers," then why call on politicians to interfere with customer authority? On the other hand, if the answer is "the state," then the solution is to repeal all those laws that grant such privileges. The answer is the restoration of the rule of law. The answer is "same strokes for different folks." The answer is Leviticus 19:15: "Ye shall do no unrighteousness in judgment: thou shalt not respect the person of the poor, nor honour the person of the mighty: but in righteousness shalt thou judge thy neighbour."
Why should the state extract more wealth for itself from rich people? How does that benefit the customers? How is it that wealth extracted by the modern welfare-warfare state is a form of guilt reduction in payment for the "privilege" of higher income?
Society does not need guilt-reduction for the wealthy by way of higher taxes on the wealthy. Society needs legal reform that shrinks the state and also reduces its attempts to re-distribute wealth by means of coercion.
The task of the political reformers should not be to provide hoped-for psychological guilt reduction for the wealthy. The task of political reformers should be to reduce the politics of plunder, which has been used by lawyers, accountants, and lobbyists hired by the super-rich to create the modern system of state-subsidized plutocracy.
What is the nature of this state-granted privilege? Gross correctly identifies one aspect of it: credit. But he does not say how it works. It works through fractional reserve banking, which is protected by the central banking system: government-granted privilege to bankers.
In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today. Admit that you, and I and others in the magnificent "1%" grew up in a gilded age of credit, where those who borrowed money or charged fees on expanding financial assets had a much better chance of making it to the big tent than those who used their hands for a living.
The solution in the United States is not higher tax rates on the rich. The solution is a one-sentence law: The Federal Reserve Act of 1913 is hereby abolished, along with all legislation amending this law.
5. FROM PRIVILEGE TO LUCK
Gross shifts the argument from privilege to luck. This is the standard ploy of virtually all modern defenses of higher taxation. Wealth does not come from customer choice. It comes from luck. Therefore, the state can veto customer choice, and there will be no negative economic consequences.
Yes I know many of you money people worked hard as did I, and you survived and prospered where others did not. A fair economic system should always allow for an opportunity to succeed. Congratulations. Smoke that cigar, enjoy that Chateau Lafite 1989. But (mostly you guys) acknowledge your good fortune at having been born in the '40s, '50s or '60s, entering the male-dominated workforce 25 years later, and having had the privilege of riding a credit wave and a credit boom for the past three decades. You did not, as President Obama averred, "build that," you did not create that wave. You rode it.
What created that wave? Fractional reserve banking. Who made it into the equivalent of Waimea Bay? Richard Nixon, who unilaterally abolished the last traces of the gold exchange standard on August 15, 1971. Then the Federal Reserve took over, no longer restrained by the legal requirement to sell gold to foreign governments and central banks for $35 per ounce.
6. HAND IT OVER!
Here is the culmination of his presentation.
And now it's time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions. You'll still be able to attend those charity galas and demonstrate your benevolence and philanthropic character to your admiring public. You'll just have to write a little bit smaller check.
So, their wealth was created by privilege, luck, and credit. It was created by "good fortune." So, the state is ready to take more of their money. This will " favor economic growth and labor."
How?
What favors labor, meaning increased income in exchange for labor services? Here is a short list. Increased capital investment. Better tools. Better training. Greater freedom. How does a larger state contribute to any of these factors of production? This is what he needs to prove. But he does not even mention the existence of the intellectual problem. He merely assumes that the state contributes to economic growth and labor. As I said, he is a Keynesian.
7. WHAT WOULD SCROOGE MCDUCK DO?
Gross ended his presentation with this.
Scrooge McDuck would complain but then he's swimming in it, and can afford to duck paddle to a shallower end for a while. If you're in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing "capital" at lower rates than "labor" should now end.
Unlike Bill Gross, I know Scrooge McDuck. He is a friend of mine.
Really.
Vic Lockman is a professional cartoonist. For years, he wrote story lines for Scrooge McDuck's comics. He did not draw the final versions of the comic books, but he drew the panels and wrote the text.
Vic wrote a wonderful little cartoon booklet on the Federal Reserve System, The Official Counterfeiter. The first edition came out in 1969. The 1974 edition is online. I wrote about it here: //www.garynorth.com/public/9035.cfm. Scrooge understands that capital gains taxes reduce the creation of capital. This is turn reduces the productivity of workers. This in turn reduces the income of workers.
What if all corporate profits were allowed to be re-invested without any tax penalty? When the money is paid as dividends, it is taxed as ordinary income. But as long as shareholders reinvest, they can buy and sell without penalty. It would be like an IRA. The assets can build up over time without penalty. Only when an investment asset is sold and the money deposited in a personal bank account would it be taxed.
Bill Gross and Warren Buffett do not like this idea. It would keep too much of the world's capital away from the state. It would be used to create jobs. It would be used to increase the choices available to customers.
CONCLUSIONS
Bill Gross is a Keynesian. He is representative of all Keynesians. He thinks that the state is economically productive.
He is also guilt-ridden. He therefore favors an expanded state to reduce his guilt.
Back in 1981, I hired David Chilton to write a manuscript refuting this sort of guilt. I titled it Productive Christians in an Age of Guilt-Manipulators. It is online for free here.
I suggest that you pay no attention to Bill Gross's exercise in masochism. He is a kind of fiscal flagellant. But in his case, he is not whipping himself. He is calling on rich people to encourage voters to hand the whip over to the state.
I hope the voters will never hear of Bill Gross. I surely hope his peers do not take him seriously on any of this. The state's supply of whips is far too large already. If Mr. Gross wants to indulge in financial S&M on a personal basis, that is his business. I prefer to avoid the opportunity.
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.