Enforcing invisible "contracts"

Elizabeth Warren's Blank Check

by Robert P. Murphy

Recently a video of Elizabeth Warren has gone viral, garnering more than half a million views in the first ten days. After lambasting the policies of the Bush administration, Warren goes on to critique the claim that rich people have a right to the income from their activities. Warren argues that it is only fair that the rich give back to the community (in the form of higher taxes), since they benefit from the government investments that made their financial success possible.

Warren's argument is wrong both on principle and in practical application. It's important to spell out exactly why she's wrong, because her viewpoint is gaining traction among the progressive Left. Besides the obvious popularity of Warren's statements, Robert Frank's hip new book is another example of this assault on conventional property rights.

Warren's Case against Private Property

Starting at the 0:48 mark in the video, Warren says,

There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

There are so many things wrong with Warren's analysis — which in context she is using to justify increasing tax rates on "the rich" — that it's hard to organize them. Let's first discuss the big-picture problems with her framing of the principles, and then we'll focus on the practical, economic flaws.

Warren's Flawed Philosophy

As Sheldon Richman acknowledged, Warren starts out on solid ground: nobody is an island. If we take the principle broadly enough, then obviously nobody got rich "on his own." We all benefit from being born into a society with a legal, cultural, and material infrastructure already in place. If it weren't for the prior existence of language (not to mention the discovery of mathematics and electricity), then the current members of the Forbes 400 list would be living like savages.

But what does this have to do with paying taxes to the government? Warren alludes to an "underlying social contract." Well it's very convenient for her to discuss this contract, which none of us has ever seen but apparently she can interpret.

Even on Warren's own terms, we would have to say that the community collectively decides how much it will tax people in order to provide goods that benefit the community (such as roads, national defense, etc.). So when the George W. Bush administration "cut taxes on the rich" — a move that Warren finds indefensible, as her earlier remarks in the video demonstrate — that was just as valid an exercise of the public's will as it will be if and when the Obama administration raises tax rates. Yet for some reason, Warren acts as if the "social contract" always means we can take more from rich people, regardless of how much we're currently taking. (If the Obama administration doesn't raise taxes back up to the 70 percent marginal tax rate on upper income earners like we had in the late 1970s, will Warren say it's because Jimmy Carter was breaking the underlying social contract back then?)

Warren is right: there is a widespread view that really wealthy people are very fortunate — that they have been blessed. And that's precisely why so many wealthy people give very large amounts of their fortunes to charitable causes. Warren simply asserts that the government should be the recipient of this understandable urge for the wealthy to share.

Besides philanthropy, another social practice is that parents take care of their children. Then, when the children become adults, they in turn take care of their offspring. This is exactly what Warren has in mind with her talk of "pay forward for the next kid who comes along." That's exactly what society expects of people, and that's what most of us do. Here again, we see Warren injecting the government into the mix, without any justification.

The final major principled problem with Warren's position is that the government gives the rich little choice in accepting the alleged benefits of its activities. It's not as if a factory has a choice between getting products via government highways or privately run highways. And CEOs in Boise — who don't think they are at serious risk of an al Qaeda attack — don't have the option of rejecting the US government's "helpful" foreign policy with its tremendous price tag.

To see just how absurd Warren's view is, imagine a Soviet-era party official chastising workers who thought they had labored long enough in a Siberian work camp: "You ungrateful wretches! Don't you realize that the bread your wives wait in line three hours for comes from the government? There is a social contract here, where we give you food and shelter, while you give us work and respect."

Practical Problems with Warren's Stance

Besides the principled objections, we can also raise several practical, economic problems with Warren's views. For one thing, a factory owner already does pay a lot for use of the government roads and labor services of his employees. In contrast to other "public goods," roads often have a much more dedicated payment stream, in the form of tolls and gasoline taxes. So the factory owner, who pays trucking companies to ship products around, is already paying a lot more to maintain the interstate highway system than is a lower-income person living in Manhattan with no car.

Regarding skilled workers, here too the factory owner already pays for it: we call these payments "wages" or "salaries." If someone goes to the University of California at Berkeley and becomes an excellent engineer, who is able to deliver an extra $150,000 in revenues to a factory owner, then with competitive labor markets we'd expect the engineer to earn close to $150,000.

This analysis doesn't mean that business owners are indifferent to educational quality, but it doesshow that things aren't quite as obvious as Warren makes them out to be. If students at state schools are receiving subsidized education that raises their productivity, the primary beneficiaries are the students themselves. So Warren should be asking them to cough up more money, not the employers who have to pay full freight for their services.

If we really wanted to be picky, we could ask if Warren thinks wealthy businesses that do not rely on roads, and that have few employees from government-funded schools, should get a break on their income taxes. For example, suppose a best-selling novelist went to private schools his entire life. Now he sits in a log cabin in the middle of nowhere, emailing his latest manuscripts to his agent. Except for Al Gore's Internet, what "public resources" is our novelist consuming? Why should he have to pay a large fraction of his income to the government?

Conclusion

Elizabeth Warren's argument for higher taxes on the rich fails on both principled and pragmatic grounds. Rather than giving a well-defined and philosophically defensible justification for a specific policy, she is arguing for a blank check for politicians to squeeze ever more out of "the rich" — which in practice will include the middle class.