Focus on the Ill-Gotten Gains of the Rich Instead of Their Tax Rates

President Obama's rhetoric about wealthy entrepreneurs is unfair to some and insufficiently harsh toward the subset he's most likely to know.

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Do rich entrepreneurs owe their success to their own efforts or the commonweal? James Joyner has a good answer. "Of course nobody got rich totally on their own," he writes. "Of course the fabled 'job creators' rely on the infrastructure we built collectively, whether it be roads and bridges, an educated workforce, relative safety from crime, a reasonably functional judicial system and what have you. But those building blocks were in place for those who didn't get rich, too, so of course those who did deserve the lion's share of the credit for the fruits of their labor."

That sounds more sensible to me than what President Obama said, and I'm presuming the charitable interpretation of his remarks. Consider an enterprise like this one. The Internet began as a government project. It's indispensable to every digital business. In that sense, it is true that the owner of and its many employees didn't make it a successful enterprise alone. But the same infrastructure was available to my former colleagues at Culture11, a web magazine that ran out of money, and to those who've never started an e-business. Failed entrepreneurs didn't do it on their own either.

Being part of American society creates an obligation on the part of profitable enterprises to pay taxes. It is prudent to set tax rates high enough to balance the budget and maximize returns to infrastructure. There are strong arguments for a progressive tax code. But the truism that successful enterprises didn't do it on their own isn't itself a sound argument for their paying more. With equal access to the shared physical and legal infrastructure of the U.S., successful businesses performed better than the competition and risked more than those who never entered it.

They're entitled to the gains that result.

President Obama's alternative formulation is flawed in two ways. Julian Sanchez best articulates one of them. We obviously need to "do things together" to succeed, he acknowledges.

But as Aaron Powell and Jason Brennan rightly ask, why should we assume that "we" and "together" has to mean "through government"? Why can't "we" do things "together" by ... well, forming businesses? Clubs? Civic organizations? Churches? If we're assigning credit for past achievements -- and implicitly, the debt we owe for them -- why the federal government and not, say, our fellow citizens directly, or state and municipal authorities, or the whole of humanity engaged in mutually enriching global trade? Of course, there are solid arguments why certain things we build together -- roads, for one -- will generally not be adequately supplied unless we do them through government. But as Aaron Powell points out, if we limit ourselves to these kinds of examples, we arguably end up with a pretty libertarian conception of government.

Questioning why shared projects should be accomplished via the federal government is a particularly pertinent question in an era when it funnels so many tax dollars toward Wall Street bankers, Blackwater mercenaries, and the Orwellian infrastructure of the Transportation Security Administration. While getting groped at the airport I've never seen one of those signs that say, "Your tax dollars at work," but I never forget who is paying the hand that creeps up my thigh.

The skeptical reader might by now be thinking that lots of rich people don't in fact deserve their wealth. They're absolutely right. And progressives like Barack Obama would better serve the country's interests if they focused on preventing ill-gotten gains from being got. These illegitimate gains mostly spring from the fact that wealth makes it easier for people to game the system. As Joyner says, summarizing an argument made by his co-blogger, "the rich got there either by direct rent-seeking or by indirect government subsidies like intellectual property protection."

It is beyond dispute that there is a huge amount of rent-seeking in the American system, that lobbying yields truly stunning returns on investment, that the complexity of our tax code benefits very rich people who employ extremely intelligent tax attorneys to reduce their tax burden, and that certain policies (like the Wall Street bailout) redistributes toward moneyed interests.

So yes, some of the rich did get there illegitimately.

In fact, Obama's notion of entrepreneurs has surely been shaped by the fact that spending one's adult life as a community organizer, a state legislator, and a United States senator results in your being surrounded by relatively more rich people who deserves little of what they have: The ones who got rich via political connections rather than talent in free-market capitalism. Tony Rezko didn't build his business all on his own. He had help from people in government!

When campaigning in 2008, Obama explicitly argued that the American system required systemic reform as a precondition for fair outcomes. After being elected, he abandoned any real effort to fundamentally change the system, and proceeded to work on enacting reforms within it. I'd love to see Obama achieve systemic tax reform that ends the advantages the rich gain from complexity and access. Instead he's focused on the "within the system" reform of raising rates on the rich. Given the alarming fiscal situation we're in there's a case to be made that doing so is necessary. But it's a suboptimal course, and there should be no illusions about that.

Having railed against the ill-gotten gains of lobbyists in 2008, Obama hasn't really found a way to tame them. Obama's inclination to micromanage the economy with subsidies to specific firms all but guarantees capital will keep flowing to the wealthy and well-connected rather than the most efficient uses. There's been no real attempt at reforming Wall Street in a way that gets rid of the incentive for financial transactions that create neither efficiency nor value to anyone other than traders. And Obama generally favors policies that make America's tax, regulatory, and health-care systems more complicated and reliant on the discretion of corruptible bureaucracies.

All of this is to say that there are a lot of ill-gotten riches in America. But there is little focus on reforms that would remedy that huge, seemingly intractable problem. Instead, a public upset over the perception of ill-gotten gains is used in service of efforts to raise taxes on the rich generally. If that effort succeeds, more serious inequities and inefficiencies will remain unaddressed. Meanwhile the sort of politically connected businesspeople that Obama knows will still have more money than is their due; and the entrepreneur who makes the bulk of his money creating actual value will be left thinking that Obama's overall approach to this issue is unfair to him or her.

That honest entrepreneur will be right.