The chief economic worry about Democrats is that they do not understand or appreciate the role of investment capital.
Democrats tend to view a certain quantity of economic output as a given. It just happens. So, the key question of political economy is how to justly distribute the benefits. They also tend to view public capital as a substitute for private capital, or even superior to it.
But no quantity of economic output is a given. It doesn't just happen. Investment capital plays a pivotal, irreplaceable role in making it happen.
And public capital isn't a substitute or superior. Government can only put into an economy what it takes out in taxes or borrowing.
Producers have to produce before consumers can consume. But producers cannot produce ex nihilo. Investment capital provides the financial bridge between production and consumption.
The provision of investment capital has become much more diffuse. About half of American families own stocks and bonds. Anyone with a savings or money market account contributes to investment capital.
In reality, however, the affluent provide most of the country's investment capital. They are the ones with discretionary income. What the rich do with their money is very important economically.
The Democrats want to raise taxes on the affluent and on corporations (which are repositories of investment capital). The numbers, and their effect on investment capital, are staggering.
In his budget, Obama purposes increasing taxes on affluent individuals by $43 billion a year and on corporations by another $28 billion. That's over $70 billion a year to begin with and over $1.4 trillion over a ten-year period.
But that's just to warm up. The Democrats also propose to fund their health care bills through higher taxes on affluent individuals and corporations. The Senate bill imposes $24 billion a year in such taxes when fully up and going and $188 billion over 10 years.
The House bill is even higher, $50 billion a year when operational and $480 billion over 10 years. Obama's new proposal falls somewhere between them and would apply the Medicare tax to investment income for the first time.
So, between Obama's budget and the health care plan, that's a shrinkage in the nation's investment capital pool of up to $1.9 trillion over the next decade. But that's only the beginning of the effects. Between Obama's increased income tax rates, the income tax surcharge in the House health care plan, and state income taxes, the highest marginal income tax rate in most states will approach or exceed 50 percent. That will hugely discourage savings and investment by the affluent.
This tax-the-rich approach is justified as a matter of social justice. The government needs money, goes Democratic thinking, and it is fairer to get it from the rich than the middle class or the poor. Democrats also tend to believe that large disparities in income and large accumulations of wealth are evils to be ameliorated in their own right.
The rich already pay a higher percentage of federal income taxes than they make in income. And the true social justice question shouldn't be whether income or wealth disparities are increasing, but whether the lot of the poor is improving. Concentrating on the latter question leads to entirely different policy choices than concentrating on disparities.
The politics of income redistribution are mixed. Most people believe that the rich aren't paying their fair share and most people would like for government to do more for them.
However, although not following the specifics, the American people also seem instinctively to understand that one of the questions is whether private investors or the government will more productively use $1.9 trillion over the next 10 years.
We may not entirely like rich people. But they can usually be counted on to make wiser investment decisions than politicians.
