As the election season draws closer, more and more candidates have thrown their hats into the ring. It seems everyone and their dog is now running for president. Up until the end of last month, the forecast looked as if it was to be, well, the entire Republican party versus Hillary Clinton. That is until late April of this year when the senator from Vermont Bernie Sanders announced his candidacy. And if that isn’t bad enough, Bernie Sanders brought a couple of economic fallacies with him which have since been regurgitated by his supporters and many others on the Left.

 

Prior to taking on this piece, it was my intention to write about common economic fallacies that libertarians encounter, as I have done in the past, and how to address them. Yet, since Sanders has announced his candidacy, there are a couple of propositions he has made that inspired me to kill two birds with one stone and address them here. Those positions are:

  1. Raising the top tax rate to 90%
  2. “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.”

 

We will begin with the first one, in which Senator Sanders is advocating the top marginal tax rate be jacked up to 90 percent, just as it was under Eisenhower. According to Bernie, and many others on the left, a top tax rate of 90% would spur economic growth, using the era during Eisenhowers presidency where it was near 90% as justification. The claim is that since high top tax rates of the ’50’s allegedly spurred the economy,  they would do the same today. The first mistake that Bernie makes with this proposition is believing that this amount was actually “paid.” Yes, the top marginal tax rates were insanely high during those years, but at the same time, very few people were paying that amount.

The word “marginal” here is key. When politicians and the media talk about tax rates, they will typically sneak in the modifiers “marginal” or “effective,” depending on whatever appeal to ignorance they’re trying to exploit at the moment. The marginal tax rate is simply the rate at which income is taxed prior to any tax deductions. The effective tax rate is the tax rate paid after all qualifying deductions are factored. So it is true, as Bernie Sanders points out, that we had an incredibly high marginal tax rate on the wealthy (91%), However, the marginal rates were never actually paid by anyone, due to the slew of tax-shelters and deductions that were available to not only the superrich, but also the wealthy laborers, such as doctors. As Peter Schiff writes:

For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss. 

 

A tax-loophole is essentially a tax-cut that merely manipulates behavior. Yes, you have to jump through a ridiculous hoop to obtain the tax-cut (meaning simply lowering taxes outright is preferable), but nonetheless, when these massive tax-deductions are factored in, Sanders’ argument falls flat on its face. Yes, the marginal rates were high, but the effective tax rates – the rates actually paid – were comparable to the rates we have today (once we wade through the enormous complexity of our tax code).

It is also worth mentioning that even before the loopholes, the average marginal tax rate was lower than it is today. Very few people actually qualified for the 91% tax rate, even before the deductions took place. The average marginal tax rate gives a better representation of what the overall tax burden on the aggregate economy was. In the 1950s, the average marginal tax rate was only 25%. Compare this to the average marginal tax rate in the 2000s of 37% (and by this time, many tax shelters had been closed, meaning the gap in effective tax rates would be wider). In short, Senator Sanders focuses exclusively on that attractive 91% number because once the full details are revealed, it is clear that the economy he longs for is one with lower taxes, not higher.

The other flaw with this position is that it implies high taxes (thus government spending) drives the economy. Government is people spending other people’s money. Since taxes are not the product of government labor, the lives of those who decide how it gets spent (government officials) aren’t at risk when it’s spent inefficiently. Market forces, such as profit and loss, are not present to the same extent as they are with private money. Government has no predictive abilities; markets do. And even when governments do, they have no good solutions. Prices are a reflection of future risks, demands, and production. The funny part is that government never has any foresight. The tragedy of central planning is that knowledge cannot be centralized, a Washington bureaucrat has no clue what the preferences of people are in Texas, Oklahoma, or even right down the street. It would be fairly absurd for me to spend my roommates money and expect to make the same decisions he would have (especially when I pay myself a salary out of his money before anything else), it is far more absurd to expect a bureaucrat in DC to know all the preferences of everyone in America, and then make a one size fit all solution to a problem. The problem here is that no central planner can know what is best for all the individuals better then the individuals themselves can (and even if they could, they would still have to waste money funding the bureaucracy in charge of it all, anyway).  When the government attempts to distribute resources all it does is create malinvestement. Capital and income are destroyed by those same malinvestments by taking away resources the market place finds worthy, to finance areas the government thinks is. Now, because the government’s total knowledge is only made up of hundreds of bureaucrats – versus the market being made up of millions of individuals – resources by government can not be allocated as effectively as they can by the market.

 

Let’s now look at the second position of Bernie Sanders. Earlier last week, Bernie Sanders was on CNBC with John Harwood discussing a number of issues where at one point said, “You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.”

Looking past the appeal to emotion, there are a few implications with this statement but the first one we’ll look at is Bernie Sanders attacking having too many choices. If Bernie Sanders is looking out for the middle class as he claims, then what benefit is it to do away with choice and competition which provides lower prices and better quality for everyone including the hungry children in this country he supposedly cares so much about? More so, Sanders ignores that the value of an activity or good is subjective, so it is different from person to person, place to place, and over time, and millions of individuals of average intelligence have more knowledge distributed across them (this distributed knowledge is communicated to other individuals in the form of prices) than the most intelligent bureaucrat. Individuals economize resources based on their own preferences and their own ends and based on the expected preferences of others, which are partly reflected through the price mechanism and oftentimes predicted through other means of information as well. Even producers of capital goods removed from the final consumer by one or more phases derive their profits from consumer satisfaction.  The market picks winners and losers.

 

As Jeffrey Tucker states,

Why are there so many types of tennis shoes and deodorants? It is because people are willing to give up their own property in exchange for these products that they are choosing for themselves.

Business cannot force them on anyone. If a deodorant doesn’t sell, it loses market share and eventually disappears from the shelves. If it does sell, it stays, and the profits are used to create ever more compelling products that meet people’s needs. The average person in this system is sovereign, the ultimate decision maker as regards production priorities and the use of scarce resources.

To disagree with the choices of others is really to exercise a kind of disdain for the choices of the masses of people. Intellectuals, particularly socialists who claim to champion the people’s interests, have been doing this for hundreds of years. This attitude of mind is the opposite of populism. It is to replace the value priorities of average people with the value systems of elite intellectuals.

 

In a free market, choices are decentralized, the advantage being that if one person makes a bad decision, they are such a small part of the market it is less likely to have an adverse effect on outcomes. In a centralized system, if one person (or group of people) control the whole system, one mistake could have far reaching consequences. I  actually had a theory for a while that centralization would be preferable if those in charge were 100% infalliable, but we are talking about politicians who make a career out of deceit and self promotion. By trusting a government official, you are putting your money in the hands of a complete stranger and hoping that they will spend it wisely. Sure the government official is usually better dressed than the common person on the street, but that doesn’t not make him or her more virtuous or smarter than any other common person.

 

The individual is about profit (monetary or psychic), but the wonderful thing is under a market system, this is not a vice, this is an advantage. Without the motive of profit it is fair to say that we not not be enjoying as many innovations as we do today. Profit incentivises constant innovation which leads to greater productivity, efficiency, and better living standards. Sanders’ complaint about the amount of things like deodorant ignores the fact that it is a product of higher production, which benefits the poor as well as the rich.

 

This brings us to the second implication of Bernie Sanders which is that we rich capitalists are indulging in excess while other people go wanting. That is, Bernie Sanders is implying that economics is a zero-sum game. The claim is that my gain is someone else’s loss, similar to a fixed pie. Given a fixed pie, everything I have is something you don’t have. But when trade is allowed to happen unimpeded, everybody contributes to growing the pie in his quest for a bigger slice. As Rothbard illustrated in Man, Economy, and State,  production and distribution are the same process in markets. If you object to the distribution, you object to the production. If you want more distribution, increase production. Per Says Law, one must produce in order to consume. If it were true that people couldn’t create wealth (or if it were fixed) we’d all be really poor. If there were fixed wealth, then per capita we would be getting poorer with every person that is born. We know the underlying logic of the fixed pie is erroneous because if it wasn’t, no transactions would take place. We know that the pie can grow based on economic efficiencies and investment, all of which rely on voluntary transactions. Nobody would make a losing trade. It can’t be a zero-sum game because each (voluntary) transaction is mutually beneficial or it wouldn’t happen (subjective value). The pie analogy is great because it helps shed light on the issue. It’s not a zero-sum game because it’s not a fixed pie. Plus, Sanders is implying that because the rich are better off, the poor must be worse off. But the reality is that a rising tide lifts all boats, so to speak. Bernie’s argument is bad and he should feel bad.

 

His last implication is an attempt to draw attention to wealth inequality in the country. When it comes to wealth inequality, there are a few conclusions to be made when someone approaches you speaking of inequality. First of all, why is inequality inherently bad? Is it merely because someone has more? If the problem isn’t that Peter is poor but that Paul isn’t then it just illustrates the driving force of the progressive left’s philosophy where they seem far more interested in abolishing prosperity than poverty, to the point that I don’t even think they see soaking the rich as a means to an end — I suspect they see “helping” the poor as an excuse to harm rich people. There is no excuse for this. Sure, much of the wealth that corporations have obtained, deemed unfair by the Left, are the results of state interventions like subsidies, eminent domain, copyright laws, and so on. But this is an argument against intervention. I’m all for abolishing these things. I think it’s likely there’d be less inequality under conditions of freedom. The poor will be richer, and the rich will also be richer absent these state privileges.

Also, it all depends on what the definition of wealth inequality is. Next we must define wealth. Typically this is defined as the sum of money, valuable possessions, property, or other assets. I would add that this definition must subtract any debts so a more accurate definition of real wealth would be “net wealth.” This then leads us to the question of what is poor or rich? This is very arbitrary. The purchasing power parity in, say, China is very different than that in the United States. Someone can be rich in China but not in the U.S., given the same income.

Further, an attempt to extinguish wealth inequality is impossible. Think of the repercussions. Someone making $80,000 a year might just be as comfortable as someone making $120,000 based on varying costs of living, yet they have an unequal income. Does extinguishing wealth inequality mean then that everyone should make the same amount? By taking it to its logical conclusion, we end up with something akin to communism. Even if you could make everybody economically equal without killing half of us and impoverishing the rest, we’d be unequal again by the end of the day, and by the end of the next day there’d be poor people and rich people again, and there is no reason to object to that by itself.

 

One of the issues of wealth inequality can be illustrated by a rather basic example. Let’s assume Peter makes $25,000 a year and Paul makes $50,000 a year. Note that there is an income gap of $25,000. Let’s now assume the economy grows (likely due to a reduction in government intervention and lower taxes), where Peter now makes $50,000 a year and Paul makes $100,000 a year, the new income gap is now $50,000. A student of economics will recognize that despite Paul earning a greater income in absolute terms, both Peter and Paul are better off compared to where they were before. Regardless of this fact, according to the Bernie Sanders of the world, only Paul is better off while Peter is worse off simply because the gap between them has grown.

 

There seems to always be a habit of looking at inequality, not the total wealth of society, nor the fact that even the poorest are dramatically better off now than they were 30 years ago. That’s not to say that the rich should get tax breaks at the expense of the rest of us (everyone should get tax breaks), it is just to say that proponents of higher taxes are not looking at the big picture here; despite this “inequality problem,” the poor are still much better off. In addition, I must also point out as I did above that ‘poor,’ ‘middle class,’ and ‘rich’ are all relative terms, and the important thing is looking at the actual wealth of society. All but the poorest people have computers, internet, various gadgets, eat fairly well, etc. The best solution is to lower all of our taxes.  Abolish taxes, barriers to entry, and other state meddling, then caring for the poor is basically ceases to be a problem that has to even be considered.

 

Societies that adopt socialist ideas like what Bernie Sanders suggest are doomed to failure, since the inevitable outcome they have on an economy is the consumption of existing capital until eventually there is no capital left to destroy. No society can increase its standard of living without capitalism, which is brought about by removing the most uncertain element: arbitrary government interference. This leads to a more open market where quality, price, availability, and so forth will determine the consumers choices, and the best products/businesses will profit. Individuals like Bernie Sanders and his supporters often support policies like the ones he advocates because their underlying fundamentals allow the open continuation of malicious policies while simultaneously allowing the bureaucracy to claim said policies are in the interest of helping its citizens.  No central planning body or select handful of people can ever anticipate or plan for the needs and wants of every  individual, as only they can know what they consider happiness, what they value and what they wish to achieve. In this way, it is infinitely better to have millions of individuals who are working voluntarily through markets to satisfy their wants and needs.