Should we Divid the Wealth? H. Hazlitt

)WE-kL-T-H ?• HENRY HAZLITT FROM TIME IMMEMORIAL there have been reformers who demand ed that wealth and income should be "divided equally" - or at least divided with less glaring inequal ities than the reformers saw around them. These demands have never been more insistent than they are toda.y. Yet most of them are based, in the first place, on a completely erro neous 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 aver age,. the owners of American in dustry grabbed off 80 per cent of the wealth produced in their fac tories, while the workers got· only 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.

100 20 per cent.! His contention wa.s widely accepted and· exerted great influence. Yet the truth, as we have seen in the article on "The Distribu tion of Income" (the Freeman, October, 1971), is exactly the· op posite. Labor in America is get ting the lion's share of the na. tion's output. In recent years the employees of the country's cor porations have been getting more than seven-eighths of the corpo rate 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 pay ments only 8 per cent, and divi dends only 3 per cent. The truth seems to be that per1 See Howard E. Kershner, Dividing the Wealth (Devin-Adair, 1971), pp. 17-24.

1972 SHOULD WE DIVIDE THE WEALTH? 101 sonal income in this country· is al ready distributed roughly in pro portion to each person's current contribution to output as meas ured by its market value. Some people, of course, inherit more wealth than others, and this af fects 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 to day 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 in comes of $50,000 or more. Their total adj usted 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 bil lion. for themselves. Suppose the government had seized the whole of this and dis tributed it among the 200 million total population. This would have come to $120,· or $10 more a month~ .per person. As the dispos able personal per capita income in 1968 was $2,939, this expropria tion would have raised the aver age income of the recipients by 4 per cent to $3,059. (Per capita in come actually rose anyway to $3,108 in 1969 and to $3,333 in 1970.) Of course if the govern ment 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 redistribu tion· must destroy wealth .and in come. We can recognize this most clearly if we begin with the ex treme case .• If the median income per family has been $10,000 a year, and we decide that every family must be guaranteed ex actly 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 "guar anteed" in any case. People could 102 . THE FREEMAN February 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 work manship," without economic re wards, would have nothing to guide it into one channel rather than another, and nothing to hold it beyond the point of fatigue. Dseful and profitable work would be blackmarket work. Those who survived would do so at a near subsistence level. But the same kind of results, less extreme in degree, would fol low from less extreme redistribu tion measures. The most fashion able 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 indi cate 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 com pulsorily equal income, with the ceiling made identical with the floor. At least people earning in comes above the minimum guar antee, though they would beop pressively taxed, would still have some incentive to continue earn2 (New Rochelle, N. Y.: Arlington House, 1969), pp. 62-100, ing whatever surplus they were al lowed 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 incen tive to work even if they had pre viously been earning, or were ca pable 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 uncondi tionally to other able-bodied peo ple whether they accept work or not. It is wrong in principle to give money to people solely be cause they say they haven't any and especially to support such peo ple on a permanent and not merely on a temporary emergency basis. It is wrong in principle to force the workers and earners indefi nitely to support the nonworkers and nonearners. This must undermine the incen tives of both the workers and the nonworkers. It puts a premium.on idleness. It is an elementary re quirement of economic incentive as well as justice that the man who works for a living should al ways be better off because of that, other things equal, than the man who refuses to work for a .living.

1972 SHOULD WE DIVIDE THE WEALTH? 103 VVe 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 pres sures would be for raising it con stantly), 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 eu phemism for a tapered-off guar anteed minimum income. The pro posal is that for every dollar that a man earns for himself, his gov ernment income subsidy would be reduced, say, only 50 cents, in stead of being reduced by the whole amount that he earns. In this way, it is argued, his incen tive 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 sur face plausibility; in fact, the pres ent 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: 3 In The Annalist (published by The New York Times), Jan. 4, 1939. • 1. The NIT (negative income tax), by neglecting the careful ap plicant-by-applicant investigation of needs and resources made by the traditional relief system, would, like a flat guaranteed in come, open the government to mas sive 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 guaran teed 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 sub stantial number of people who pre fer near-destitution in idleness to a comfortable living at the cost of working. It is true that under the NIT scheme they would be al lowed 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 percent 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 104 THE FREEMAN February original monetary illustrations, proposed that the "break-off point" of their scheme. would be some thing 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 pov erty-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 gov ernment 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 reason ably be expected to live. How could such a program be politically de fended?

As soon as the NIT program gets into practical politics, there fore, the pressure will be irresist ible 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 offi cial poverty-line income - say, $8,000 a year - it would still have to be subsidized by the govern ment. "Everybody must be treated alike." • 4. This would be ruinously ex pensive, but it is still not the end. The subsidized families would ob j ect to paying a 50 per cent income tax (as their spokesmen would put it) on everything they earned for themselves. So they would be al lowed to earn a certain amount entirely exempted from such a de duction. (Such an exemption has already been granted on self-earn ings 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 increas ing 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 theself-earn ings of the NIT subsidy recipients be exempted from any offsetting deductions whatever. But this would mean that once a family had 1972 SHOULD WE DIVIDE THE WEALTH ? 105 been granted the initial minimum income guarantee of, say, $4,320 a year, it would still be getting that full sum in addition to what ever it earned for itself. But "ev erybody 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 million aires - would get the full guaran teed income. This end-result cannot be dis missed as mere fantasy. The prin ciple of a government subsidy to any family, no matter how rich, is already accepted in our own So cial Security scheme and in Great Britain under the name of "family allowances." It is merely that the amounts are smaller. So the Nega tive Income Tax, as a social meas ure, turns out to be only a half way 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 subsbitute for the existing mosaic of welfare and relief measures. Can· we seri ously imagine that the specific pressure groups now getting veterans' allowances, farm subsidies, rent subsidies, relief payments, Social Security benefits, .food stamps, ~edicare, ~edicaid, old age assistance, unemployment in surance, and so on and so on, would quietly give them up, with out protests, demonstrations, or riots? The. overwhelming prob ability is that a guaranteed in come or NIT. program would sim ply be thrown on top of the whole present rag-bag of welfare meas sures piled up over the last thirty to forty years. We may put it down as a politi cal law that all State handout schemes tend to grow and grow until they bring on a hyperinfla tion 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 limi t ing the number of acres that any one person could possess. The typi cal "land reform" since his day, repeatedly adopted in backward agricultural countries, has con sisted in confiscating the big es tates and •either "collectivizing" them or breaking them up into 106 THE FREEMAN February small plots and redistributing these among the peasants. Because there are always fewer such work able parcels than families, and be cause, though each parcel of land may be of the same nominal acre age, 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 fa vor 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 fer tility 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 re form" of this type is an impover ishment 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 af fect general economic develop ment. 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 al ready been made by Rothbard, Knight, and others. 4 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 com monly rise to near-confiscatory levels. A recent compilation 5 com paring the highest marginal in come-tax rates in fifteen countries yielded the following results: Switzerland 8 per cent, Norway 50, Denmark 53, West Germany 55, Sweden 65, Belgium 66, Aus tralia 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. 4 Murray C. Rothbard, Power and Mar ket: Government and the Economy (Men lo 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.

1972 SHOULD WE DIVIDE THE WEALTH? 107 376 292 88% 654 1942 $122,000 $ $ National Income .. $77,000 Incomes over $300,000: Total amount $ 1,669 Taxes paid $ 281 Top tax rate 25% No. of returns...... 2,276 In other words, during the same period in which the total national income irncreased58 per cent, total incomes over $300,000 fell 77 per cent. If the aggregate of such $300,000 incomes had risen pro portionately 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 in structi vely be undertaken not only from U. S. but many foreign in come-tax returns. It is not merely the effect of personal and corporate income taxes in reducing the incentives to bring high earnings into exist ence 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 comparing actualities merely with might-be's and might-have-been's.

In March, 1947, the National City Bank, based on reports of the Bu reau of Internal Revenue, pre sented the illuminating table be low. (The dollar figures stand for millions of dollars.) 1926-28 average 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 (rang ing above the standard rate of 4114 per cent up to 9614 per cent) yielded less than q 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 be tween 45 and 65 per cent brought in only 1 per cent of the total na tional 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 exist ence in the first place. It is very difficult to estimate this effect in quantitative terms, because we are 108 THE FREEMAN February structure now seizes for current government expenditures are pre cisely 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 genera tion 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. 6 It is not merely that everybody would continue to earn different incomes as the result of differ ences in ability, industry, and 6 Elementary Principles of Economics (New York: Macmillan, 1921), pp. 478 483.

luck, but differences in thrift alone would soon reestablish 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 in come for the sake of future in come. "It requires only a very small degree of saving or spend ing to lead to comparative wealth or poverty, even in one genera tion." Even communists have now learned that wealth and income cannot be created merely by al luring 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 Mos cow: "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 insti tution of capitalism, of private property and free markets, tends to maximize production, while eco nomic dictatorship and forced re distribution only discourage, re duce and disrupt it. ~ 7 The New York Times, May 29, 1971.