The fat cat conundrum

This post is essentially a continuation of my previous post about Nick Hanauer's arguments about wealth creation.  When you are poor you need to spend your money as productively as possible.  By contrast, when you are rich you enjoy the luxury of spending your money unproductively.

In addition, you possibly also enjoy the luxury of helping to ensure that poor people remain poor.  You can do this for example by exploiting the unwillingness of your employees to ask for a pay rise, or by exploiting the unwillingness of customers to quibble over prices.

If we start from the perfectly reasonable assumption that - collectively - rich people benefit the economy to a far lesser extent than middle class and working class people, then we are justified in asking why the government does not require rich people to pay more tax.

Surely therefore it makes sense for the government to encourage the nation's wealth to be spread as evenly as possible across the population.  However this has not proven easy to achieve.  Some governments, such as the French government led by President Hollande, have tried increasing the marginal rate of tax paid by rich people, but the outcome is often to drive prosperity out of the country.  Rich people leave France to avoid the higher taxes, and take their wealth with them, and so wealth leaves the economy rather than being redistributed.

Some readers might see this as proof that rich people are in fact wealth creators, but this is not the case.  Suppose I am rich because I win the national lottery.  I am not a wealth creator because the lottery creates no wealth.  It merely takes money from people who ought to know better and shuffles it around the economy.  If I go to live in another country, then I am taking my money out of the economy, but the money I am taking out does not represent any wealth that I created.

The wealth I am taking abroad was created by invention and manufacture, and was distributed - efficiently or inefficiently - by market forces.  Similarly, if I am rich as a result of playing the stock market, then I am rich because I bought shares that other people wanted to sell, and then sold the shares that other people wanted to buy.  I did not make my money alone.  If I am rich as a result of business, then I am rich because, for example, I sold manufactured goods which other people wanted to buy.  Other people made me rich.

In my previous post I implied that Nick Hanauer was not entirely correct.  He implies, or appears to imply, that there is a case to be made for increasing taxation on the rich, but he does not consider the likelihood that higher taxation would lead to rich people taking money abroad.

I wrote in an earlier post that:

If David Cameron wants to help businesses, then he should bring in a law requiring companies not to pay large salaries to their directors unless creditors are paid on time, and the company remains solvent.

I have since argued that employers should not be allowed to pay big salaries to their directors unless no one in the company earns less than 140 percent of the minimum wage. I see no need to step back from that point of view.

Related previous posts include:
The cats stay fat
Energy sector fat cats
Austerity versus democracy