Taxes are the lever policymakers believe will create equality, but have instead become a heap of mismanagement. Discover how the American Dream has been distorted by a lack of education and manipulation. In this episode, Dr. James Otteson joins Tom to discuss the morality of business and wealth.
Looking for more on Dr. James Otteson?
Website: www.jamesotteson.com Book: “Seven Deadly Economic Sins: Obstacles To Prosperity and Happiness Every Citizen Should Know”
00:00 – Intro
04:17 – Will the build back better plan achieve income redistribution?
10:11 – How should we expect middle class people to enrich wealthy people?
14:12 – What’s important about income inequality vs wealth inequality?
16:29 – How is socialism popular?
25:56 – How did the desire to be rich become evil?
28:55 – Why does success start with shared principles?
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.
Welcome to the WealthAbility show, where we're always discovering how to make way more money, and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility.
So we have in Congress right now, the ‘Build Back Better Plan', or at least that's the title of it given by the Democrats, this supposedly three and a half trillion, some say it's $5 trillion bill. The question is, that I have is; first of all, will it work? And second of all, why do we have it in the first place?
So what's, behind all this, and we are really super fortunate today to have Dr. James Otteson. Jim is the author of seven deadly economic sins. He is an expert in the field of business ethics, and Jim, it is just great to have you on the show.
Thank you very much Tom, it's my pleasure to be with you.
So if you could, just give us a little bit, about your background and your expertise?
Sure. So as you mentioned, I teach business ethics. I'm at the university of Notre Dame. My training, my graduate training's actually in philosophy, not in business. I came to an appreciation, and to the study of economics, because I wrote my dissertation on Adam Smith's moral theory. So Adam Smith, who's often credited with being the founder of the discipline of economics, he also wrote a book called the theory of moral sentiments. So, I became very interested his moral theory, which led me to become interested in his economics and on other economic theory that came out of the 18th century.
Now, I teach business ethics, where I try to apply a little bit more of a historical context, when people are worried about contemporary issues. A lot of things that arise now, are nothing new under the sun, they've arisen before, and so we try to expand the historical horizon a little bit, and also bring a little philosophy to bear, in trying to deal with some of the contemporary issues in business ethics.
I love it. So we, WealthAbility, we operate from the standpoint, that all tax law really revolves around incentives of one type or another, right? There's just not that much of the tax law that raises revenue, most of it is an incentive. So in this new bill, we have child tax credits, which, if you look at the incentive, that's an incentive to have more children, right? That's the way I look at it. I'm going, that's an incentive to have more children. We have incentives for renewable energy. I had to get away from clean energy, because to me, it's not so clear that it's clean, but it is renewable, okay? So renewable energy; solar, charging stations for electric cars. We have low income housing credit, so we have those incentives.
We have some disincentives, we have higher capital gains rates. We have higher corporate tax rates. We have higher personal tax rates, which really are just anti incentives, right? They're just disincentives, and so when you look at all of these, will it work? Will this… I'm going to try to be completely fair here, will this build back better? Does it work, to tax the rich? The rich being anybody, who makes over 400,000, right? That's that's who, presumably the rich is.
They're including corporations in that, which is… Not so sure about that, but let's say that they include that, that include the rich. Does that work, and then we'll talk about is there a need for it, and then we'll talk about, okay, why are we doing this in the first place?
So let's start with: Do you think that this will work to, A, stimulate the economy, and B, reallocate income?
Well, I was about to ask you… So it's a great question, it's a big question, obviously, but I was about to say, work at what?
It depends on what your definition of work is, and what you think the goal of the legislation really is. One of the mistakes that I think a lot of legislation makes, is that… You brought up incentives, which implies that human beings respond to incentives, but the critical piece of that, is not only do they respond to incentives, but they also respond in ways that are a bit unpredictable. Human beings for better or worse, they are unpredictable. They make choices that aren't always exactly what we would like them to make. I think one of the mistakes that a lot of legislation makes, is that human beings are relatively static. In other words, you can make some change to policy or legislation, and nothing else will change.
A lot of the forecasts, and a lot of the cost benefit analyses that people try to make, when they're scoring legislation, assumes that nothing will change. Everybody will engage in exactly the same behavior they were engaging in before, and so if we raise taxes by 10%, well, we just look at whatever the pot of money was before we would increase the tax rate, we just take 10% of that, and we say, ‘oh, that's the new revenue. We're going to have 10% of that.'
That would be the argument that the tax fund issue would make, to use dynamics scoring, right?
Where you actually have to look at behavioral changes.
People do change their behaviors, and so that will automatically mean, that whatever would actually happen, what would eventuate after the passage of this legislation, won't be what we would've expected. So that doesn't mean it's better or worse necessarily, but it will certainly be different.
But, I would add one other thing. You mentioned my book seven deadly economic sins. So, one of the sins that I talk about in that book, is the idea that good, is good enough. That's what I call it, the good is good enough fallacy. What I mean by that is, that if somebody shows or argues, that there's some kind of benefit that would come out, say from a policy change. We change this policy, here's the benefit I think we could get from it.
If we have a child tax credit, well, here's the number of people that would be benefited by it. That would include not only parents, maybe, but also childcare providers and maybe a range of other people. We point out all of that benefit, and let's suppose just for the sake of argument, if you'll allow me Tom, just for the sake of argument.
We will just stipulate that all of those benefits actually would ensue, that you would really get those. Well, usually the analysis stops right there, and says, well if there's benefit, then therefore we should do it. What I would argue is that, no, that's not good enough yet.
The fact that it would lead to some benefit is necessary, but it's not sufficient, because what you need to show is that not only would it lead to a good benefit, but that it would be better, than whatever else those resources would otherwise have been expended on.
We live in a world of limited resources. So any amount of resources we put in one direction as resources, we cannot put in other directions. I'll just give you one quick anecdote. A few years ago, one of my sons made an argument, he actually made a presentation to me that we should buy a Ferrari. He is a teenage son, so you can imagine what kinds of good things he thought would happen, if we bought a Ferrari. After the end of it, he said, the conclusion of his presentation was therefore, we should buy a Ferrari.
I said, ‘well, okay. You know, even if all of those good things you list actually would happen, there are a few other things that you might want to reckon the calculation. Maybe we'd have to give up our house, maybe I wouldn't be able to send my kids to college or something.'
That's the element that's often missing from talk of legislation. We talk about the benefits or the putative, the aspirational benefits. But there's never really a good faith accounting, or a good faith estimate of what are we giving up, in order to get this.
That bill, if it's $3.5 trillion, if that's the number, that's about $10,000 for every man, woman and child in America. So that means, in order to justify that, I would say, you have to show, that whatever benefit you think that bill is going to create, is greater than the benefit that all of those people would've gotten. If they had just gotten to keep $10,000, or a family of four, $40,000. What would they have done with that money? Would they have chosen to put it towards these, whatever the goals are within the bill? I think that's the real question, that's a very hard question to answer, and it's often just left out of the discussion.
Yeah, that's interesting. So let's talk about what the bill does. I want to run a theory by you, see what you think.
So if you got a lot of money that is coming from higher income people, and it's going to lower income people, there's a massive wealth transfer intended in this bill. The people who have the money, that are being taxed, typically use that money to invest in the economy; in energy, in other things, in jobs, right? Where the people who don't have the money, when you transfer it, typically what they're going to use it for, and this is actually one of the arguments of the Democrats proposing this, is look, this will stimulate the economy, because they will immediately spend it, which I think is probably true.
They will spend it, what will they spend it on? Well the money will actually be, it's really a transfer from the people making $500,000 to the people who own Walmart stock and the people who Amazon stuck, because that's where they're going to spend it. In the end, it does not end up in the pockets of the people you're giving it to. It ends up in the pockets of the people, that get the money, that they spent.
What do you think?
Yeah, I see your point about that, this is not a zero sum world. I think that's also partly, what people tend to think. When you're asking people, should we transfer wealth? Why should we be worried about the fact that in the United States, you have such a wide disparity of wealth, in a place like the United States?
Well, many people assume, or they think, I think what their assumption is, that there's a relatively fixed amount of wealth, and if one person becomes a billionaire, it can only have happened, at the expense of other people, so there's probably some element either of injustice or unfairness, something bad that went on, we need to recognize.
Yeah, so basically a zero-sum game.
It's a zero-sum game, and I think that's a very pervasive view about the economic world. Maybe people don't articulate it quite that way, but I think that's an assumption that many people have.
I think what you're pointing out, or putting your finger on, is that when wealth is flowing, it doesn't usually stop in one place, it goes in various places, and so if it turned out that the real beneficiaries of something like this transfer were, as you say, shareholders in places like Walmart, I mean, that may well be the case. That's certainly not the intended audience, or the intended beneficiary. I think if that were pointed out, then maybe we would have a different view. But my guess is, and I'll ask this to you. Maybe I'll put the question back to you.
Suppose made you made that case, and people said, ‘oh, okay. Yeah, that's not what we want. That's not what we meant. We wanted something different. We want the beneficiaries actually to be the poorest people in the United States.'.
Do you think then they would say, ‘Okay, well let's not engage in wealth redistribution, let's do something else.'.
Or would they instead make the argument, or maybe entertain the idea, which I think is your idea that: well, remember that Jeff Bezos and Walmart, these people are actually creating more wealth, they're not just redistributing wealth, and so the more capital they have at their disposal, the more jobs, value and benefits, goods and services, that are created, to improve everybody's lives.
Well, there's that point for sure. The other interesting aspect of this, this is not a redistribution of… Well I would argue it is a redistribution of wealth, but it's a redistribution from the higher middle income, to the very wealthy, that's where it's being redistributed.
It's not being redistributed to the poor and middle class, because they will spend it, okay? They won't invest it, because they don't have the education, okay? So if you really wanted income equality, you'd have education equality. What I think, what we're missing in this country is education equality, that we do not have educationally quality in this country, and giving people free community college, does not make for education equality. In fact, it does nothing, it's two more years of high school, right?
Where, where if we had real education, real financial education for example, which we don't only have practically any financial education in the schools, then maybe we would have less income inequality. That's really, if you wanted more equalization, it would be in education equality, not just income, because income doesn't create wealth, right? It's the use of the income that creates the wealth. It's not the income itself, that creates wealth.
We all know people who make $500,000 a year and are poor. They're still living hand to mouth, because they spend every dollar they get. Every time they get a raise, they actually spend more money, they never actually build wealth. So if you're talking about a wealth disparity, versus an income disparity, those are two different questions, frankly.
Yeah they certainly are, and when we talk about income inequality, people argue for various measures to equalize incomes, or to raise taxes. We have a very progressive system of tax.
Of taxes on income. What we don't have in the United States is a wealth tax. Now that is something that a couple of people in Congress have talked about, is a wealth tax. But that points to exactly what you're suggesting, which is that the wealthiest Americans, tend to have very little income, taxable income. That's not what they're… They may show a very small income. I think Bezos shows a small income, Warren Buffet shows a small income, because what they have is something entirely different, that even if you raised income taxes, it wouldn't touch what they're doing.
Yeah, but I would argue that even if you had a wealth tax, it still ends up back to them because-
Now I see your points.
Whether you use that money, it's still going to people who are not educated, in finance and how to invest, and so what the money ends up doing, is it goes back to Geico, Warren Buffet, Amazon, Walmart, Google, et cetera. So it's still going back to the wealthy.
Yeah, no, I understand.
It may increase… It's a little like giving a kid a candy bar. You're hungry, so I'm going to give you a candy bar, and that candy bar is going to satisfy your hunger for five minutes, but it's not going to satisfy your hunger for tomorrow, okay?
Which is the challenge I have with this whole idea, because when… We can't truly redistribute wealth, unless we redistribute education. So let me ask you the question then. Okay, so why? What do you think is behind this? Is it really this purity, and this ignorance of what's going on, or is there something… There's a lot of conspiracy theories out there. People reach for the conspiracy theories. I know people, that are very smart people, that they're all into conspiracy theories, I'm going okay, so they've got to be in conspiracy theories, because they can make sense of it.
So can you help us make sense of, why this leaning towards socialism, and away from capitalism? How do you make sense of that?
Yeah, so that's a complex question. I think there's more than one thing going on. First, think about younger people, millennials and younger in the United States. So millennials down to, maybe current college students, or high school students.
I think for many of them, they don't really have a good definition in their minds, or a good concept in their minds, of what socialism or capitalism are. They don't know what they really are, and maybe that goes back to your point about education. But, if you ask those groups of people, ‘tell me what socialism and capitalism are?'
They'll say things like, ‘well, capitalism is where everybody's out for himself, and doesn't care about anybody else, and is happy to stab anybody else in the back to benefit himself.' That's what capitalism is.
What's socialism? ‘Socialism is where we care about people, including people who need help.'
Okay. Well, if those are your two definitions, well then if somebody says, which do you prefer? That seems pretty clear. But I also think that there's a slightly different way, that you might be able to frame this, and I think part of the question is, whether it's possible for business and business people, people engaged in business and a market economy, or a commercial society, can business be, what I would call honorable?
Let me give you one example. You've probably heard the phrase, that businesses or business people, should give back to society. So we hear that a lot. Well, I don't know if you've ever given any thought to that phrase, but think about what it means to say, you need to give back. Notice, we don't say that business needs to give, but give back.
That means that they, that assumes they took, in the first place.
That assumes they did something wrong, that they need to atone for now, by giving back. It's like a sin, you need to atone for it.
Creating Amazon, and this ability to order online, during the pandemic, was no gift at all.
Yeah, but I think in all honesty, many people think that the only way you can become a Jeff Bezos or, pick whoever you want as a super wealthy person, the only way that's possible is by having engaged in wrong doing, somewhere along the line, maybe we don't know it's exactly what you did wrong, but we're sure you did something wrong, and that's why you need to give back.
My suggestion would be well, is there some way we can imagine engaging in business, such that it's actually valuable in itself, not just for giving to charity afterwards or something, but the activity of business itself, and I think there clearly is, and there has to be, if we bring it back down to the level of, when you go into the store, and you buy something from somebody, from the clerk, you give the money, you give $5 to the barista, the barista gives you the coffee, which one of you benefited from that transaction?
The answer is both of you did, because if either one of you didn't benefit, you would've said no. Those kinds of transac… And that's by the way, reflective in the fact, that you both say thank you to each other. But those kinds of transactions, repeated millions and billions of times, those are the mutually beneficial, mutually voluntary and mutually beneficial transactions, that incrementally raise overall levels of prosperity.
So to come back to where we started, people are worried about inequality, and I think they're worried about inequality, because they think that inequality arises only from injustice, or from some lack of fairness, somewhere along the way. But we might be able to say, look, if a lot, maybe many, maybe even most business transactions are mutually beneficial, then maybe what we should really say we want, is just improving human conditions.
So in other words, if everybody's situation is getting better, maybe not all at the exact same rate or to the same level, that's true. But we want improving conditions, then maybe that would lessen the worry about inequality itself, and allow us to focus on things like, well, how actually in absolute terms, are the lives of even the people we officially designate as poor, are they getting better? Are they getting material better? Are the goods and services that they're able to consume and use, are those increasing in variety, scope and depth?
Those are answers I think we can… Actually those are questions, we can actually get empirical answers to.
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So let me go to back to something you said. Okay, so millennials, gen Zers, they maybe have a distorted view of what socialism and capitalism are, okay? That's my experience too, okay? The education is perhaps not what I would like to see in that area, but certainly that doesn't hold true for Bernie Sanders, who is our head socialist, right? Bernie Sanders.
Okay, I can give AOC a pass, because she's in that millennial group, that's fine. But Bernie Sanders, you can't give him a pass, because he grew up in the Soviet era. He grew up when Mao Zedong was the leader of China. So he grew up among socialism, communism socialism. What's he after? What do you think is behind that?
Yeah, that's a good question, I don't know him personally, so it's hard for me to look into his soul, and see what's going on inside it. But what I can say is, I can speculate a little bit, based on what I've heard from him and other people.
Just so you know, I like Bernie Sanders, because I think he believes what he says.
Yeah, I think he does too, and that I think is important. So what actually, is motivating him? I think maybe a couple of things. On the one hand, there is a very strong attraction to the idea, of all of us being in it together. We want to rise or fall together, as a group with a kind of unity, a deep community, where we take the common good seriously.
If the community succeeds, then all of us are succeeding, as opposed to some of us more than others, and I think because of that strong attraction, to this notion of a unity, we're all in this together… That looks very different, from what you get under the self-interested individualistic capitalism. Under capitalism that looks like, ‘well, we're really all in it for ourselves.'.
If you look at a commercial society, what do you see? You see lots of different people pursuing lots of different life paths, lots of different preferences they have, and choices they make, but we're not all making the same choices, we don't all have the same preferences. We're not all pointing in the same direction, and I think for a lot of people, that lack of unity is unattractive to them.
And yet Jim, you made a really good point earlier, which is: There is no business without customers. So what that means is, there's a willing buyer and a willing seller, right? If there were not a fair exchange, there would be no exchange, and you would be out of business. We see that over and over again. A restaurant for example, loses their chef, and all of a sudden they have no customers, okay?
Or they don't treat people well. A business doesn't treat their customers well, they don't have any customers. So there has to be that exchange, and people have to be saying, ‘yeah I like doing business here.'.
It's interesting to me that you talk about millennials, I'm going, millennials are the reason Amazon works, okay? They are the primary users of Amazon. I'm sorry, it's not… I'm a ‘Hey boomer', and it's not, it's not the ‘Hey boomers' that are the primary users of Amazon.
We're more likely to go down to main street, right? So it's just fascinating to me, that we have this discussion and what I'd like to finish up with is, we have this discussion now about the rich are bad, and we need to do something about that.
The one that gets me is of course, I just did a town hall on this new bill, and in this new bill, there's this whole idea behind… A lot of the idea behind it is, we need to tax the rich because they're cheating.
Right? Well I happen to know, and all CPAs know, that it's not the rich who're cheating, it's the middle class who cheat, and that is born out by data, okay? And the IRS knows that, well, the IRS just wants more money, so I can't blame them for that. That's their job, is to build their empire, I get that. That's what bureaucracy does. But, my question is, if you look at that, why do we have this feeling, that being rich is bad? That's the American dream, is to be rich.
So how did the American dream, now be evil? What happened there?
Yeah. Well, that's a great question, and I'll just put out a couple of thoughts. One is, I wonder, and this really is a speculation. I wonder if we said, okay, is it really just being rich is bad? Or is it that we are unequally rich?
So if everybody were a billionaire, would that be okay? Is it that you're only allowed to be a billionaire, or it's bad to be a billionaire, if there are people who are poor at the same time. If the second one is the case, then maybe that indicates that what we're really worried about, what people are worried about, is the great inequality.
That might just go to envy, right?
Well, that is one of the seven deadly sins, and probably for a reason as well. So I think that's an interesting speculation, but the other part of your question I think is very interesting, and that is, you mentioned before, that it's the millennials who are driving places like Amazon. They're the ones who are making these choices, after all shouldn't that… It's not the boomers or somebody else, and if they're making these choices, then that suggests that they're happy with the choices they make.
Here's one other thing I would mention. I think a lot of people think, that when people are making those free choices, to patronize one business or another, they aren't authentically free choices. In other words, they're being manipulated into those choices by marketing, by the capitalists, by the business people. They're being talked into believing, that those things are actually good for them, when they really aren't good for them.
So it looks like a free choice. Nobody's putting a gun to their head, but on the other hand, their preferences and their desires have been so manipulated by a commercial society or by business interests, that they're not authentically free choices.
I think that might be part of what's going on behind some of the objections as well. That, okay sure the millennials are buying those things, but what they don't know is that those things aren't actually good for them. So what we need to do, we who know, what actually is good for people, we need to intervene and steer the choices in the right kinds of directions.
Right, so we know better than you, so we should make the choices for you. That's basically it.
Let me end with this. What are some practical things, maybe two or three practical things, that people can do, given this divisiveness, given this move, half the country towards socialism, the other half rebelling against socialism, what can people actually do about it?
Well, I'd say… I'm a professor, so I'm speaking from my little corner of the world where I'm not actually creating wealth, I'm just talking about people who create wealth. One thing I would say, is to begin with shared principles. So whether you want to redistribute wealth or not, I think everybody would agree, that you have to have wealth in order to redistribute it.
So if there isn't any wealth, then it doesn't matter what the principle of distribution is anymore, because there isn't anything to distribute, you can't divide zero. So, where we should first think about is, what are the institutions that actually enable the creation of prosperity, and including the increasing creation of prosperity, and what we don't want to do, whatever else, whatever our policies are, what we don't want to do is endanger that. We don't want to kill the goose that lays the golden egg.
It's not just about who gets the egg. It's also about the goose and we want more than one goose. We want lots of geese. That's something that I think can cut across political division, that yes, we do need to have increasing prosperity, and there are lots of ways…
To go back to your very first point, human beings do respond to incentives, and if you punish them for creating things, or make the cost of producing or creating so great, that people just say, ‘ah, it's not worth it.'.
It doesn't have to be everybody all at once, but at the margins, the more and more people that you raise the cost for doing that, they're just going to shrug their shoulders and say, ‘yeah it's not really worth it.' We're seeing this in things like people… The decreasing workforce at the margins, you're seeing people saying, ‘I'm not sure it's really worth it.'.
That's a very dangerous trajectory, pushing out into the future, and so I think the first way to start, is by saying, we want increasing prosperity, that raises everybody's opportunities, and prosperity for everybody.
I like it, so start with the shared principles.
Got it. Anything else?
Don't forget about opportunity costs. No matter what you decide to do, before you know that it's a good thing to do. You got to think about what you're giving up. Every decision has an opportunity cost.
I love that. That's so important, when you're talking about business, investing, taxes even, is that you are giving something up, anytime you make a choice. You have to decide, is what I'm getting, more valuable than what I'm giving up? Which I think is part of the education, so I love that.
So Dr. James Otteson, Seven deadly economic sins. I love the title of the book. I love this, I loved this discussion. Jim, it's been great having you on the show. Remember, this is a show about, what's going on in the world and why, and what we can actually do about it.
I love, I love, Jim. I love your idea, we need to start with shared principles. Everybody, I think everybody believes that we want people to have enough, and we want people to have a standard of living. I don't think there's any real disagreement there. So we can start there. We can build from that, and I think we can get more education, and really share the education, because I continue to believe this is not a wealth inequality issue, it's not an income inequality issue, it's an education inequality issue, and the more education we get… What we always end up with is, way more money and way less taxes. We'll see you next time, thanks.
You've been listening to the Wealth Ability Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.