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Friday, January 18 , 2019, 1:09 am | Fair 51º


Harris Sherline: Pushing on a String

Would taxing all of the nation's richest people really bring in a profit for the government?

A commentary about the stimulus bill in the Orange County Register noted: “There are more fundamental reasons to doubt whether throwing more money at a problem largely if not entirely caused by loose money and government incentives and mandates to overspend and over lend will yield the kind of recovery that President-elect Barack Obama and most Americans would dearly love to see. In his speech on the economy and his stimulus package Thursday ... the president-elect declared that ‘only government can provide the short-term boost necessary to lift us from a recession this deep and severe.’

Harris Sherline
Harris Sherline

“The unspoken assumption behind such a statement is that government has a virtually inexhaustible supply of money that can be deployed without having deleterious side effects, only beneficial ones. The problem, of course, is that government has no money of its own, only the money it takes by force from the productive sector of society or it borrows and must pay back with taxes extracted from our children and grandchildren. In the private marketplace economic transactions take place only if both (or all) parties believe they benefit. (Emphasis mine)

“Such private, profit-making activity, as most of American history demonstrates, involves not simply the redistribution of existing wealth but creation of new wealth. Increased government spending, however financed, takes money from the private wealth-generating sector of society and allocates it to projects not on the basis of their capacity to be economically self-sustaining, but on the basis of their political attractiveness ... (A) government ‘stimulus’ can only be accomplished by taking money away from genuinely economically productive activity. Pumping dollars that will eventually be worth less than they are today into various projects may provide some short-term relief or appearance of relief. But only the private sector can actually create wealth and thereby stimulate genuine economic growth. This seems pretty elementary, but most people in Washington have powerful incentives to ignore elementary truths.”

It’s a common misperception that, in the interest of fairness, the “rich” should be taxed to pay for the government programs politicians favor, for whatever reason. However, looking beyond the simplistic slogan of “taxing the rich,” the question is just how much money can be generated this way.

Looking at the situation from one perspective, we can get a clue from the September Forbes list of the 400 richest Americans. The top five were Bill Gates (Microsoft), $57 billion; Warren Buffett (Berkshire Hathaway, $50 billion; Lawrence Ellison (Oracle), $27 billion; Jim Walton (Wal-Mart), $23.4 billion; and S. Robson Walton (Wal-Mart), $23.3 billion — a total of $180.7 billion. Their portfolios have no doubt lost value as the market crashed, so assuming their combined holdings are now worth only 50 percent of their previous value, they would still have a total net worth of around $90 billion.

Based on the Obama administration’s proposed $3.5 trillion 2009 budget, if the government took the entire $90 billion net worth of these five richest Americans, it would run the government for only about 10 days. If the total $1.57 trillion net worth of the Forbes 400 Richest Americans were confiscated, it would run the government for only about 164 days. So, for those who seem to believe that taxing the “rich” can pay for everything they want, what happens when the richest Americans have nothing left? Whose taxes will be increased next? Obviously, the middle class, notwithstanding Obama’s repeated promises to reduce them.

The Orange County Register has it right. Private enterprise does not redistribute wealth, it creates new wealth, whereas increased government spending can only be accomplished by taking money from the “private wealth-generating sector of society.” The more money government takes and spends, the less there is available for business and industry to grow and create jobs. When the situation reaches the point where the government is spending more than it takes in and finances the excess outgo by borrowing or printing money, the inevitable result is inflation. Just how much inflation and how fast it happens depends on the ratio of the borrowing to the size of the economy. The more the borrowing or printing of money, the more inflation occurs. If it’s too much too fast, hyperinflation results.

Germany after World War I, Argentina in the 1980s and Zimbabwe today offer clear warning about this risk. Unfortunately, most of today’s politicians are economically ignorant and seem to think they can somehow repeal the laws of economics and continue to spend without suffering the consequences. That won’t happen, and higher rates of inflation are sure to follow. You won’t like it.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his own blog, Opinionfest.com.

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