The Truth About Income Inequality

The term “income inequality” has become a rallying cry for those on the Left and Socialists around the US. This is not a new concept but has been around since the beginning of time. It was exploited by Karl Marx in the Communist Manifesto where he encouraged the workers to revolt against their “rich masters”. In fact, this “inequality” isn’t just a human thing, it appears in nature as well. In a lion pride, the alpha male, although he did not participate in the hunt, gets to eat first and takes what he wants while the others must wait. This is the origin of the phrase, “the lion’s share”. Unlike the animal kingdom, humans are aware of the inherent unfairness of inequality in its many forms and over time have worked to end many of them. In the US, we have set up a system that was different from the European systems that were prevalent in the Middle Ages. In those systems, people were put into classes, or castes, and their lives were determined by the class into which they were born. If you were born a peasant, you would most likely die as one. There was very little chance to move up in standing in that system. The only good thing was that you had the same odds of moving down too.

 

The American colonies adopted a different form of economic system that did not use the caste as it was in Britain. The colonies were far enough away from Britain that the royal influence was greatly diminished economically and politically. This left the colonies free to experiment with different economic philosophies and systems. In fact, Jamestown was one of the first examples of Communism in history in the 1600’s, that was 241 years before the Communist Manifesto was written. It turned out to be a failure and the colony adopted private property and Capitalism as their economic model. Under this system, the colony began to prosper and those in Europe who heard about it desired to come to the New World. While many of the newcomers were fleeing religious persecution, and seeking religious freedom which was offered in the New World, they were also escaping the caste system they were locked into from birth. They sought greater opportunity economically and politically with freedom from the tyranny of the Crown. The British settlers’ actions were different from the “command and conquer” philosophies of the French and Spanish who forcibly made their way into Central and South America. The British colonies, while not innocent of wrongdoing, set up trade with the indigenous people in many areas. This increased the prosperity of the colonies as well as that of the tribes with which they traded.

 

Protests have cropped up around the nation with the slogan “Fight for 15”, a push for a $15.00 minimum wage nationwide. Most of the protesters are from the fast food industry backed up by the Service Employees International Union (SEIU) which represents people in the service industry including restaurants. The current Federal Minimum Wage is $7.25 per hour and can be lower for tipped employees. While some states and municipalities do have higher minimum wage rates, not many have one as high as $15. The chief complaint for the protesters is that no one can live on the minimum wage even as a full-time employee. Some outlets have reported that some of the protesters have been paid to attend these events. The SEIU has apparently spent millions on the campaign including paying strike benefits to non-members. This would show that the protests are not “grass-roots” as they are insinuated to be. Another complaint is that CEOs are paid so much more than average workers to the tune of 100 times. The group has even gotten the support of some politicians like the self-proclaimed Socialist Bernie Sanders who is far from poor with a net worth over $500,000. While the organizers know what they are doing and what they are calling for, some of the protesters may not understand the driving force behind all of this.

 

The entire “Fight for 15” movement is based on three main beliefs that come from Marxist philosophy and have been perpetuated by leftist, Socialist professors at universities across the US. These beliefs are anti-Capitalist, anti-free market, and anti-profit as they embrace the philosophy that greed propels Capitalism and that workers are used to advance that greed. The organizers of the movement think that the government should be in control of the wealth in the US and that the wealthy are withholding it from the poor. It is in this vein that they support exorbitant taxation of the “rich” which is defined as those making $250,000 or more a year. During his administration, Barrack Obama called them millionaires and billionaires which, the last time I checked, $250,000 was just a quarter of a million. The moving target of who is rich allows liberals and leftists to lump middle class and upper middle-class people into the realm of the “rich”.

 

The first belief that the “Fight for 15” movement embraces is the “zero-sum game” which states that there is a finite amount of wealth and it is distributed by those who control most of the wealth. In this belief, the poor are in their situation because the wealthy are holding all the wealth and not letting the poor have it. As a result, liberals believe the government should force the wealthy to share their money through taxation and redistribution of that wealth. This belief completely ignores the fact that wealth is fluid in the economy and the wealthy spend a great deal in it. It also ignores the fact that wealth is not finite and is created rather than distributed. Wealth is created by people when they make a profit from their business and use some of those profits to get more people interested in their products or services. The more people who buy, the more revenue that is generated therefore increasing profit and wealth. The only way to be successful in the market is to offer a product or service that is needed or desired by people and at a price they are willing to pay. If you have a product that is hard to produce you may want to look for investors to get the capital needed to start production and that is where the wealthy play a large role. Without investors with money they could spend on new ideas, there would be many products we take for granted today that would have never made it into production and therefore we would not have at all. The next belief also builds off the “zero-sum game” perspective but is different in how the wealth is distributed.

 

The second belief is that for a person to become wealthy, that person must take it from someone else. In other words, the wealthy get their wealth from others thereby make the other people poor. In this belief, the rich stole the wealth and horde it away from those to whom it rightfully belongs. This belief also ignores economic facts and pits the have-nots against the haves in a way that justifies theft from the rich. This was the premise of Robin Hood and characters like him. This also justifies the Progressive tax structure that bases tax rates on income level. The question that is impossible to answer in this scenario is when in history did the poor have the wealth that the rich now possess? When did this “great transfer” of wealth occur? The truth is, it never did and the poor did not lose their wealth by theft. The fact is that those born rich are not destined to stay rich if they do things that exhaust their money without replacing it. A person born poor is not destined to remain poor if they do things that will improve their abilities and open opportunities. In the end, a poor person will remain poor if they do the things that make them poor and may become rich if they do things that will make them rich. In the same way, a rich person will remain rich if they do the things that made them rich but will become poor if they do things that can make them poor. In the US, we have the best economic system to go from poor to middle-class and even rich if there is determination, courage, and hard work to achieve better than you have. The key here is not to look at what the rich have but to try to improve on your life in little ways while being patient. Sooner or later you will have wealth if you avoid that which can hold you down. The third belief is two-pronged and feeds off the perceived “unfairness” of income inequality.

 

The third belief goes straight to the heart of Marxism and the philosophy embraced by Democrats, Socialists, and Anarchists in the US. Part of it is a core component to the emotional makeup of human beings which has led to murders and other atrocities throughout human history. We are talking about jealousy, especially the type that leads to covetousness that in Biblical terms is a sin.  We have all experienced jealousy in our lives, it is just a human emotion that we all feel. Some have taken extreme measures in dealing with it while others just let it go and never dwell on it. In the Marxist view, jealousy is the product of unfairness. Those who oppose Capitalism claim it is an unfair system where the rich get richer and poor get poorer and there is no chance for the “little guy” to become successful. They believe it is unfair that some people can have things that others cannot obtain. This is the cornerstone to the philosophy that no one should be allowed to have more than anyone else, or equality of outcome. This completely dismisses the human nature to be competitive and diminishes the human spirit which thrives on achievement. In this type of society, there would be no need to work harder, learn more, or even to be the best at what you do. There would be no incentive to improve upon oneself and excel in a craft or trade. There would be no reward for ingenuity and invention let alone a driving force behind advancement in technology or other evolving fields. While Capitalism is not a “perfect” system, a system of complete fairness and equality would halt human advancement and stagnate civilization.

 

As with anything the Left does, there is glaring hypocrisy in the “Fight for 15” movement that many of the participants do not see or refuse to see. As stated before, one of the chief complaints of the movement is that CEOs are paid at a much higher rate than average workers. Take into consideration that there are several Hollywood A-list actors who have endorsed the movement and have even spoke at rallies condemning the “wage gap”. They complain that a CEO can make in one hour what an average employee makes in a year. The irony here is that some of these actors make more from one movie than the average worker on set makes in 50 movies they work on. I still don’t see any of these multi-millionaire actors turning down $20 million roles in favor of a $15 an hour rate. I would not expect them to but it is a bit hypocritical to call out one person for something that is commonplace in your industry. Another hypocrisy in the movement is the union’s involvement in the organization of the rallies. First off, union workers are rarely paid low wages for their work. Secondly, this is an effort by the union leaders, who, by the way, make a lot more than their members some over $600,000 annually, to increase the membership of the unions and therefore increase union income. Unions have been losing members in the past years due to many people rejecting organized labor as an outdated relic. Thirdly, the union knows that, while they can get success in some states, the goal is to get the federal minimum wage increased. The reason here is simple but most people don’t know about it. If the minimum wage is increased nationally, the union’s wages that are tied to the minimum wage would increase by the same percentage without the need to negotiate a new contract that may be rejected by management. So, supporting the movement for a $15 minimum wage is really a backdoor way to get union employee wages raised on the backs of other workers. You see the raise in the minimum wage would be negated by the raise in union wages which would have a domino effect on the cost of living. Plus, with the new technology, automation of certain tasks that would be performed by low-wage workers could be more cost effective than ever before. With each increase of the minimum wage there is a corresponding rise in unemployment applications.

 

While some things in life can seem very unfair, we must remember that life itself can be very unfair. Some kinds inequality is actually a good thing in the fact that we use them for inspiration. Because of human beings’ competitive nature, income inequality drives people to achieve more and push themselves to succeed. If income was guaranteed and outcomes all equal, there would be no need to excel and become better, in fact, there really would be no need to do anything at all productive. The hard truth is that there will always be rich, middle class, and poor people and there is very little the government can do about it. The only way the government can give the poor money is to first take it from someone else. You cannot raise up the poor by bringing down the rich, that will only make everyone equal in misery and no one wins except the politicians. Many people think that Socialism is the answer but in Socialist countries there are only two classes of people. Those who have lived in it understand the best that it is the rich leaders and everybody else. In the Soviet Union, the party leaders lived in grand mansions while the general population were crammed into small apartments with little food. Is that what you want for the US? Oh, but everyone was equal!

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Earth to Hillary, Businesses DO Create Jobs.

“Don’t let anybody tell you that… it’s corporations and businesses that create jobs.”  That is what Hillary Clinton said at a campaign rally.  She later tried to clarify her remarks by saying the following.

“Our economy grows when businesses and entrepreneurs create good-paying jobs here in America and workers and families are empowered to build from the bottom up and the middle out — not when we hand out tax breaks for corporations that outsource jobs or stash their profits overseas.”

Are we to believe this?  Newsflash! Corporations don’t pay taxes, consumers do!  Here is the question.  If you own a business and sell a product or service do you pay the taxes out of your pocket or out of your profits?  The answer is your profits.  Businesses small and large pay everything from building rent to payroll, from insurance to taxes out of what they make from the sale of their goods or services.  The more labor, rent, insurance, taxes, or any myriad other expenses cost, the higher the price of the goods or services.  Once someone understands this concept other things come into focus.

If Hillary believes that our economy grows when businesses create good-paying jobs but then complains about corporate tax breaks then she believes in an oxymoron.  The United States has one of the highest corporate tax rates in the world.  This is why those corporations that can do so move.  The US also taxes money made overseas when it is brought back to the US so it is an incentive to leave profits offshore.  It does not take an economist to understand that corporate taxes raise the cost of doing business.  Another unintended consequence of corporate taxes are the slowness of job creation and the depression of wages.  Yes, corporate taxes stifle wages by cutting into the profit margin of a business .

For those who don’t know, here is how the price of an item or service is set in most businesses.

Materiel Cost:  This is the price the business pays for inventory, storefront (all expenses associated with the building including electricity) that is factored into the final price of an item.

Personnel Cost: This is the rate at which labor (the number of employees required and the level of pay for each) is factored in will affect the final price of the item.

Regulatory Cost: This rate includes all local, state, and federal taxes, fees, and compliance costs.  The cost of every fee and tax is factored into the final price of the item.

This is the simple version of business cost and as you can see there is more than just the price of the item itself.  The only area where the business actually has the most control is personnel cost.  This is controlled in three ways.

Reduction of Workforce: When faced with increases in the other factors, a business may decide to lay off or fire employees.  This usually means those who are the newest will be let go first but sometimes it is the higher paid employees who get canned.  Businesses may also

Lower Wages: This actually can happen after a business has had layoffs.  When it becomes necessary to hire new people they will usually start at a lower wage then those before them.

Reduction of Hours: The business might decide to continue with the current workforce and just cut the hours worked by employees.  Many employees would then become part-time workers.

If Hillary wants to grow the economy she would fare better if she advocated that government get out of the way by eliminating the corporate tax altogether.  Businesses would flock to the US if the corporate tax rate were zero.  Booming business as we have seen in North Dakota (where McDonald’s is offering $12.00 per hour) raises wages and creates opportunity so much so there is actually a labor shortage.  “Trickle down” economics can work when allowed to thrive but it was halted by both George HW Bush and Bill Clinton through tax and regulation.  So there you have it.

IRS Warning to Chuches, “We Are Watching You”

In the movie Congo, Tim Curry plays a Romanian obsessed with finding the fabled diamond mines of King Solomon. When the group finds the mines, he is intrigued by the hieroglyphics on the wall. He deciphers them to learn that the phrase “we are watching you” is repeated over and over. The Freedom From Religion Foundation (FFRF) has settled a lawsuit with the IRS regarding political speech in Christian churches.  The FFRF filed the suit alleging that the IRS was not monitoring the political speech out of the churches that the FFRF claimed violated the IRS rules on non-profits and politics.  The foundation stated that churched were illegally electioneering and wanted the IRS to enforce the law.

Here is the rub.  The Constitution of the United States in the first amendment specifically states the “Congress shall make no law respecting an establishment of religion or prohibit the free exercise thereof”.  The FFRF maintain that they want to “promote the constitutional principle of separation between church and state” as stated on their website but there is not a mention of such a separation in the Constitution. What is truly unconstitutional is that a federal agency (IRS) has the power to grant tax-exempt status to non-profit organizations such as churches and FFRF and then place limitations on the Constitutionally protected free speech of such organizations.  In this politically charged day and age any sermon delivered in a church that condemns homosexuality as a sin, promotes a pro-life message, or even criticizes the government for a law or policy that is bad for the nation could be considered politicking and could lead to revocation of tax-exempt status.  The next question is just how will the IRS know if such speech is occurring?  Will there be monitors sent to churches to document the sermons?  Will pastors’ fourth amendment rights be violated to obtain sermon notes?  When an agency has as much power as the IRS all citizens should be concerned.  Those who supported the IRS targeting of Conservative and TEA Party groups should consider that under another administration, if the practice was continued, they could be the next target.

The only real and viable solution to this problem is to get rid of the current progressive tax code (which, by the way, is the cornerstone of Communism) with all the loopholes, deductions, and punitive tax brackets.  The tax code as it stands today is so complicated that IRS agents have had trouble with the pages of code.  What do we use as a replacement?  After all, the government needs the tax revenue to operate.  The idea of a flat tax has been floated for several years and has gained support of many middle class working families but Democrats claim it would hurt the poor by making them pay higher taxes but none of its detractors can site any study or economic model that proves this.  Yet, the same Democrat party’s solution to spending is to raise taxes on the millionaires and billionaires (which they state start at the income level of $250,000.00) or raise corporate taxes.  This always leads to economic stalling and higher prices on everything.  At the same time, there are so many tax credits that the lowest income earners actually will get back more in a refund than the have paid in.  Where do you think that money comes from?  I have found that even college graduates do not understand the basics of taxation and income.  Many have bought into the belief that taxing the “rich” will lead to prosperity for the poor.  This could not be further from the truth.

The government does not have money, it must generate revenue.  This is accomplished in the form of taxes, tariffs, fees, and fines, the largest source being, of course, taxes.  Before the twentieth century there was not a permanent income tax.  The main source of revenue for the federal government was tariffs on imported goods and excise tax on alcohol and tobacco.  It was not until 1913 that the 16 amendment was passed that made the income tax permanent.  Since then the code has grown from just effecting the top 1% to almost everyone seeing the deductions from their paychecks, even if they get it and more back the next year.  Also added to the income tax are deductions for Medicare, FICA, and Social Security that are not refunded and are even matched by one’s employer.  The Democrat party has stated that the “rich” should pay a higher percent of their income, up to 45% but the truth is even at 15% those who make more will pay more (15% of $1,000 is $150 while 15% of $10,000 is $1,500).

The most studied and modeled tax system proposed in recent years was actually developed by economists and has been shown in all of these to lead to a an economic boom, bring business back to the US, reduce unemployment, and raise wages.  All of this that the current administration has promised but not delivered and the reason why is simply that they are using a failed system that always leads to worse economic circumstances.  What is the system?  First, what if I told you that the tax plan would allow you to keep every dollar you were paid except for deductions for retirement and health insurance?  You would like that, right?  Now, what if I told you that you would receive a check from the government each month based on the size of your family?  Now I have your attention, don’t I? The plan was introduced by then Representative John Linder in 2008.  It is called the Fair Tax and you can read about it here.  In a nutshell it eliminates all payroll and corporate taxes and replaces them with a consumption tax at the retail level.  This removes all embedded taxes in the products we buy reducing the price by about 23% and replaces that with about a 23% tax that you pay only when you by new items (no tax on resale or used items).  With no corporate taxes, businesses will have incentive to locate in the US and without having to match Social Security and other deductions from employees, wages would have more room to expand.  All in all, the Fair Tax would be the best and most sensible tax reform that would take the teeth out of the IRS’s “we are watching you” attitude.