26 January 2016

Income Inequality

As I plod along in years I see around me a most curious disparity among the people with whom I've rubbed elbows. Old persons failing to make ends meet even though they diligently worked and saved. Old persons retiring very nicely on investments and ventures that have paid handsomely. Young people who live richly on disproportionate pay with no experience. Young people who fail to find careers or a livable wage even with extensive education. It's seems a little chaotic at first but this income inequality thing has been building for a while now.

Recently there's been some visibility to this issue sparked by an essay by a well-known venture capitalist, Paul Graham. Which was picked by and editorialized across the inter-webs including a nicely framed and researched article in The Washington Post (I recognize implying "researched" about a Washington Post article is a bit redundant and unnecessary).

In my own mind, I get why a VC (someone who makes money using money!) would be trying to shave the goat a little and make it sound like start-ups and investing are about creating value. In his view, he'd like convince you that somehow his way of making money from money is good and different from all the other guys who make money using money in bad ways. And his parting shot is a nice bit of white-washing:

"...let's attack poverty, and if necessary damage wealth in the process. ... And if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing." - Paul Graham

Who wouldn't agree with that?! The issue is that it isn't nearly enough and tries to draw an arbitrary line implying that some forms of wealth creation without value creation are acceptable. And splitting this proverbial hair is where those who are calling for reform are also missing the mark.

It is unwise (some might say impossible) to stop innovation and the ability leverage advantages into disproportionate earnings. So why try? Instead of trying to determine where value is being creating simply tax those transactions that are purely financial. This treats everyone who is making money using money all the same unrelated to if value was actually created. This approach is referred to as a Financial Transactions Tax and generally applies to the purchase and sale of stocks, derivatives or other financial instruments. These are widely promoted and there are several in effect in countries other than the United States. Recently the Tax Policy Center published an interesting discussion draft of some analysis they'd been working on that is specific to FTTs.  While they cover the topic from a lot of angles and have very in-depth research and examples of the topic, it is worth noting that even adopting a small and very progressive form of FTT could generate an estimated $50 billion (that's a B, folks) in revenue. Where would this go? Why to fix all the inequality areas of course! Healthcare, education, and so forth.

So while it is necessary to grab your pitchforks and light the torches to go after the crooks who are pulling money out of the economy in sneaky, underhanded ways, it is just as important to pull back the disguise on all these wolves of wall street too. If you are making money using any means that doesn't inject that equal value into the economy, you deserve to be taxed so as much wealth as possible stays in the economy and out of private hands.

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