I was reading one of my old articles while I was writing on the FairTax, and it reminded me that I have been seeing more and more populist appeals from politicians of late. Sadly, even John McCain seems to have a momentary dalliance with populism, though he appears to have abandoned that for the moment and turned to a more solidly conservative position (at least if we ignore immigration and the environment).

As populism seems to be enjoying a renaissance, especially since the subprime mortgage "crisis", I have decided to go back to my old essays and build upon the ideas I developed there, and write a more comprehensive take on the errors of many populist positions.

One set of populist beliefs I will not be covering are those that relate to protectionism, either in the form of trade barriers or prohibitions on outsourcing jobs. I think I wrote a fairly definitive comment on those recently, so I will let that work, "Protectionism", stand on its own. As a result, my look at populism will examine only those positions related to the domestic economy.

The domestic populist appeal tends to fall into three distinct categories. First, there is an effort to institute "soak the rich" tax schemes against individuals. Second, there are schemes to increase corporate taxation. Third, there are plans to hand back money to voters in various forms. As the plans to basically pay off voters are of necessity funded by the tax schemes, I will put that off for the moment, and focus instead on the populist plans for taxation.

Soak the rich tax schemes take a number of forms, higher upper income tax brackets, removing caps on the income social security can tax, luxury taxes, increased capital gains taxes, and others. The most popular seem to be capital gains, luxury and increased income taxes. Removing the social security caps have been mentioned, but only as a means of preventing social security bankruptcy, and, as the effect will be the same as an increase in income taxes, I will deal with it at the same time.

Capital gains tax increases have not enjoyed as much popularity as they once did. The problem is that it is hard to sell them as only harming the rich. Even among the circles open to populist appeals there is an increasing number of people who hold stocks in retirement plans, or even invest in stocks directly, making it less popular to argue that capital gains taxes hit only the rich.Still, as we hear from time to time that the capital gains tax should be increased, let us look at this tax.

The outcome of a capital gains tax increase should be obvious to anyone, yet apparently they are not. When we tax the proceeds form investment, we cause a decline in investment. Money that would otherwise go to build up the economy flows into other investment vehicles, such as land, or overseas shelters. This does not harm the rich much, they simply divert their money to slightly less profitable venues. It does harm managed funds, such as in 401K's, as many are defined to include only specific types of investments, and thus end up being harmed by the capital gains tax. But the most likely group to suffer from capital gains taxes are the working class, especially those looking for entry level jobs, as new startups and expansion are the types of businesses most hampered by a lack of new investment. So, as with most populist schemes (as we shall see) the taxes planned to soak the rich end up harming the working class much more.

Luxury taxes are yet another effort to exploit class envy which end up hurting the poor more than the rich. The truly rich can purchase luxuries overseas and simply avoid the taxes, or else they will just defer purchase of luxuries. So, for the rich this is likely a minimal inconvenience. On the other hand, for the less affluent, these taxes place luxuries out of reach. And, for those who work manufacturing, selling or servicing luxuries, this can mean reduced wages or even unemployment. Again, a tax aimed at the rich ends up placing luxuries out of reach of the less wealthy while also destroying any number of jobs among the working class.

Nor does the final soak the rich scheme break this pattern. Admittedly, the rich have a hard time avoiding income taxes, at least some of  them. In some cases, such as CEOs and others who can adjust their compensation, they can take stock options and other non-cash income to avoid having to pay higher income taxes. Likewise, those who are self employed, they can adjust their corporate structures to reduce their nominal incomes. But for many of the rich, these taxes do take a real bite out of their wealth.

The problem with that is that the wealthy are those who create jobs. Or at least are a significant source of the money which fuels job creation. When their wealth is taken from them and given to the state it is no longer available for investment, and, just as with capital gains taxes, we end up seeing a reduction in job growth, cutting off opportunities for job seekers and hurting the poor and middle class much more than the wealthy.

Nor do populist schemes work any better when we move to corporate taxation. If anything, corporate taxes are more dishonest, and more harmful to the middle and lower classes.

Let us start with the basics, corporations pay no taxes. Either those taxes are passed along to consumers or they come out of the dividends paid to shareholders, most of whom are middle class. There is no "corporation" to pay taxes, it is a fiction. All of that money is eventually taken from someone's pocket. And, as the consumers with less money feel higher prices more than those with more to spend, when corporations pass along tax increases, the poor feel it much more. When ADM raises food prices 15%, it is meaningless to the wealthy, but to the poor it may represent a 5% increase in their monthly expenditures. Likewise, when dividends drop 10%, that may not matter much to a wealthy man who has a large, diverse portfolio. But for a more modest investor, relying on those shares for retirement, that decline may make quite a difference.

In other words, yet again, corporate taxes, while targeting the rich, also miss their mark and strike the poorer classes much harder.

Nor do the uses to which these populists put these taxes really help the poor. Schemes such as tariffs to keep jobs in the country do little to help the poor. Yes, maybe 10,000 steel workers are kept working, but the increased cost of steel puts 20,000 manufacturers out of work, as well as raising the cost of appliances and cars for everyone. Without fail, once the numbers are evaluated, the government would have been better off simply paying those steel workers not to work rather than raising tariffs.  Yes, those steel workers get to keep their jobs rather than having to find another, but they benefit only in the sense that they have the same job. The only real beneficiaries are those "fat cats" the populists claim to dislike, the owners of the inefficient industries who now have less competition and can continue to compete without worrying about efficiency.

I could go on and on, but I think my point is clear.

The populist rhetoric may appeal to some, but once we move away from mere words and examine the true results of populist schemes, it becomes obvious that the only people who truly benefit are the populists politicians themselves, who trade other people's money for the votes to keep them in office, as well as the limitless government power they desire.

NOTE

Yes, my figures in the essay above are mere approximations. I know that they are not accurate. They are used simply to provide a rough estimate of the harm done. Should anyone want actual numbers relating to a specific topic, please ask and I will dig through sources to provide them. Though the numbers I use are fictitious, there is more than enough evidence of the incredible costs to the economy of keeping jobs in the country through the use of tariffs.