Our current United States tax structure values slavery more than work. Let me unpack this statement a bit. We tax capital gains at 15% while we tax income on wage labor at 28% to 35%, about twice the rate. This means people will have a higher incentive to earn income through capital gains on investments than to work for a living. However, capital gains on investments are generated by someone else’s work, so one who invests in stocks or bonds is earning an income on someone else’s labor. This can be viewed as a variation on the concept of slavery.
From a moral standpoint, one is more entitled to the fruits of ones own labor than to the fruits of the labor of another. Hold on! you might say. Your capital is providing jobs for other people who voluntarily entered into the wage arrangements that will generate the wealth for the investor. I will not argue against the value of capital investments and the concept of capitalism in general. In fact, I am a supporter. My concern is with who controls capital and for what reasons. I will maintain that a system of taxation that encourages the exploitation of the labor of another more than individual work is morally suspect. I would much rather see people encouraged to invest capital in their own businesses. Current tax laws discourage that.
From a practical standpoint, this tax system encourages the demise of the American middle class, for the capital accumulated in investment funds is generally invested in production facilities in other countries and distribution through chain stores in the United States that pay less for labor. Ironically, the American middle class—both Democrat and Republican—have created this system and fueled it with tax exempt and tax-deferred pension funds.
Democrats often complain about the 1% and Wall Street corruption and corporate welfare that this system generates, but Democrats are as heavily invested in pension funds driving this system as are Republicans. The psychology driving this system is less than noble. It basically boils down to the concept that “I want to earn money and retire on profits generated by someone else.”
Today most government pensions are invested in Wall Street funds. To generate the highest return, these funds will invest capital where there is the greatest return—which will be where there is the lowest labor cost and the least regulation or chance of lawsuits. In recent years in our global economy, this has meant investing in China, India, Indonesia, Mexico and other countries that provide competitive environments for corporate investments.
Governments, whose employees hold many of these funds, want to see high profits and often provide protections and loopholes that reduce competition for companies with the idea that they can generate higher profits for pension funds. After all, when there is bitter competition, profits are low, and returns on investments are low.
We can conclude that a contradiction lies within Americans, and the American middle-class is liquidating itself by having representative pass tax laws that discourage work and self-sufficiency, and encourage investing, debt financing, and other activities in which reliance for our livelihoods or retirements depends on someone else. This situation is not unlike St. Paul’s war within himself, between his mind and his flesh. And it is a contradiction that is blindly accepted by the culture of the United States. How many people, Democrat or Republican, do you hear saying that capital gains on stocks should be taxed at a higher rate than wage labor? Generally, you will not get this argument from someone that holds a 401K or 403B retirement account managed by Wall Street fund managers.
These policies that began more than a generation ago with the creation of tax deferred retirement accounts and lower capital gains taxes are now coming home to roost in the form of driving out the middle class. The traditional characteristic of a strong middle class is self-sufficiency, not a dollar amount on a wage. Self-sufficiency means: (1) ownership of property and the fruits of ones labor, and (2) the ability to determine ones own fate, including retirement. Thus the traditional middle class consisted of farmers and family businesses that could earn profits from their activities and plow those profits back into business expansion and savings for retirement.
In my previous article I explained the problem that exists with the disparity between capital gains taxes and high corporate taxes that eliminate the possibility of small businesses plowing much profit back into ones business. It is known that most corporations do not even try to make a profit and that over 60% of corporations are incentivized not to pay taxes, but give out any potential profits as wage bonuses to employees or stock options to CEOs. These incentives are morally perverse, encouraging no capital reinvestment from corporate profits, but the borrowing of capital from banks that can be depreciated on tax returns. In this way the capital assets of the nation that were previously owned by a self-sufficient middle class have been shifted to a high concentration on Wall Street.
This shifted concentration of wealth which fueled the rise of the 1% and corporatism in Washington was created by tax policies that sought profits on investments, largely for retirements. It has created a new form of feudal lords and serfs, those who control wealth and those who work for minimal wages. The collapse of Rome was followed by a system known a feudalism in which the descendants of Rome’s one-thriving middle classes became serfs to feudal landlords. Today’s serfs are not land peasants but low-paid employees. But, the result is the same, they are not free to pursue life, liberty, and happiness because when they work hard, they are taxed in ways that shift wealth to those who control the capital.
An analysis of our tax structure shows that “we did it to ourselves.” The Ancient Greeks—Plato and Aristotle—taught that democracies do not work because people make laws that are against their own long-term interest. We can see examples of this in the concept of referendums in California where voters vote for benefits and against the taxes to fund them. Plato argued that democracies inevitably go bankrupt.
The Greeks concluded, as should we, that a “polity” or a constitutional republic is necessary to curb the self-destructive behavior of democracies by establishing constitutional bounds that set limits and prevent the creation of laws that undermine the stability of a society. Principles, like “governments ought not borrow money” and “capital gains taxes on investments in the labor of others should not lower than taxes on wage labor,” can be built into constitutions as safeguards of the middle-class that is required to exist if such republics are not to degenerate into tyrannies.