Sunday, October 07, 2012

Building it: In which I explain why "you didn't build that" so offended business people 

The American left frames the current election in terms of debt -- what one group of people owes to another. In their formulation, the wealthy owe more to everybody else, their "fair share," in the politically correct expression of the idea. About a year ago, the now Democratic candidate for the United States Senate, Elizabeth Warren, won the hearts of lefties everywhere with a speech that claimed that successful businesses were fundamentally collective instead of individual accomplishments:

"You built a factory out there? Good for you," she says. "But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."
This summer just past, President Obama tried to make exactly the same point, but so botched his presentation of it that he handed the right a rallying cry (helpfully rendered in to out-of-context bold below):
There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

In all the argument over whether conservatives were taking "you didn't build that" out of context, few on the left acknowledged that he was trying to say what Warren had said to such acclaim from the Democratic base. Even in context, the argument that accomplishment in business is collective is deeply offensive to most people in business, at least when they are not camouflaging themselves at a college town cocktail party. Since many liberals are genuinely baffled about why this should be so, I shall try to explain. Suffice it to say that the reasons are legion.

The very argument is disingenuous. Neither mainstream Republicans nor the Tea Party activists who drove the 2010 election are against public roads, public education, police departments, firefighters (Warren) or, even, technology spin-offs from necessary spending on national defense (Obama, re the Internet). There has been a broad national consensus around each of these for between 100 and 200 years (I am sure we all remember that Eli Whitney's invention of interchangeable parts was in the context of defense spending). To suggest otherwise is to erect and demolish a straw man -- an argument your adversary never made -- the last and worst tactic of a lawyer with a losing case. As any good law professor knows...

Even if, as a liberal might respond, there are many other examples of government spending that helps "successful" people (in Obama's expression) or factory builders (in Warren's), the argument is still a straw man. The argument today is not between minimal government and Communism. Today government at all levels accounts for 39% of GDP, up from 33% or so during the now halcyon Clinton years. That range defines the mainstream debate -- most Republicans would be thrilled to return government's share of GDP to Clinton-era levels, and most Democrats would be outraged. The range might expand to 46% or so at the high end if one includes the 80-100 Democrats in the House who would fully nationalize health care, and falls to perhaps 30% at the bottom if one includes the most conservative Tea Partiers who would privatize Social Security. But that is the widest possible scope of the disagreement, and under no circumstances does it contemplate that we should do away with roads, police, teachers, firefighters, or national defense. To suggest otherwise, as Warren and Obama have done, is so transparently dishonest that it can only be explained as an attack on "successful" people for political advantage. They noticed.

Nobody argues that "successful" people should not pay more tax than, er, unsuccessful people.

Oh. Are you offended by my use of "unsuccessful" people? Well, President Obama was making his point about "successful" people. Who are people who are not "successful" if they are not "unsuccessful"? Do you find that irritating? Well, it is the President's terminology, not mine. Any good businessman knows that success in life takes many forms. Again, the President's implication that "successful" people define success in narrow material terms is offensive, so it is not unfair for us to point out that the opposite of "successful" is "unsuccessful". Not that we would have thought of it that way.

Anyway, I know a great many "successful" people, and not one of them believes that "successful" people should pay less tax, either in absolute terms or as a percentage of their income, than "unsuccessful" people. Further, I am unaware of anybody important who advocates that result. When politicians on the left argue otherwise, they are dishonest. Not only have "successful" people paid an ever higher proportion of direct taxes at all levels, but they are paying a higher proportion relative to their own share of national income. In 2010, I paid 42% of my income in direct taxes -- income, FICA, Medicare, and property -- divided by adjusted gross income. That is a higher proportion than any "unsuccessful" person would pay, and it obviously does not include sales taxes, gasoline taxes, excise taxes, "fees" paid to governments so I can do something I should be allowed to do anyway, taxes on my wages paid by my employer, and corporate taxes paid by companies in which I have invested. If the taxes I pay are not a high enough proportion of my income for Warren and Obama, how high should it be? President Obama believes it should be substantially more and it will be on January 1, 2013 unless Mitt Romney wins. Personally, I do not believe I am failing to pay my "fair share" by forking over more than 42% of everything I earn to the government. If you do, then please tell me how much of my time I "should" work for the benefit of the government? We need to understand what liberals believe.

Now, what about those super-"successful" people, like Mitt Romney, who do not have highly-taxed employment compensation and instead live off dividends and capital gains which are taxed to the individual at much lower rates? Perhaps they do indeed pay too low a proportion of their personal income in taxes (although dividend and capital gains income is mostly (although not always) double-taxed because it is subject to corporate tax (which in the United States is the highest in the world, averaging 35-40% of U.S. income in most states)). The main objection to raising taxes on dividends and capital gains is that capital is mobile, and that high taxes on capital cause it to leave for jurisdictions that tax it less. That would be bad for the United States, which needs as much capital as it can get right now. That is why even socialist countries usually have highly preferential rates for capital gains, and that is why it is unwise to raise our taxes on dividends and capital gains, at least without a significant reduction in corporate tax rates.

Beyond the roads, cops, honest courts, and firefighters, government is an obstacle to entrepreneurs, not the helpful partner that Warren and Obama imply. Liberals, and especially President Obama, think that "business" is best represented by the Fortune 100 and its "chieftains". Most people who "built that" know otherwise, that government serves to entrench huge bureaucratic businesses at the expense of the upstarts that actually create new jobs. First, there are now so many regulations associated with being a "government contractor" that few small businesses can feast at the taxpayer's trough even if they had the political stroke to get the contract in the first place. Second, the ever larger pile of federal, state, and local regulation favors the large over the small, the mature business over the growing. As I wrote a couple of months ago,

Regulation usually imposes a fixed cost on each affected business regardless of size. Therefore, complex and costly regulation favors large companies (for which the proportionate cost of compliance is relatively small) over small and mid-sized companies. Left liberals almost never recognize that more regulation almost always drives consolidation in the affected industry, forcing smaller companies to sell out to larger ones. In general, you cannot have both heavy regulation and small, diffuse businesses. The first drives out the second in favor of the behemoths for whom large overhead is a small proportion of the total.
Of course, the most frustrating aspect of all of this to business people is that these points seem so obvious as to be self-evident, so when the chattering classes do not recognize them as such we distrust their motives and assume they are all a bunch of cynical parlor pinks. Increasingly, though, I believe that there are a great many people, especially in the educated elites, who are profoundly disconnected with the reality of commerce, and actually have very little idea how small and growing businesses struggle to create the wealth that we all need to support our prosperity. That is to America's great misfortune.

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