17. Redistribution of Earnings and Wealth

WHETHER OR NOT YOU’RE a millionaire, virtually all of your dollars are redistributed to others from the very moment they are earned. That redistribution of your money, when voluntary, can take a path of spending, lending (investing), or giving. The portion of the money that you choose not to spend will take the paths of redistribution based on someone else’s choices.

The money itself provides no direct benefit to its holder until it is exchanged for something having utility. In other words, if money can’t be exchanged for something that is valued, it is useless and, therefore, worthless. Whether you hold one dollar or one million dollars makes no difference in wealth; the so-called millionaire and the pauper are equally poor. Only if an individual can use those dollars in exchange for something that has utility to the person do the dollars become valuable.

Let’s trace the dollars that someone actually spends. When a person builds a house, every item involved in the building of that house—concrete, wood, metal, glass—comes from raw materials that have zero value, until someone gives them utility. The metal in pipes comes from iron ore that is useless until someone digs it out of the earth, another person refines it, another machines it into pipes, another delivers it, and another installs it. This is true of every item in the house—be it wood from a tree in the forest that becomes a frame, a floor, and a roof, or be it sand from a beach that becomes glass in a window or a mirror. All these items in their raw, natural state are as useless to a pauper as to a millionaire.

The value of the raw materials in building a house is the same, irrespective of the size of a house. The only difference between a large house and a tiny one is the number of people who are compensated for infusing utility into those raw materials. In a similar vein to building a house, consider the valueless musical symbols that go into the creation of a concert. The money spent to experience the joy of music is distributed to a composer who arranges worthless, nonmaterial symbols in a unique sequence and to the musicians who give those symbols utility by producing pleasurable sounds from their instruments.

The portion of one’s money that is not spent but, instead, placed in a bank account will be distributed immediately to borrowers who purchase houses and cars, and who, in turn, redistribute those dollars to those who infuse utility into otherwise useless materials. From the moment of receipt, the totality of the money that each of us has earned is thus transferred and redistributed to others—every last cent, except for the few dollars we may be carrying in our pocket or purse.

I am reminded here of one dinner guest’s statement that no one should be allowed to own a yacht. Like houses, yachts are also built from useless raw materials that gain utility because of the efforts of various people, each receiving a share of the expenditure—in this case, made by wealthy yacht owners. In 1990, the U.S. government passed a luxury tax under the Omnibus Budget Reconciliation Act that applied to the sale of yachts. So what should we expect as a result of this new tax, knowing that people will act in their own self-interest? Many potential buyers either didn’t buy yachts or circumvented the law by buying them from foreign makers. The lawmakers thought the tax would generate more revenue, but it backfired in two ways. It resulted in less tax being collected (from buyers, workers, and yacht builders) and caused bankruptcies of yacht companies.²⁹ The law was soon repealed because of the outcry, not from discontented would-be yacht buyers, but from discontented yacht builders and workers unintentionally removed from the earning redistribution path chosen by the yacht buyers.

The proposition that the State should take control of a large share of a wealthy person’s earnings by taxation means that the State, instead of the earner, will determine its distribution. In this case, the distribution by the State is made, regardless of a recipient’s productivity.

In short, all money is fully redistributed, whether voluntarily by the person earning it or by the State after acquiring it from the earner. Of these two methods of redistribution, which one appears fairer and more humanitarian? Which one do you believe is more peaceful and will lead to greater prosperity for more people? Which method of redistribution would you choose for the betterment of your life if you were behind John Rawls’s “veil of ignorance”?³⁰

²⁹Elda DiRe, “Luxury Tax (Federal Taxation),” CPA Journal online (October 1991).

³⁰John Rawls (1921–2002), A Theory of Justice (Boston: Belknap Press, 1971; rev. ed., 1999). The “veil of ignorance” is a thought experiment in which Rawls proposes that the basic structure of a just society is one whose adopted rules are arrived at by the consent (contract) of all its members, who at the time of consent and prior to the application of such rules (“the original position”) are unaware (behind a “veil of ignorance”) of the natural fortune or social circumstances of the person in whose body and mind they will live while adhering to the application of such rules.