A Tale of Two Islands

Once there were two islands – each had ten couples living on them. For years each day the couples would wake and spend the morning fishing and the afternoon taking care of maintaining their huts and surviving.  Each couple would catch one fish that would feed them for the day.    One day two of the people on each of the islands discovered a way that they could catch enough fish for everyone.

On the first island the people decided that those who could best fish would catch enough fish for everyone and the others would then use the time to improve their village, begin farming and improve everyone’s lives. Everyone was better off.

On the second island the people decided that they would let just the two go fishing and the rest would not do anything but take some of the fish – a tax from those who were working. Over time the two people fishing asked why they should do all of the work to support everyone else and began to catch less fish.  Everyone’s lifestyles and attitudes got worse.

As technology improves efficiency both companies and individuals can earn more and produce more. This is a good thing as it allows others to take on different productive endeavors to improve our society both financially and culturally.  If, however, you over tax those who are the engines of our economy they will not produce as much and everyone will be worse off. At the same time it is important for everyone in society to contribute, rather than simply taking from those who are productive, so that everyone may be better off.   Simply taxing the most productive and while other’s do little or nothing will not benefit society and actually hurts the most vulnerable.

We are truly living in an amazing time of innovation and we have a choice of whether we will use this to improve everyone’s lives or not.  It is critical that everyone contributes, and that we do not over tax those who are generating growth.  In my opinion two of the biggest risks we face as a country are  a sense of entitlement and a lack of work ethic.   There are those who are critical of the success of others and feel entitled to benefit from society while not contributing.  We can all improve and prosper like the people on the first island or we can fall prey to our own success like those on the second. I believe there will always be people who want to do better for society and will continue to innovate- the question is whether we will  benefit as a society or not.

As we hear more about new income tax proposals and criticism that the ‘wealthy’ are not paying their fair share the following should be noted. According to the IRS the top 1 percent of taxpayers pay more in federal income taxes than the bottom 90 percent combined. In fact while tax rates have gone down the amount paid by the top 1% has gone up over time.

Tax Rate Chart

Not only does this group pay more taxes they also produce more jobs and capital than the rest of the population combined. As we get deeper into the election season and one of the issues is the concentration of wealth and ideas for ‘redistributing’ we should consider whether this really benefits us all or not.

It should be noted that wealth has become more concentrated by the wealthy. According to The Economist (November 2014) real incomes for the top 1% of families grew 3.4% a year from 1986-2012 while those for the bottom 90% grew 0.7%.   The chart below indicates the results of this trend for the wealthiest 1/10 of 1% of Americans.

Income Chart

As the government attempts to redistribute wealth we believe that it is critical that everyone pursue a productive endeavor like those on the first island so that we all may be better off. If we simply tax those who are productive and give it to those who do not want to work, we will be like those on the second island and everyone will be worse off – especially the most vulnerable.   We have the opportunity to grow and prosper as a country in which everyone benefits – the question is will we seize it.

 

 

 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Randy Carver and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss. All information is as of 1/14/16 and subject to change.