Rich, Poor and Middle-Class

Today I want to react to my friend Karl Smith, to my cousin Mitt Romney, and to the part of the American electorate Mitt was trying to pander to when he said:

I’m not concerned about the very poor — we have a safety net there. If it needs repair, I’ll fix it. I’m not concerned about the very rich — they’re doing just fine. I’m concerned about the very heart of America, the 90-95 percent of Americans who right now are struggling.

I think Mitt has things exactly backward here. Fortunately, I have high hopes that he said it precisely because it isn’t true: that he is concerned about the very poor and the very rich, but has a lot of trouble connecting emotionally with the middle-class. So, since he might be our next president, oh may it be true that Mitt, in his heart of hearts, agrees with me when I say this:

I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich–not so much for themselves, though their welfare counts too–but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class–and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery. 

With that statement in hand, it is easy to answer Karl Smith, whowrites this in response to my post “Why Taxes are Bad”:

If we agree that benefits reduce work effort, while taxes reduce utility then basic tax transfer mechanisms seem to offer us exactly the tradeoff we want.

Welfare benefits discourage the poor from working. However, the poor have a low marginal productivity of labor.  So, society loses little when poor people work less.

On the other hand rich people have a low marginal utility of income. So if we extract their utility by extracting their income society loses little.

However, when we redistribute money to the poor society gains a lot because the poor have a high marginal utility of income.

Isn’t this exactly the trade we are looking for?

On the part of the poor, my answer is “Of course we should help the poor more, and should not worry much about any resulting lost output by the poor.” However, we do need to be concerned that for many, a job is an important contributor to self-esteem, in a way that the poor do not always fully take into account when they let tax and benefit incentives influence whether or not they work.

As for the rich, as I write above, it is not so much their welfare I am concerned about, though that counts too, but getting incentives right to encourage them to work hard for the benefit of the rest of society. Among other things, the best of the rich provide a crucial decentralized guiding role for our economy.

But Karl’s point that benefits reduce work effort is a big problem when those benefits go to the middle class. The middle class make up the bulk of our society and produce the bulk of GDP. So if government benefits cause them to work less–for example, to retire earlier than they otherwise would–we all end up poorer.

Two last points: First, it will take me at least a hundred posts to develop, clarify and defend my views about taxation and related aspects of public policy. Second, many readers will be surprised that I think Romney might care about the poor (though not so much about the middle class) in his heart of hearts. This could be my familial bias talking, but I try to back up this view in my post “Will Mitt’s Mormonism Make Him a Supply-Side Liberal?”

Also inspired by a saying of Mitt’s:                  

“Corporations are People, My Friend”

Inspired by a saying of Barack’s:

“You Didn’t Build That: America Edition”