Friday, February 24, 2017

Narrowing the Wealth Gap with Mandated Charitable Giving

There is a political tidal wave coming. This article is meant to provoke a conversation about how to deal with it.

To be clear, the wealth gap should not be "solved," in the sense of elimination. Eradicating the wealth gap entirely has only one outcome: Cuba. But the gap has been rising, and it will become an acute political and social problem in the coming decade. 

What, if anything, should we do about it?

We know what the liberal solution is: more taxes, more redistribution, bigger government, and perhaps even a "guaranteed minimum income."

The conservative answer has been, essentially, to say that those are bad ideas. and it's true, they are. But the fact remains that, for reasons we'll get into, the pressure to "do" something will be enormous, and it will become politically untenable for conservatives to be without viable, actionable, answers of their own.

By way of background, in the 1970s, the bottom 50% of income earners made about 20% of the overall pie, while the top 1% made about 11%. Now, those numbers have more or less flipped:

(Note this graph does not include transfer payments, so it tends to exaggerate the gap.)

What's driving this? Well, the high end is infinite, so there's no limit on how rich the upper end can get, particularly with the digital economy making it possible to scale new companies almost instantly (as opposed to the old days, when you had to physically build factories or stores). But those same technological advances have rendered many jobs obsolete, particularly ones that used to lift people into the middle class, obsolete.

Going forward, these trends will become even more acute. Some of the most common jobs in America are things like cashier and truck driver, both professions that will be vaporized by automation. Artificial Intelligence will also replace all manner of jobs, and they will never come back. At the same time, the near future will start producing trillionaires.

Mind you, I don't think there's anything morally wrong with people becoming fabulously wealthy. Good on 'em! They obviously produced something that people really wanted. Further, the very wealthy tend to give lots of money away. People like Bill Gates are re-inventing philanthropy in ways that are much more results-oriented. But such facts won't stop the wealth gap from growing as a political flash point. Indeed, Trump was elected by focusing on closing the gap from the bottom, a fine idea. The real question, though, is what future Democrats will be elected by proposing to close the gap from the top with confiscatory taxes?

  The libertarian-leaning conservative in me says, "Let the market sort things out. After all, our economy has survived countless transitions in the past..." Once, 90% of American adults were in the agricultural industry. Now, it's 2%. Not only did we survive this transition, we thrived. Same with the transition from buggy whips to cars, and many others.

But from my perch in the tech industry, I'm exposed to a lot of self-appointed futurists (a species in abundant supply), and the chorus is saying, "it's different this time." 

Is it? My old client Sir John Templeton once described those words as the five most dangerous in the English language. The futurists say, however, that AI will take over (most) everything and there will be no jobs left for the masses. Personally, I doubt this very much, but that doesn't mean the transition will be smooth, quick, or painless. It could take a very long time. Look at Lowell, Massachusetts, or Waterbury, Connecticut, towns still trying to transition from the textile age. I worry about the ramparts being stormed before the coming Great Transition sorts itself out. How do we smooth the path before some mega-"Occupy" of the future burns down the house?

Raising taxes is the wrong solution. Redistribution is rife with moral hazards and unintended consequences. It breeds dependency and complacency, precisely the wrong ways to allow people to adapt to a new economy. It bleeds our nation's soul. 

Guaranteed income, an idea beloved by Euro-socialists, is simply doubling down on the redistributive state, unless it replaces it (doubtful). The government acts as as the intermediary and administrator, and the government isn't good at particularly at running anything. Incentives are misaligned by political exigencies and cost structures inevitably spiral out of control.

Conservatives have always been right to resist the left's worst redistributionist tendencies, but how do they counter? They have been quiet, because there's nothing in the Wealth of Nations or Atlas Shrugged that quite anticipated the mind-bending pace of change that we're starting to see. Exponential growth - Moore's Law and all - is highly dislocating.

I have a thought on how to address this. My suggestion is to raise taxes but allow individuals to decide how to spend the money. Specifically, the government would mandate charitable giving.

The approach would go something like this. The government would say,  

Hey you rich people, we could just raise your taxes, say, 10% or 15%, but we're not going to...Instead, we're going to make you put that money into a charitable investment account, out of which you will give a certain percentage to certified, independently audited, charities every year.

What does this accomplish? From the Left's perspective, it knocks the rich down a couple of pegs, and in a way that's visible to their constituents. From the Right's perspective, it keeps the money out of the venal hands of the government and gives individuals a large degree of control over the destiny of their capital. 

The elements of a grand bargain are there.

I also would make the "charity tax" mandatory for almost all incomes, but highly progressive. Let's turn everyone, regardless of income or political persuasion, into a philanthropist.

The increase in charity, even if forced, would nudge us back to our civil society roots, when we solved our own problems and didn't look to the government first. 

I am reminded of how the Museum of Modern Art was founded in a single evening, in 1929, in John D. Rockefeller's living room with a handful of philanthropists who decided a showcase for this new, important style of art was needed. In France, where the government is expected to make such decisions, the first modern art museum - the Pompidou - wasn't built until the 1970s. By then, all the good stuff was taken. 

Let's all be like this guy, John D. Rockefeller

But it wasn't just high-end projects like museums. We looked around, saw what needed fixing or who needed help, and got on it. It was the American thing to do. There was no social safety net in the Great Depression and yet there were no mass starvations, either. People took care of each other through civic organization like mutual aid societies. It brought us together as a people. It is no coincidence that our current divisions have risen over a time period during which government programs have crowded out much civic philanthropy.

The civil society wasn't just about the Rockefellers, it was about the Joneses, and that's where we can go again. Our new citizen-philanthropists would be much better problem-solvers than the government. They are on the ground and would react in real time to issues as they arose, particularly as it related to their local communities. Being closer to the problem breeds better solutions, something that ties nicely to an idea from Catholic social doctrine called subsidiarity, which essentially says that what problems can be addressed at a lower level (e.g. families, charities, towns) should not be addressed at a higher lever (states, countries). Solutions should flow up, not down.

How does this help with the Great Transition? For one, it let's air out of the political balloon, which buys the transition some much-needed time. For another, we can assume that part of that huge pool of charitable capital would be used for things like education and re-training, two more things of which the government is a uniquely bad purveyor. If economic dislocation becomes our biggest challenge, count on private solutions to be better.

I recognize one of the problems here is that politicians would have to approve this, and that means allowing all that money to escape their collective grasp. Tough sell. And while it's hard for a conservative like me to propose anything that includes the word "mandatory," I imagine it's equally hard for liberals to let people do what they want with their money. But pressure will build either way, and someday that may be enough to make a deal.

Food for thought.


  1. I like this idea, stewardship instead of taxation.

  2. Fantastic!!! Loved it. But of course it ain’t happening as you concluded. They will never allow it; that is why they fight charter schools so vehemently. The Democrats want to propagate an underclass that will be completely dependent on them. This underclass will no longer be determined on racial grounds but on education or lack thereof. No one will be able to thrive without an education (unless they can hit a jumper of throw a ball). Yes Democrats want to keep people uneducated…

    Income inequality is a big problem worldwide. I am sure you are familiar with the Elephant Graph & the work of Branko Milanovic. While he is a lot more liberal than us, there are many things we can all agree on. And we’d better do something about it quickly (before self-driving cars make all sorts of drivers obsolete) because my only good investment idea is to buy stock of pitchfork manufacturers…

  3. You are always thinking "out of the box" Scott ... Great idea and article ... Cous Bobby