Should We Divide the Wealth?

Henry Hazlitt is well known to FREEMAN readers as author, columnist, editor, lecturer, and practitioner of freedom. This article will appear as a chapter in a forthcoming book, The Conquest of Poverty, to be published by Arlington House.

From time immemorial there have been reformers who demanded that wealth and income should be "divided equally" — or at least divided with less glaring inequalities than the reformers saw around them.

These demands have never been more insistent than they are today. Yet most of them are based, in the first place, on a completely erroneous idea of the extent to which present wealth or income in the United States is "maldistributed." An American socialist, Daniel De Leon, announced in a celebrated speech in 1905 that, on the average, the owners of American industry grabbed off 80 per cent of the wealth produced in their factories, while the workers got only 20 percent.¹ His contention was widely accepted and exerted great influence.

Yet the truth, as we have seen in the article on "The Distribution of Income" (the Freeman, October, 1971), is exactly the opposite. Labor in America is getting the lion’s share of the nation’s output. In recent years the employees of the country’s corporations have been getting more than seven-eighths of the corporate income available for division, and the shareowners less than an eighth. More than 70 per cent of the personal income in the nation in 1970 was received in the form of wages and salaries. Business and professional income totaled less than 7 per cent, interest payments only 8 per cent, and dividends only 3 per cent.

The truth seems to be that personal income in this country is already distributed roughly in proportion to each person’s current contribution to output as measured by its market value. Some people, of course, inherit more wealth than others, and this affects their total personal income. How large a role this plays is statistically difficult to determine, but the income distribution figures just cited would indicate that the role is minor. As a percentage of the total population, there are today very few "idle rich," however conspicuous a few playboys may make themselves at the night clubs and gaudy playgrounds of the world.

Moreover, the "surplus" money simply doesn’t exist to raise mass incomes very much. In 1968, out of a total of 61 million income taxpayers, 383,000, or six-tenths of 1 per cent, paid taxes on incomes of $50,000 or more. Their total adjusted gross income came to some $37 billion, or 6.6 per cent of total gross incomes reported. Out of this amount they paid a little more than $13 billion, or 36 per cent of their income, in taxes. This left them with about $24 billion for themselves.

Suppose the government had seized the whole of this and distributed it among the 200 million total population. This would have come to $120, or $10 more a month, per person. As the disposable personal per capita income in 1968 was $2,939, this expropriation would have raised the average income of the recipients by 4 per cent to $3,059. (Per capita income actually rose anyway to $3,108 in 1969 and to $3,333 in 1970.) Of course if the government resorted to any such violent expropriation, it could not repeat it after the first year, for the simple reason that people would cease earning incomes of $50,000 a year or more to be seized.

A Destructive Process

Any attempt to equalize wealth and income by forced redistribution must destroy wealth and income. We can recognize this most clearly if we begin with the extreme case. If the median income per family has been $10,000 a year, and we decide that every family must be guaranteed exactly that and no family can be allowed to retain more than that, then we will destroy all economic incentives to work, earn, improve one’s skills, or save. Those who had been getting less than that would no longer need to work for it; those who had been getting more would no longer see the point in working for the surplus to be seized, or even in working at all, since their income would be "guaranteed" in any case. People could be got to work only by coercion; most labor would be forced labor, and very little of it would be skilled or efficient.

The so-called "instinct of workmanship," without economic rewards, would have nothing to guide it into one channel rather than another, and nothing to hold it beyond the point of fatigue. Useful and profitable work would be black-market work. Those who survived would do so at a near-subsistence level.

But the same kind of results, less extreme in degree, would follow from less extreme redistribution measures. The most fashionable of these at the moment is the Guaranteed Annual Income. I have already analyzed this at length, together with its most popular variant, the Negative Income Tax, in my book, Man vs. the Welfare State,² and will only briefly indicate the objections to it here.

A guaranteed minimum income would not have quite the universal destructive effect on incentives as would an attempt to impose a compulsorily equal income, with the ceiling made identical with the floor. At least people earning incomes above the minimum guarantee, though they would be oppressively taxed, would still have some incentive to continue earning whatever surplus they were allowed to retain. But all those guaranteed a minimum income, whether they worked or not, would have no incentive to work at all if the guaranteed minimum were above what they had previously been earning for their work; and they would have very little incentive to work even if they had previously been earning, or were capable of earning, only a moderate amount above the guarantee.

It is clearly wrong in principle to allow the government forcibly to seize money from the people who work and to give it unconditionally to other able-bodied people whether they accept work or not. It is wrong in principle to give money to people solely because they say they haven’t any —and especially to support such people on a permanent and not merely on a temporary emergency basis. It is wrong in principle to force the workers and earners indefinitely to support the non-workers and non-earners.

This must undermine the incentives of both the workers and the non-workers. It puts a premium on idleness. It is an elementary requirement of economic incentive as well as justice that the man who works for a living should always be better off because of that, other things equal, than the man who refuses to work for a living.

We have to face the fact that there are a substantial number of people who would rather live in near-destitution without working than to live comfortably at the cost of accepting the disciplines of a steady job. The higher we raise the income guarantee (and once we adopted it, the political pressures would be for raising it constantly), the greater the number of people who would see no reason to work.

Nor would a so-called "Negative Income Tax" do much to solve the problem. The Negative Income Tax is merely a misleading euphemism for a tapered-off guaranteed minimum income. The proposal is that for every dollar that a man earns for himself, his government income subsidy would be reduced, say, only 50 cents, instead of being reduced by the whole amount that he earns. In this way, it is argued, his incentive for self-support would not be entirely destroyed: for every dollar he earned for himself he would be able to retain at least half.

This proposal has a certain surface plausibility; in fact, the present writer put it forward himself more than thirty years ago,^³ but abandoned it shortly thereafter when its flaws became evident. Let us look at some of these:

1. The NIT (negative income tax), by neglecting the careful applicant-by-applicant investigation of needs and resources made by the traditional relief system, would, like a flat guaranteed income, open the government to massive fraud. It would also, like the flat guaranteed income, force the government to support a family whether or not it was making any effort to support itself.

2. It is true that the NIT would not destroy incentives quite as completely as the flat guaranteed income, but it would seriously undermine them nonetheless. It would still give millions of people a guaranteed income whether they worked or not. Once more we must keep in mind that there are a substantial number of people who prefer near-destitution in idleness to a comfortable living at the cost of working. It is true that under the NIT scheme they would be allowed to keep half of anything they earned for themselves up to nearly twice the amount of the basic NIT benefit, but they would tend to look upon this as the equivalent of a tax of 50 per cent on these earnings, and many would not think such earnings worth the trouble.

3. The NIT might prove even more expensive for the taxpayers than the flat guaranteed income. The sponsors of NIT, in their original monetary illustrations, proposed that the "break-off point" of their scheme would be something like the official "poverty-threshold" income — which is now (1972) about $4,320 for a non-farm family of four. At this point no NIT benefits would be paid. If the family’s income was only $3,320, falling short of the poverty-line income by $1,000, then a $500 NIT benefit would be paid. And if the family’s earned income was zero, then a benefit of $2,160 would be paid.

But, of course, if no other government subsidy were paid to the family (and the original NIT sponsors proposed that their plan be a complete substitute for all other welfare payments) then the government would be paying the poorest families only half of what its own administrators officially declared to be the minimum on which such families could reasonably be expected to live. How could such a program be politically defended?

As soon as the NIT program gets into practical politics, therefore, the pressure will be irresistible to make the payment to a family with zero income at least equal to the official poverty-line income. If this means $4,320 for a family of four, say, then some NIT payment must be made to each family until its income reaches twice the official poverty-line income, or $8,640 for every family of four. And this means that even if a family were already earning much more than the official poverty-line income — say, $8,000 a year — it would still have to be subsidized by the government. "Everybody must be treated alike."

4. This would be ruinously expensive, but it is still not the end. The subsidized families would object to paying a 50 per cent income tax (as their spokesmen would put it) on everything they earned for themselves. So they would be allowed to earn a certain amount entirely exempted from such a deduction. (Such an exemption has already been granted on self-earnings of Social Security recipients, and it is proposed in a pending Congressional bill to enact an NIT.) This would make the NIT still more crushingly expensive for the remaining taxpayers.

5. There would be political pressures every year for increasing the amount of these exempted earnings. In fact, a 50 per cent "income tax on the poor" would be denounced as an outrage. In time the proposal would be certain to be made that all the self-earnings of the NIT subsidy recipients be exempted from any offsetting deductions whatever. But this would mean that once a family had been granted the initial minimum-income guarantee of, say, $4,320 a year, it would still be getting that full sum in addition to whatever it earned for itself. But "everybody must be treated alike." Therefore there would be no break-off point, or even any tapering off. Every family — including the Rockefellers, the Fords, the Gettys, and all the other millionaires — would get the full guaranteed income.

This end-result cannot be dismissed as mere fantasy. The principle of a government subsidy to any family, no matter how rich, is already accepted in our own Social Security scheme and in Great Britain under the name of "family allowances." It is merely that the amounts are smaller. So the Negative Income Tax, as a social measure, turns out to be only a halfway house. Carried to its logical conclusion, it becomes a uniform guaranteed handout to industrious and idle, thrifty and improvident, poor and rich alike.

6. It is an anticlimax to point out, but it needs to be done, that there is no political possibility that a flat guaranteed income or a "negative income tax" would be enacted as a complete substitute for the existing mosaic of welfare and relief measures. Can we seriously imagine that the specific pressure groups now getting veterans’ allowances, farm subsidies, rent subsidies, relief payments, Social Security benefits, food stamps, Medicare, Medicaid, old-age assistance, unemployment insurance, and so on and so on, would quietly give them up, without protests, demonstrations, or riots? The overwhelming probability is that a guaranteed income or NIT program would simply be thrown on top of the whole present rag-bag of welfare measures piled up over the last thirty to forty years.

We may put it down as a political law that all State handout schemes tend to grow and grow until they bring on a hyper-inflation and finally bankrupt the State.

Land Reform

Perhaps I should devote at least one or two paragraphs here to so-called "land reform." This appears to be the most ancient of schemes for forcibly dividing the wealth. In 133 B. C., for example, Tiberius Gracchus succeeded in getting a law passed in Rome severely limiting the number of acres that any one person could possess. The typical "land reform" since his day, repeatedly adopted in backward agricultural countries, has consisted in confiscating the big estates and either "collectivizing" them or breaking them up into small plots and redistributing these among the peasants. Because there are always fewer such workable parcels than families, and because, though each parcel of land may be of the same nominal acreage, each has a different nature, fertility, location, and degree of development (with or without clearance, grading, irrigation, roads, buildings, and the like), each must have a different market value. The distribution of land can never be universal and can never be "fair"; it must necessarily favor a selected group, and some more than others within that group.

But apart from all this, such a measure always reduces efficiency and production. From the moment it is proposed that property be seized, its owners "mine" its fertility and refuse to invest another dollar in it, and some may not even raise another crop. It does not pay to use modern equipment on small farms, and in any case the owners are unlikely to have the necessary capital. "Land reform" of this type is an impoverishment measure.

The Henry George scheme of a 100 per cent "single tax" on ground rent would also discourage the most productive utilization of land and sites, and adversely affect general economic development. But to explain adequately why this is so would require so lengthy an exposition that I must refer the interested reader to the excellent analyses that have already been made by Rothbard, Knight, and others.’

Progressive Taxation

Among the "advanced" nations of the West, however, the most frequent contemporary method of redistributing income and wealth is through progressive income and inheritance taxes. These now commonly rise to near-confiscatory levels. A recent compilation comparing the highest marginal income-tax rates in fifteen countries yielded the following results: Switzerland 8 per cent, Norway 50, Denmark 53, West Germany 55, Sweden 65, Belgium 66, Australia 68, Austria 69, Netherlands 71, Japan 75, France 76, United States 77, Canada 82, United Kingdom 91, and Italy 95 per cent.

Two main points may be made about these hyper-rates: (1) they are counter-productive even in raising revenues, and (2) they do hurt not only the rich but the poor, and tend to make them poorer.

All the revenues yielded by the U. S. personal income tax of 1968, with its rates ranging from 14 to 70 per cent, plus a 10 per cent surcharge, would have been yielded, with the same exemptions and deductions, by a flat income tax of 21.8 per cent. If all the tax rates above 50 per cent had been reduced to that level, the loss would not have been as much as it took to run the government for a full day. In Great Britain, in the fiscal year 1964-65, the revenue from all the surtax rates (ranging above the standard rate of 41¹/₄ per cent up to 96¹/₄ per cent) yielded less than 6 per cent of all the revenue from the income tax, and barely more than 2 per cent of Britain’s total revenues. In Sweden, in 1963, the rates between 45 and 65 per cent brought in only 1 per cent of the total national income-tax revenue. And so it goes. The great masses of the people are accepting far higher rates of income tax than they would tolerate if it were not for their illusion that the very rich -are footing the greater part of the bill.

One effect of seizing so high a percentage of high earnings is to diminish or remove the incentive to bring such earnings into existence in the first place. It is very difficult to estimate this effect in quantitative terms, because we are comparing actualities merely with might-be’s and might-have-been’s. In March, 1947, the National City Bank, based on reports of the Bureau of Internal Revenue, presented the illuminating table below. (The dollar figures stand for millions of dollars.)

In other words, during the same period in which the total national income increased 58 per cent, total incomes over $300,000 fell 77 per cent. If the aggregate of such $300,000 incomes had risen proportionately to the whole national income, the total would have reached $2,644 million — seven times greater than it actually was.

A great deal more statistical analysis of this sort could instructively be undertaken not only from U. S. but many foreign income-tax returns.

It is not merely the effect of personal and corporate income taxes in reducing the incentives to bring high earnings into existence that needs to be considered, but their total effect in soaking up the sources of capital funds. Most of the funds that the present tax structure now seizes for current government expenditures are precisely those that would have gone principally into investment — i.e., into improved machines and new plants to provide the increased per capita productivity which is the only permanent and continuous means of increasing wages and total national wealth and income. In the long run, the high rates of personal and corporate income taxes hurt the poor more than the rich.

Equality, Once for All

A socialist proposal that used to be aired frequently a generation or two ago, but is not much heard now (when the emphasis is on trying to legislate permanent equalization of incomes), is that the wealth of the country ought to be distributed equally "once for all," so as to give everybody an even start. But Irving Fisher pointed out in answer that this equality could not long endure.° It is not merely that everybody would continue to earn different incomes as the result of differences in ability, industry, and luck, but differences in thrift alone would soon re-establish inequality. Society would still be divided into "spenders" and "savers." One man would quickly go into debt to spend his money on luxuries and immediate pleasures; another would save and invest present income for the sake of future income. "It requires only a very small degree of saving or spending to lead to comparative wealth or poverty, even in one generation."

Even communists have now learned that wealth and income cannot be created merely by alluring slogans and utopian dreams. As no less a figure than Leonid I. Brezhnev, First Secretary of the Soviet Communist party, recently put it at a party congress in Moscow: "One can only distribute and consume what has been produced, this is an elementary truth."7 What the communists have still to learn, however, is that the institution of capitalism, of private property and free markets, tends to maximize production, while economic dictatorship and forced redistribution only discourage, reduce and disrupt it.

—FOOTNOTES—

¹ See Howard E. Kershner, Dividing the Wealth (Devin-Adair, 1971), pp. 17-24.

2 (New Rochelle, N. Y.: Arlington House, 1969), pp. 62-100,

³ In The Annalist (published by The New York Times), Jan. 4, 1939.

 4 Murray C. Rothbard, Power and Market: Government and the Economy (Menlo Park: Institute for Humane Studies, Inc., 1970), pp. 91-100. Frank H. Knight, "The Fallacies in the ‘Single Tax’," The Freeman, Aug. 10, 1953.

⁵ First National City Bank of New York.

⁶ Elementary Principles of Economics (New York: Macmillan, 1921), pp. 478483.

⁷ The New York Times, May 29, 1971.